Under South African law relief options are available to businesses which are in debt. A business may attempt to negotiate an extended period wherein debts can be settled or the business can wait for the debtor to come knocking on their door. It is very important to consult an attorney before extensions for the payment of debts are negotiated as this may be construed as an act of insolvency with its own repercussions if incorrectly worded. The new Companies Act, Act 71 of 2008 (hereinafter “the New Act”) came into effect on the 1st of May 2011. The aim of the New Act is to provide a legislative tool that can be used to effectively ‘rescue’ and recover financially distressed companies. The old Companies Act, Act 61 of 1973 (hereinafter “the Old Act”) imputed no actual obligation on directors of a company when a company was in financial distress.
The definition ‘rescue’ proposes a reorganization and restructuring of a company’s debts and management to assist a company to reacquire a state of profitability. Directors of a company that have reasonable grounds to believe that a company is in a situation of financial distress, have the option to either apply to the court for an order placing the company under ‘business rescue’ or to have the company liquidated. A temporary moratorium is placed on the rights of claimants against the company or in respect of property in its possession on the date that an business rescue order is granted.
A financially distressed company is a company that appears reasonably unlikely to be able to pay all its debts as they become due and payable within the immediate ensuing six months or that appears to be reasonably likely to become insolvent within the immediate ensuing six months. Business rescue proceedings can be initiated by way of a resolution of the board of directors of a company to voluntarily commence with business rescue proceedings or any affected person may apply to court for an order to place the company under business rescue.
After the resolution was adopted by the board of directors, the resolution along with a notice of appointment of the appointment of a business rescue practitioner must be filed with the Companies and Intellectual Property Commission (CIPC). A notice of the resolution must be given to every affected person. In order to succeed with an application for business rescue to court, the applicant must prove that the company is financially distressed, the company has failed to pay its debts and there is a reasonable prospect of rescuing the company. Reasonable prospects entails that the implementation of a business rescue plan is likely to deliver a better return for creditors and shareholders of the company as opposed to the results of an immediate liquidation of the company.
When a company is placed under business rescue no legal proceeding, including enforcement actions may be instituted against the company, or in relation to any property belonging to the company, or lawfully in its possession without the written consent of the practitioner or with the leave of the court.
The business rescue practitioner must first meet the requirements as set out in Section 138(1) and can be appointed by the board of directors within five days after filling the resolution with CIPC or can be appointed by the court as an interim practitioner nominated by the affected persons. The practitioner will have full managerial control over the company and will be responsible for the restructuring of the company as indicated in the business rescue plan implemented and developed by the practitioner. Directors who allow companies to continue to trade in a state of insolvency or financial distress and fail to take the necessary steps to rescue the company must acknowledge that their failure may be the sole cause of liquidation and liability may follow their indecisiveness in this instance.
The business rescue mechanism allows directors a life buoy to escape the liability that may necessarily follow a sinking ship.
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