CHAPTER 22: BUSINESS RESCUE

Introduction
• Before the Companies Act of 2008, South African business rescue was governed by the Companies Act
of 1926 and 1973.

• Companies Act of 1926 introduced, and the Companies Act of 1973 maintained, a system for business
rescue of companies that did not succeed.

• The primary mechanism provided by these two Acts was the process of judicial management, which
was only available before a company was placed in liquidation.

• Under the system of judicial management, when a company faced financial distress, the management
of the company was replaced by a judicial manager appointed by the court. The judicial manager
would then take control of the company's affairs under the supervision of the Master of the Court.
• The process was, however, not available to close corporations, and the system of judicial management
was in general largely ineffective.

• The Companies Act of 2008 brought about significant changes to the business rescue landscape in
South Africa.

• The Companies Act of 2008 introduced business rescue proceedings for financially distressed
companies.

• If it appears reasonably unlikely that a company will be able to pay all its outstanding debts, or if it is
likely that it will become insolvent within six months, then it is considered financially distressed.
• Business rescue, as provided by the Companies Act of 2008, is a temporary process aimed at
restructuring the company's affairs to ensure its viability and avoid liquidation.

• During the business rescue process, claims against the company are suspended, allowing for the
restructuring to take place under supervised conditions.

• The supervisor overseeing the process is known as a business rescue practitioner.

• It is important to note that the business rescue practitioner does not replace the management of the
company but rather monitors and supervises its activities.
Elements of business rescue
Business rescue consists of three elements:

• Supervision of the management of the company by the business rescue practitioner.

• A moratorium on the enforcement of claims against the company.

• Development and implementation of a business rescue plan by allowing the restructuring of the
company's affairs, business, property, debt, other liabilities, and equity.
Who may institute a business rescue?

- Business rescue can be initiated either by the board of a company or by an affected person.
Initiative of the board
The board of a company may take a resolution to initiate voluntary business rescue proceedings. The
board must have reasonable grounds to believe that:

• the company is financially distressed

• there appears to be a reasonable prospect of saving the company.

Following the resolution by the board, the company must

• file Form 123.1 (http: //www.cipc.co.za/files/9214/0108/5631/CoR123_1. pdf) with a copy of the board
resolution with the CIPC.

• publish within five business days the resolution to every affected person.
• appoint a business rescue practitioner within five business days after the resolution has been filed.

• file a notice of the appointment with the CIPC within two days of having made the appointment.

• publish notice of the appointment to every affected person within five business days of having filed the
notice with the CIPC.

The Act provides for opposition to the resolution of the board, as well as for setting aside of the
appointment of the business rescue practitioner.
Opposition to the board decision
An affected person may approach the court to set the resolution of the board aside. The court can also do
so if it regards this as just and equitable. The following are affected persons:

• Shareholders

• Creditors

• Registered trade unions representing employees

• Other employees not represented by the registered trade unions

The grounds for opposition to the board resolution are the following:

• No reasonable basis for believing the company to be financially distressed.

• No reasonable prospect of rescuing the company.

• The procedural requirements were not met.

• Opposition to the business rescue practitioner.

Initiative of an affected person
The second way to commence rescue proceedings is when an affected person applies to the court to have
the company placed under supervision.

Notice of the application must be given to the CIPC and to every affected person. The court can grant the
order if it is satisfied that:

• the company is financially distressed

• the company has, in respect of an employment-related matter, failed to make due payment

• it is just and equitable to do so for financial reasons

• a reasonable prospect of rescuing the company exists

The affected person may recommend a practitioner who may be appointed as interim practitioner by the
court.

The appointment may be ratified by the majority of the independent creditors’ voting interests on the first
meeting of the creditors.

Interested parties need to be notified of the appointment.

