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Mercantile Law 443 - Business Rescue Classnotes
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Advanced Company Law classes dealing with Chapter 6 Business Rescue.
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Business Rescue07/10
General
South Africa was one of the first countries to have a statutory corporate rescue
method
1926 Companies Act
The courts as well as the creditors were very suspicious of this procedure
Currently — Chapter 6 contains two methods of assisting businesses in financial
difficulty
Business Rescue
Compromise with Creditors
We will deal with this at the end
Previously this was called judicial management
68% of all business rescue cases are in respect of companies
65% are private companies
3% public companies
32% of cases are in respect of close corporations
The majority of Business Rescue cases end in liquidation
This is partly because it is so vulnerable to abuse
But also because it is used as liquidation proceedings ‘lite’.
The definition of ‘company’ is important here because it does not include external
companies (companies incorporated elsewhere than SA)
This is the reason why Steinhoff cannot be placed into Business Rescue
‘Affected persons’ - creditors, shareholders and employees
But in the case of employees; if they are members of a registered Trade
Union, they must be represented by the Trade Union when bringing an
application for Business Rescue proceedings.
‘Financial distress’ - NB definition - provides for both types of insolvency
Commercial insolvency - unable to pay its debts as they fall due
Balance sheet insolvency - liabilities of the company exceed the assets
NB: This does not need to be an immediate thing.
If the company will be insolvent in the next six months, can place
company in Business Rescue.
This idea of acting before the company becomes insolvent has found
application in Preventative Restructuring under the European Directive
(which must be implemented in all companies incorporated in the EU)
Method
1 - Board resolution
Majority decision by the Board; resolution filed with the CIPC
, 90% of Business Rescue proceedings are commenced using this method
This method is confidential
Despite its adverse effects on the shareholders; creditors etc.
Directors do not have to consult with anyone before taking this resolution
As a result there are very strict requirements regarding notification to
creditors and shareholders
Within 5 Business days, you have to inform the affected persons
The Board must appoint a Business Rescue practitioner
They will supervise the Business Rescue of the company
The directors are under their authority
If there is an issue, the Board cannot remove this person
It must be done by an affected person by way of court order.
But the court has been reluctant to remove Business Rescue
practitioners
An affected person can apply to have the Business Rescue set aside on
specified grounds
Either that they are not financially distressed — rare that this is the
reason
Or that there is not actually a reasonable prospect of saving the
company.
Or that there was non-compliance with the procedural requirements
(notification etc.)
An affected person can also apply to have the Business Rescue practitioner
to provide security for the proper performance of his/her duties
This is a normal principle for persons appointed in positions of trust
(executors, trustees etc.)
The only reason this hasn’t been part of the actual drafting can only
be because the drafters were not South African and did not know that
this was the done thing in SA.
2 - Court order by application to court by an affected person
The 10% that are commenced by this means are mostly
those where the Board can no longer take a resolution (where
commencement of liquidation has already begun); or
where the Board is not prepared to take a Business Rescue
resolution
You cannot commence Business Rescue via shareholder resolution
They have to apply to court.
Once the application has been filed with the registrar, the application must
be served on the company and on the CIPC, as well as notifying all affected
persons.
The court appoints an interim Business Rescue practitioner as soon as the
order is issued
The reason for an interim appointment is that this practitioner is
nominated by the applicant
But at the first meeting of creditors that takes place after a court has
placed a company under Business Rescue, they can ratify the
appointment or nullify the appointment and appoint another.
, The requirements for both are the same
1 - The company must be in financial distress
There is a specific definition of what this means
2 - There must be a reasonable prospect of rescue
Consequences of placing a business in Business Rescue
Moratorium —
Company must be placed into a sort of ‘protective bubble'
So that the directors can decide what is going to happen without
being harassed by creditors
Uncompleted contracts
Drafting of a rescue plan
In the old days, before this was a requirement, there was no ‘plan’ —
this had the advantage of being flexible.
Nowadays you must have a set plan; the Act does not provide for its
amendment, however.
In practice, the practitioners merely adapt the plan, redraft and
have the creditors vote on the plan again.
Creditors must approve the plan with 75%.
Shareholders only get to vote on the plan if their rights are affected.
Implementation of the Plan
The Act envisaged that business rescue should not take longer than 3
months
But it actually takes around 8 months to a year
Only 28% of cases have had a plan that was approved and approved
The majority of Business rescue cases end in liquidation
1 - The majority of business rescue proceedings are done for
the wrong reasons
To get a better deal for shareholders / creditors
To avoid loss of goodwill and avoid negative public
opinion
2 - This procedure is used as an informal liquidation
3 - A certain annoying provision in the ‘objects’ of business
rescue in the Act
Says that you can place a company in business rescue
to obtain a better return for your creditors
Requirements for Commencement
The requirements are essentially the same between Board-commencement or
Court-commencement
Financial distress
Prospects of rescue
The problem is that although strictly speaking the directors must have reason to
believe that the company complies with these requirements, nobody actually
checks that this is true.
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