Business rescue is a process that allows for the rehabilitation of companies in financial distress. It serves as an alternative to liquidation procedures, in which a business ceases trading and its assets are then sold and distributed among creditors according to an order of preference.
Liquidation generally provides creditors with a better return than bankruptcy, since it allows companies to restore their trading operations and save jobs and economic impact.
What is the legal regime?
In South African law, business rescue is a procedure that can be initiated either by the board of directors or court order. This legal procedure creates a temporary moratorium on claimants (for example creditors) from bringing lawsuits against the company, giving those in financial difficulty time to restructure their affairs and return to profitability.
The legal framework for business rescue is outlined in Chapter 6 of the Companies Act No. 71 of 2008.
A Financially Distressed Company
According to section 128 of the Companies Act, a financially distressed company is one that appears unlikely to pay all its debts as they become due within six months or is likely to become insolvent within those same six months.
A company can be placed under business rescue when either its board of directors or a court orders it to be monitored in what are known as ‘business rescue proceedings’.
During a business rescue process, the company will be managed and controlled by an experienced business rescue practitioner with full authority over both its business operations and property. However, its existing board remains intact, with directors prohibited from acting contrary to the guidance provided by the business rescue practitioner.
According to section 138 of the Business Rescue Plan Act, companies are subject to a moratorium on creditors’ rights until a Business Rescue Plan has been adopted and approved by the BRP.
As part of a business rescue plan, the company will be restructured and returned to profitability. This involves appointing new management and taking steps to safeguard its assets.
Affected persons refer to those individuals with rights during the business rescue process, including directors, shareholders, employees or their representatives and trade unions representing employees of the company. These parties possess numerous important privileges which are outlined in section 131 of the Companies Act.
Business rescue is the process of rehabilitating a company’s operations and restoring its commercial status, enabling it to continue trading and earning profit. This may involve selling non-core assets or even takeover by another firm. The main goal is to restore both the business and profits in order to pay creditors, shareholders, and affected parties for their losses.