Business rescue process
The practitioner must:

• investigate the company's affairs, business, property, and financial situation

• be allowed sufficient time by the court to form an opinion as to whether the company appears to be
financially distressed or whether there is reasonable prospect of rescuing it

• in a case where there is no reasonable prospect to save the company, inform the court, company, and
affected persons accordingly and apply to the court to discontinue rescue proceedings and to place the
company into liquidation

• in a case where the company is no longer financially distressed, inform the court, company, and
affected persons accordingly and apply to terminate the rescue proceedings
• report the following to the appropriate authorities for investigation:

⁃ all voidable transactions

⁃ failure by directors in respect of material obligations

⁃ reckless trading, fraud, or other breaches of the law relating to the company

• convene, within 10 days of appointment, a meeting of creditors

• obtain proof of the claims of creditors against the company

• prepare the business rescue plan in consultation with company management, affected persons, and
creditors
• convene and preside over a meeting with creditors to approve the business rescue plan

• convene a meeting of any class of holder of company securities if the rescue plan affects their rights

• exercise the functions of a director in providing express instructions or direction in respect of their
management functions to the directors of the company

• prepare and deliver a progress report to the affected persons, the court, and the CIPC if the business
rescue process has not been finalised within three months.

• The progress report must be updated monthly until the process is terminated. The practitioner will then
file a notice of substantial implementation with the CIPC.
The business rescue plan
The business rescue plan is prepared by the practitioner in consultation with the company management,
affected persons, and creditors.

The plan is then published within 25 business days after the appointment of the practitioner.

Within 10 business days after the publication, the practitioner must convene the meeting of creditors to
consider the plan.

On meeting, the practitioner must provide information, invite contributions and allow voting on the plan.

If approved, the plan binds the company and every creditor of the company.

The plan will be approved if 75% of the creditors’ voting interest (of which 50% must be independent
creditors) voted in favour of the plan. The company must then implement the plan.
Effect of approval of the plan
1. Legal proceedings
• The general rule is that during rescue proceedings, no legal proceedings can be instituted or proceeded
with against the company without the written consent of the practitioner.

• No guarantee or surety can be enforced against the company. creditors can enforce debts only in so far
as the rescue plan provides for that.

2. Property of the company

• Transactions relating to property owned by the company may only take place in the ordinary course of
business, at arm's length, for fair value, and with the written consent of the practitioner, the approved
business rescue plan, or a court order.
3. Contracts with the company
• The general rule is that the practitioner has the discretion to proceed with any contract or not.

• The practitioner may unilaterally cancel or suspend the contract entirely or any part or condition of it.

• The other party has a claim for damages only against the company.

• Employment contracts are the exception to the general rule in that they proceed in terms of their
existing terms and conditions.

• Retrenchments take place in terms of sections 189 and 189A of the Labour Relations Act of 1995.
4. Positions of directors
• The Act makes a distinction between the functions of the directors and the management functions
of the directors.

• Directors who exercise the functions of a director are subject to the authority of the practitioner
and the duties stated in section 75 (personal financial interests) and section 76 of the Act.

• Directors exercise management functions in terms of the express instructions and direction of the
practitioner. In this instance, the duties contained in section 76 apply to the practitioner.

• Acts performed by the directors on behalf of the company in matters that require the consent of
the practitioner can be voided by the court in terms of section 218.
5. Affected persons
• As far as the rights of affected parties are concerned, each creditor, employee, and securities holder is
entitled to notice of court proceedings, decisions, and meetings regarding the business rescue
proceedings.

• They are entitled to be consulted, to participate formally and informally, to attend and present
submissions at meetings, and where applicable, to vote for the approval or rejection of the business
rescue plan.

• They may also propose the development of alternative plans or make an offer to purchase the interests
of creditors or securities holders.
6. Position of shareholders
• As part of the business rescue plan, equity may need to be restructured.

• Shareholders have the right to vote on the plan if the plan proposes the alteration of the rights of that
class of securities.

• In effect they have the right to approve or reject the plan and restructuring.

• Any alteration to the classification or status of the securities will be void unless the alteration is the
result of the approved business rescue plan or in terms of a court order.

• Where the business rescue plan is not accepted, securities holders may propose the development of an
alternative plan. They also have the right to make an offer to purchase the interests of creditors and
other securities holders.
7. Position of creditors
• Creditors have somewhat complicated voting rights.

• In general, unsecured creditors have voting interests equal to the value of their claims against the
company.

• Secured creditors have voting interests equal to the value of their claims against the company minus
the amount covered by their security.

