Business rescue (“BR”) means proceedings to facilitate the rehabilitation of a company that is “financially distressed” by providing for certain procedures.
The concept of business rescue is designed to provide a mechanism to a company that has financial difficulties but has not reached the stage of insolvency. That is the “financially distressed” company.
Financially distressed in reference to a particular company, at a particular time-means that:
- It appears to be reasonable unlikely that the company will be able to pay its debts as they become due and payable within the immediately ensuing 6 months; or
- It appears to be reasonable likely that the company will become insolvent within the immediately ensuing 6 months;
- The temporary supervision of the company, and the management of its affairs, business and property (S 128 (b) (i));
- A temporary moratorium (stay of proceedings) on the rights of claimants against the company or in respect of property in its possession (S 128 (b) (ii)); and
- The development and implementation , if approved, of a plan to rescue the company by restructuring its affairs, business , property, debt and other liabilities (S 128 (b) (iii)).
Why has the ‘rescue’ culture found favour internationally?
- It maximizes return for creditors;
- It avoids the selling of assets in piece meals (at “fire-sale values), it rather tries to sell a business as a going concern;
- It keeps business afloat in order to save jobs;
- It retains and preserves goodwill of the business in order to maximize sale value;
- It is good for the economy as a whole; and
- It caters for the “Financially Distressed”
Voluntary by Company resolution or Compulsory by affected person (employee, shareholder, trade union, creditor et cetera).
In summary, commencement of business rescue occurs as follows:
- The Company can pass a Board Resolution; or
- An affected person can apply to court.
Once in liquidation, company cannot convert into Business Rescue. Once Business Rescue order obtained, company cannot apply for liquidation. If Company already in liquidation, affected person can still apply to convert to Business Rescue proceedings. Once Business Rescue order granted, liquidation proceedings are suspended.
Automatic stay on legal proceedings against Company:
- No legal proceedings (including enforcement actions) against the company or in relation to any property belonging to the company, lawfully in its possession, may be commenced or proceeded with;
- No guarantee or surety given by the company in favour of any other person can be enforced against company except with leave of the court and in accordance with any terms the court considers just and equitable in the circumstances; and
- Prescription suspended during BR proceedings – If any right to commence proceedings or otherwise assert a claim against a company is subject to a time limit, the measurement of that time must be suspended during the company’s BR proceedings.
Effect of BR on Employees:
Employees will be placed in a position of “super-priority” creditors (above lenders) after BR proceedings commence.
Effects of BR on Contracts:
- During BR proceedings and despite any provision of an agreement to the contrary, the BR practitioner may entirely, partially or conditionally suspend, for the duration of the BR proceedings, any obligation of the company that can arise under an agreement to which the company was a party at the commencement of the BR proceedings; and would otherwise become due during those proceedings; apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any agreement to which the company is party.
- Other parties to the agreement may only assert claim for damages (no specific performance) radical departure.
- Can only cancel if apply to court.
WHEN CAN LEGAL PROCEEDINGS BE COMMENCED OR PROCEEDED WITH DURING BUSINESS RESCUE PROCEEDINGS?
- With the written consent of the BR practitioner;
- With the leave of the court;
- As a set-off against any claim made by the company in legal proceedings, irrespective of when the proceedings commence;
- In criminal proceedings against the Company or any of its Directors;
- In proceedings concerning any property or right over which the company exercises the powers of a trustee; or
- Proceedings by a regulatory authority after notifying the BR practitioner. For example, SARS may institute claims for taxes owed.
21 June 2011