The new Companies Act 71 of 2008 has been greatly influenced by North American Law. The concept of Business Rescue introduced by the new act is no exception and reflects many aspects of North American Bankruptcy Law. Business Rescue means proceedings instituted to facilitate the rehabilitation of a company that is financially distressed and provides for the temporary supervision of the company and its management, protection against claims by the company’s creditors and the development of a plan to rescue the company by restructuring its affairs. In short, it can give a struggling company some breathing space when creditors come knocking. The aforementioned proceedings can commence voluntarily by way of resolution by the board of the company, or by application by an affected person to court. Various requirements are to be met when commencing business rescue proceedings, not all of which are dealt with herein. It is advisable that any company interested in commencing Business Rescue proceedings first consult with an attorney prior to instituting such proceedings.

Business Rescue by resolution

The board of the company may resolve that Business Rescue proceedings be commenced voluntarily if the board has reasonable grounds to believe that the company is financially distressed and there appears to be a reasonable prospect of rescuing the company. Such a resolution, however, may not be adopted if liquidation proceedings have already been initiated by, or against, the company and has no force or effect until it has been filed, published and a practitioner has been appointed, all within prescribed time periods. It is however important to note that, under certain circumstances, an affected person may also approach a court for an order setting a resolution of Business Rescue aside.

Business Rescue by application to court

Unless a company has adopted a resolution to do so, an affected person may apply to a court for an order placing the company under supervision and commencing Business Rescue proceedings. If the court is convinced that the company is financially distressed, failed to pay any amount in terms of an obligation arising from employment-related matters or it would otherwise be just to do so for financial reasons and there is a reasonable prospect of rescuing the company, the court may make an order as aforesaid. However, if the affected person cannot convince the court that the above circumstances exist, the court may not only dismiss the application, but, order that the company be placed under liquidation – a risk definitely not to be taken lightly as such an order does not only affect the company and its creditors, but, also shareholders, suppliers, employees and customers. It must be noted that a court can also grant an order for the commencement of Business Rescue in an application for the liquidation of a company.

When determining whether to place a company under supervision and grant an order commencing Business Rescue, the court will always consider the bona fides of the affected person and the interests of the company will always give way to the interests of the company’s creditors.

When do Business Rescue proceedings start and when does it end?

The proceedings commence when the company files the resolution, a person applies to court for such an order or the court grants such an order during liquidation proceedings. It terminates when the court sets a resolution or order that began the proceedings aside or when the court converts the proceedings to liquidation proceedings. It can also be terminated by the practitioner and when a business plan has either been rejected or substantially implemented.

The effects

Business Rescue can provide a struggling company, close to insolvency, with some breathing space and assist its attempt to recover from a distressed financial situation. This includes a general moratorium on all legal proceedings against the company. As always, however, there are exceptions to this moratorium and legal proceedings may be instituted in certain instances, for example when the court grants a creditor leave to do so or when the practitioner consents thereto in writing.

Furthermore, an application to court for a Business Rescue order suspends any liquidation proceedings which have commenced prior to such an application.

Business Rescue also affects rights of a company to dispose of property and the manner in which the directors must exercise their functions as such functions must be exercised subject to the authority of the practitioner.

From the above it is clear that there are certain risks to be considered when deciding whether to commence with Business Rescue proceedings and it is therefore imperative that any company, prior to taking any action to commence with Business Rescue, first obtain legal opinion from an attorney.

Members of RMI4law enjoy the benefit of simply phoning the 24/7 legal advice line to obtain assistance from legal advisers. To join RMI4law, simply phone 0861 668 677

Andries Stander

Attorney at Barnard Incorporated.

Telephone number 0861 088 088.

 

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