The Companies Act 71 of 2008 (the Act) provides a mechanism for entities that find themselves in a precarious financial situation to re-assess their financial situation and find solutions. This mechanism, business rescue, is defined in s 128(1)(b) as:
- The temporary supervision of the company and of the management of its affairs, business and property;
- A temporary moratorium on the rights of claimants against the company or in respect of property in its possession;
- The development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity in a manner that maximizes the likelihood of the company continuing in existence on a solvent basis. If this is not possible, the plan should result in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
When should a company commence business rescue?
A company should commence business rescue proceedings when it is financially distressed, either when it appears that the company will not be able to pay its debts as they become due and payable over the next 6 months, or if it appears that the company will become insolvent during this period (s 128 (1)(f)).
The role of the business rescue practitioner
The business rescue practitioner is appointed to oversee the company throughout these proceedings. In terms of s 140(1)(a) of the Act, during this period the practitioner has full management control of the company, substituting for its board and pre-existing management, and is responsible for developing a business rescue plan to be considered by affected persons, and for implementation of the plan should it be adopted (s 140(1)(d)).
How is a company placed under business rescue?
A company can be placed under business rescue proceedings in one of two primary ways.
- Firstly, the board of directors can resolve that the company voluntarily commences business rescue proceedings and should be placed under the supervision of a business rescue practitioner (s 129).
- Secondly, s 131 provides for the company to be placed under business rescue by an affected person making a formal application to court for such an order, provided that the company has not commenced business rescue proceedings in terms of s 129. This application must be based on one of the following:
- 1. the company is financially distressed;
- 2. the company has failed to pay any amount in terms of an obligation, public regulation or contract, particularly in respect of employment-related matters;
- 3. it is just and equitable considering both the financial circumstances and the reasonable prospects of rescuing the company.
The duration of business rescue proceedings
Section 132 of the Act provides that business rescue proceedings should not last longer than three months. Should they not end within that period, the practitioner must prepare monthly reports on the status of the proceedings until they are completed, and furnish these reports to affected persons or the court, depending on the manner in which proceedings were launched.
What does the business rescue procedure entail?
The proceedings commence either voluntarily, by means of a resolution, or when a court orders their commencement. Section 141 requires the business rescue practitioner to investigate the affairs of the company once proceedings have commenced. Section 147 then requires the practitioner to convene meetings with creditors and employees, in order to discuss the prospects of rescuing the company. Section 150 of the Act requires the business rescue practitioner to publish a business rescue plan within 25 days of his or her appointment. Once this is published, s 151 requires him or her to convene a meeting for affected or interested parties to vote on the adoption of the proposed plan.
How are business rescue proceedings terminated?
Section 132 of the Act provides that the proceedings may be terminated in one of the following ways:
- by the court setting aside the resolution adopted or the order granted to commence the business rescue proceedings, alternatively, by converting the proceedings from business rescue to liquidation;
- by the filing of a notice of termination of the proceedings (a Cor. 125.2 notice) by the practitioner with the CIPC;
- by the rejection of the proposed business rescue plan when no affected party has attempted to extend the proceedings;
- by the filing of a notice of substantial implementation by the business rescue practitioner.
THE IMPLICATIONS OF BUSINESS RESCUE
May legal proceedings be instituted against a company during business rescue?
Section 133 of the Act places a statutory moratorium on the company from the date of commencement of the proceedings. During the course of the business rescue proceedings, no enforcement action, such as the execution of an order, may take place. Legal proceedings may not be instituted against the company or any property which belongs to it or is in its lawful possession. Section 133 does however provide for certain exceptional circumstances that afford a party an opportunity to proceed with an enforcement action or the institution of legal action against the company.
The effects of business rescue on contracts
In terms of Section 136(2), the business rescue practitioner may, during business rescue proceedings and despite any provision in an agreement to the contrary, either partially, entirely or conditionally suspend, for the duration of the proceedings, any obligation of the company that may arise under an agreement to which the company was a party at the commencement of the proceedings and that would otherwise become due during the proceedings. The practitioner may also apply to a court to partially, entirely or conditionally cancel any obligation the company is responsible for on terms that are just and reasonable at the time.
It is important to note that in terms of s 136(2A), the business rescue practitioner is not empowered to cancel or suspend any provision of an employment contract, nor any agreement in terms whereof ss 35A or 35B of the Insolvency Act 24 of 1936 would be applicable should the entity be liquidated.
Parties to an agreement affected by the cancellation or suspension of any provisions do have a right of recourse and may institute a claim for damages as contemplated by s 136(3) of the Act.
Can a suretyship or guarantee agreement be enforced during business rescue proceedings?
In terms of s 133(2) of the Act, a surety or guarantee provided by the company in favour of any person may not be enforced by that person against the company except with the leave of the court and in circumstances that are just and equitable.
In Investec Bank Ltd v Bruyns 2011 JDR 1563 (WCC) the court considered the meaning of s 133 and the status of a surety and guarantee provided either by the company, or by another person or entity in favour of the company, during business rescue. It held that s 133(2) is unambiguous in that it prohibits a third party from enforcing a suretyship or guarantee, provided by the company, against the latter during business rescue.
However, the statutory moratorium that arises for the benefit of a company does not automatically arise for the benefit of a surety provided in favour of the company. This is because the statutory moratorium is a personal defence that arises for the benefit of the principal debtor (ie the distressed company) and not for the benefit of a surety (ie a third party).
Conclusion
In South Africa, our energy crisis and unstable economic climate have created unprecedented challenges for many companies. Business rescue is a mechanism for many companies that find themselves in financial distress to rehabilitate and to navigate a difficult economic environment. It should be considered by any company that finds itself in a position such as I have outlined in this article. At MacRobert Attorneys we pride ourselves on providing expert legal services and have competent legal professionals that can help to guide and navigate you and your business out of precarious financial scenarios, alternatively, to represent you as a creditor or interested party affected by business rescue proceedings, to ensure that your rights and interests are protected at all times.