• Subordinated creditors have voting interests equal to the amount they would have received if the
company had been liquidated.

• Contingent or prospective creditors have voting interests as appraised and valued by the practitioner.
8. Payment of postcommencement claims
• Remuneration of the practitioner, and other costs arising from the rescue proceedings, are paid first.

• Thereafter, employment costs incurred during the rescue process will be paid.

• Postcommencement finance is next in line, followed by all unsecured claims against the company.

NB** Postcommencement finance relates to capital that is provided to the company once business rescue
proceedings have commenced.
Business rescue practitioner
• A business rescue practitioner is the person (or the persons, if more than one practitioner is appointed)
responsible for supervising and managing the company whilst it is under business rescue.

• It is essential that a practitioner with the necessary skills and qualifications is appointed and, where
necessary, has the particular industry experience or expertise to supervise the business rescue of a
particular company.
Accreditation
Section 138 sets out the qualifications required for business rescue practitioners. A person may be
appointed as a business rescue practitioner only if the person

• is a member in good standing of a profession that is subject to the control of a regulating authority.

• is not subject to a probation order

• is not disqualified from acting as a director

• is not in a relationship with the company that will have an impact on his integrity, impartiality, or
objectivity

• is not related to a person who is in such a close relationship with the company
Restrictions on the appointment of business rescue practitioners
• Regulation 127 places some restrictions on the appointment of business rescue practitioners.

• Senior business rescue practitioners are persons who qualify for an appointment because they have
actively engaged in business turnaround for at least 10 years.
• The period for experienced practitioners is thus 5 years or more. while junior practitioners usually have
experience of less than 5 years.
• Junior practitioner may be appointed as business rescue practitioner for a small Company, an
experienced practitioner for a small or medium company, while. senior practitioner may be appointed
for any size company. A small company’s public interest score is less than 100; a medium company's
score is at least 100 but less than 500; while the score for a large company is 500 or more.
• The fee structure for business rescue practitioners is set out under Regulation 128. The CIPC may issue
a business rescue practitioner’s license to a per. son after receipt of the application on Form CoR 126.1
and payment of the prescribed fee of R500,00.
Compromise
• A compromise is a proposal regarding a restructuring of the financial obligations of a company,
submitted to and accepted by the creditors of the company in a meeting convened for that purpose.

• The purpose of the compromise is to find a mutually agreeable solution to address the company's
financial difficulties.

Proposer
• The proposal is usually made by the board of the company. They assess the financial situation and
propose a restructuring plan that can help the company overcome its challenges.

• However, in cases where the company is being liquidated, the liquidator may also put forward the
proposal on behalf of the company.
Content
The proposal for a compromise must contain sufficient information to reasonably allow the creditors to
decide whether to accept or reject the proposal.

It is divided into three parts.

• Part A: This section provides background information about the company's financial situation.

• Part B: Here, the actual proposal is stated. It outlines the specific restructuring measures and strategies
that the company intends to implement to address its financial obligations.

• Part C: This part includes the assumptions and conditions underlying the proposal.
It must also contain a certificate of an authorised director or prescribed officer confirming that:

• the factual information provided appears to be complete and accurate

• the projections are made in good faith based on the factual information and the stated assumptions.
Service and filing
• The proposal must be delivered to all the creditors of a company (or the class of Creditors) and the
CIRC. If the proposal was confirmed by the court, a copy of the court order must be filed with the
CIPC within five days after the order was made. The court order is also attached to the company's
Memorandum of incorporation, which is kept at the registered address of the company.

Adoption
• The proposal must get the support of the majority, in number representing at least 75 percent in value
of the creditors or class of creditors, at the meeting convened to consider the proposal. Voting takes
place in person or by proxy.
Approval by the court
The company is not compelled to but may apply to the court to have an approved proposal made an order
of the court. The court has the discretion to approve the adopted proposal. The court considers whether it
is just and equitable to do so by taking into account the interests of the number of creditors present or
represented at the meeting. If the company is in liquidation, the court also considers the report from the
Master.

Effect of the court order

The court order is binding on all the creditors or the members of a class of creditors as from the date a
copy of the order is filed.

This means that all parties involved are obligated to comply with the terms and conditions outlined in the
order.