The New Companies Act No. 71 of 2008 replaced the old Companies in May 2011. Pursuant to the Amendment of the Old Companies Act, Chapter 6 of the new Companies Act introduces the Business Rescue Procedure (BRP). Business Rescue is a procedure that facilitates the rehabilitation and restructuring of a company that is undergoing financial difficulties. The business rescue procedure aims to maximise the possibility of the business to remain solvent.
The definition of financial distress in the Act is as follows:
- when it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuring six months; or
- when it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.
The court having jurisdiction for BRP is the High Court. BRP shares many similarities with its predecessor, the old judicial management of failing companies; however it provides additional remedies in the reversal of a company from being financially distressed to becoming solvent. The Business Rescue regime aims to be more workable and effective than judicial management of failing companies and differs from it in that BRP is mostly self-administered by the company, under independent supervision of the business rescue practitioner and within the prescribed provisions as set out in the Act, and subject to court intervention at any time on application by any of the stakeholders. The most distinctive aspect of Business Rescue is that shareholders, employees, manufacturers, and suppliers are all regarded as stakeholders and may make an application for any company to be placed under business rescue and to take part in the company’s strategy to remain solvent, this application will most likely result in the appointment of a practitioner.
A Business Rescue Practitioner is a person appointed to reverse the company and he or she has the power to suspend any agreement of a company, except contracts of employment and S35A and B Insolvency agreements. According to Section 138 of the Act, in order to qualify as a business rescue practitioner one must be either:
- a member in good standing of a legal, accounting or business management profession accredited by the Companies and Intellectual Properties Commission (CIPC),
- or licensed as such by the CIPC.
It should be noted that a company that has adopted a resolution to begin business rescue procedure cannot later adopt a resolution to commence liquidation proceedings. After the adoption of such a resolution, but before the adoption of a business rescue plan, an affected person may apply to the appropriate Court for an order to set aside the resolution; to set aside the appointment of the practitioner; or to require the practitioner to provide security to secure the interests of the company and any affected persons. The resolution may be set aside in the event that there is no valid reason for concluding that the company is financially distressed; there is no reasonable prospect for rescuing the company; or the company failed to satisfy the procedural requirements in relation to the adoption of such resolution.
However, in the event that liquidation proceedings have already begun at the time an application for business rescue procedure is brought, such application will suspend those liquidation proceedings until the court has adjudicated upon the application or until the BRP ends. In addition, the court may make an order at any time during the course of any liquidation proceedings or proceedings to enforce any security against the company.
BRP has tremendously aided the rehabilitation of struggling but viable companies. The number of liquidations in May 2013 has dropped by a huge 51.7% compared to those of May 2012, according to figures released by Stats SA. However, one should note that not every company that is financially distressed is a suitable candidate for business rescue, BRP has been subject to some abuse which can be demonstrated by the number of High Court judgments dismissing applications for rescue, instead of granting a liquidation order. Furthermore, the Courts have held that business rescue proceedings are not for the terminally ill. Nor are they for the chronically ill. They are for ailing corporations, which, given time, will be rescued and become solvent.
In conclusion, despite the abuse of the BRP in Chapter 6 of the New Companies Act, there is no doubt that the BRP is a great alternative to the old judicial management of failing companies as it allows all stakeholders to participate in the BRP under the supervision of a neutral practitioner and it ensures that all affected parties have a say in the BRP. Thus, if the underlying principals are in place, or can be fixed by the business rescue practitioner, the BRP is a great alternative to judicial management of failing companies.