The Fundamentals of a Business Rescue

There is no denying that the South African economy, as with the rest of the global markets, has been severely impacted by the COVID19 pandemic, which was exacerbated by South Africa’s ensuing economic downgrade to junk status. Many distressed company owners are probably lying awake at night, contemplating how their businesses will continue to remain operational – never mind profitable.

For many companies who are currently in financial distress and where there is a reasonable prospect of rescuing the company, the board may apply to place the company in business rescue.

What is financial distress?

According to Section 128(1)(f) of the Companies Act 17 of 2008, a company can be regarded as being in financial distress if it appears unlikely that it will be able to pay its debts within the immediate next six months, or where it seems likely that the company will become insolvent during the same period.

What are the Directors obligations when a company is in financial distress?

The Directors of a company in financial distress are not under any obligation to place the company into business rescue. They are however obliged to formally notify their employees, and any other affected person, that the company will be unlikely to pay its creditors within the foreseeable next six months. If the Directors decide not to place the company under business rescue, they will also need to furnish these reasons in the notice to the affected persons.

What are the objectives of a business rescue?

Under the Companies Act, a business rescue aims to restructure the affairs of the company in an attempt to ensure that it can continue to operate and become solvent again. If the company fails to re-establish its solvency, then business rescue is a far more attractive option for creditors and shareholders, as they would be better off than if the company was liquidated.

How to determine if the company is capable of being successfully “rescued”

For a company to undergo business rescue, it must be capable of being rescued. The South African courts have provided direction in this regard. It must be ascertained whether;

  • there is a “reasonable prospect” of the company being rescued;
  • the cause of the failure of the company must be indicated; and
  • sustainable solutions to remedy the current situation must be provided

How is a company placed under business rescue?

Either a company can be placed under business rescue voluntarily, or they may be compelled to do so. If the Board of Directors passes a resolution stating that they believe the company is financially distressed, and that there are reasonable prospects of being able to rescue the business, then they may apply for voluntarily business rescue.

However, the company will go into compulsory business rescue should an affected person such as a creditor, employee, shareholder or trade union make an application to the court because;

  • the company has failed to pay an amount in terms of a contract;
  • that it is just and equitable;
  • that the company is financially distressed; and
  • that there is a reasonable prospect that the company can still be rescued.

Moreover, directors could be held personally liable for the debts that are incurred by the company, while trading in financially distressed circumstances.

Business rescue is actually a valuable tool that is available to turnaround an ailing business. If your business is currently experiencing financial difficulties or experiencing financial distress in this difficult economic climate, contact us for a free consultation to discuss the various options that may be viable to pursue.

Boutique Advisory is a firm of licensed business rescue practitioners and business turnaround specialists.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).