Introduction

Given the current parlous financial state of the local construction industry, many companies in financial distress face liquidation or judicial management offering no real help or the possibility of survival and or recovery for such companies. However, Chapter 6 in the recently enacted companies Act (Act 71 of 2008) has created a solution to provide companies with the required help when in financial distress called “business rescue”. But how will Chapter 6 affect creditors of a business placed under business rescue?

What is “Business Rescue” according to the Act?

Firstly, let’s have a look at when these business rescue proceedings begin and end. According to Section 132:

“(1) Business rescue proceedings begin when —

(a) the company—

(i) files a resolution to place itself under supervision in terms of section 129(3); or

(ii) applies to the court for consent to file a resolution in terms of section 129(5);

(b) an affected person applies to the court for an order placing the company under supervision in terms of section 131(1); or

(c) a court makes an order placing a company under supervision during the course of liquidation proceedings, or proceedings to enforce a security interest, as contemplated in section 131(7).

(2) Business rescue proceedings end when—

(a) the court—

(i) sets aside the resolution or order that began those proceedings; or

(ii) has converted the proceedings to liquidation proceedings;

(b) The practitioner has filed with the Commission a notice of the termination of business rescue proceedings; or

(c) a business rescue plan has been-

(i) proposed and rejected …; or

(ii) adopted …, and the practitioner has subsequently filed a notice of substantial implementation of that plan.” (Emphasis added).

When a company is in distress financially, the Act provides measures to help the the company’s rehabilitation (Section 128 (b)). This route is either chosen by the board of the company (voluntary) or by court order (compulsory) (Section 131). It entails the appointment of an appointed practitioner to manage the affairs, business and property of the company as well as a postponement of the rights of any claimants against the said company in regards to property in its possession and management. It allows for a restructuring of affairs, business, property, debts, any other liabilities and equity in order to make sure that the company has a better chance of financial stability to enable it to continue doing business. The practitioner’s standing and qualifications can be equated to that of a director of a company, ie. Good standing etcetera, as prescribed by Section 138 of the Act.

The purpose of business rescue plan

One of the duties placed upon the practitioner is to prepare and publish a business rescue plan once he/she has consulted all the parties who are affected by the business (ie. management, creditors and other affected persons) and such plan must contain all reasonably required information which would be separated into three parts namely:

  • Part ‘A’ contains background information which will consist of, amongst other things, lists of all the company’s material assets (including those being held as security for creditors), creditors and their dividend to be received as well as a list of the holders of company’s issued securities and copy of written agreements of practitioner’s remuneration;
  • Part ‘B’ contains proposals, which must containing, amongst other things, the nature and duration of the moratorium for which the business rescue plan makes provision, to what extent the company will be released from payments to creditors as well as what property will be made available to pay creditors, the ongoing role of the company and the treatment of any existing agreements,
  • Part ‘C’ of the plan must contain at least, amongst other things, the following – a statement of the conditions that must be satisfied, if any, for the business rescue plan to come into operation, be fully implemented, the effect, if any, that the business rescue plan contemplates on the number of employees, and their terms and conditions of employment, and the circumstances in which the business rescue plan will end.

What does this mean for the creditors?

When a company has successfully applied for “business rescue” it may raise concerns amongst the companies doing business with the company under rescue proceedings as well as its creditors.

First and foremost, you will want to know whether this company will be in a position to pay you or not and secondly, whether it will be able to complete the project it is undertaking for you. Business rescue does not, in terms of Section 133, release the company from its obligations to pay it creditors or to complete the project, but rather constitutes a potential postponement to payment or to fulfill its other contractual obligations.

Subject to the provisions of Section 133, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum. The Act also makes property of the company available for the creditor’s claims. The board may propose an arrangement or a compromise of its financial obligations to the creditors by delivering a copy of the proposal and a meeting to consider it (Section 155(2)).

In regards to the creditors, the practitioner has 10 business days after appointment to set up a meeting in order to inform them of chances that the business has of continuing its operations and to receive proof of claims from the creditors (Section 147). The practitioner must inform all creditors known to him of the date and time of the first meeting along with its agenda. After which the creditors may choose whether or not they want to have a committee of creditors and if so they can appoint the members, alternatively each creditor may represent itself.

Conclusion

Business rescue, as contemplated by the Act intends to employ mechanisms that may be used to save a company from financial collapse. The business rescue plan may, in terms of Section 154, provides that, if it is implemented in accordance with its terms and conditions, a creditor who has acceded to the discharge of the whole or part of a debt owing to that creditor will then lose the right to enforce the relevant debt or part of it. Lastly if the business rescue plan has been approved and implemented in accordance with this the Act, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except to the extent provided for in the business rescue plan.