03 Aug 2020

Is Business Rescue the Solution for Business Struggling Due to the Covid-19 Pandemic?

by Felicia Christian, Senior Associate, Durban,
Practice Area(s): Litigation |

There is no doubt that COVID-19 has had a major impact on businesses across the country from small business enterprises to corporate giants. Whilst some businesses may be able to restructure and ultimately recover, many are faced with a host of creditors and escalating debt.

Chapter 6 of the Companies Act contemplates business rescue proceedings which are available to financially distressed businesses in two circumstances. Firstly, a company may by way of resolution voluntarily initiate business rescue proceedings. Secondly, an affected person (defined in the Act as a creditor, an employee organization, an individual employee or a shareholder of the company) may apply to court for a business rescue order. The application may be brought in the High Court and is served on the company itself, and the Companies and Intellectual Property Commission. Any affected person who did not bring the application has a right to participate in the hearing of the matter.

Financially distressed means that (i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months or (ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months. The test for whether a business rescue order will be granted is whether there is a reasonable prospect that the company can be rescued and rehabilitated.

Once business rescue proceedings are initiated, there is a general suspension of legal proceedings against the company subject to the few exceptions provided for in the Act. During the business rescue proceedings, directors of the company continue to exercise their functions however, this is subject to the authority of the appointed business rescue practitioner who has full management control of the company in substitution for its board and pre-existing management. The business rescue practitioner may remove from office any person who forms part of the pre-existing management of the company or appoint a person as part of the management of a company.

It is the responsibility of the business rescue practitioner to develop a business rescue plan to be considered by affected persons and implemented. Business owners should be aware that once these proceedings are initiated, they cannot interfere with the business rescue practitioners plan to ultimately rescue the business. In many instances, this leads to conflict with the business owner and business rescue practitioner because of the power and control the business rescue practitioner possesses.

Although the Act provides that any liquidation proceedings that are commenced prior to the launching of the business rescue application are suspended until the business rescue application is heard by the court, liquidation is an alternative to business rescue proceedings.

Liquidation proceedings may be initiated by a voluntary winding up process or by a court application by a creditor of a company. The purpose of liquidation is to wind up the company’s affairs by selling the company’s assets in order to pay the winding up costs as well as its creditors. Any residue is subsequently divided amongst the company’s former shareholders in line with their interests in the company.

A voluntary winding up process is initiated by the company passing a special resolution which is to be filed with the Companies and Intellectual Properties Commission together with several other prescribed forms and documents. Liquidations may be granted by court order on the grounds set out in the old Companies Act for example if the company is deemed to be unable to pay its debts.

Once a final liquidation order is granted, the Master convenes the first creditors meetings to consider the statement as to the affairs of the company, proof of claims against the company by creditors and the appointment of a liquidator who is appointed by the Master based on nominations received by the creditors.

The function of the liquidator is to attend to the administration of the estate, this entails liquidating the assets of the company and thereafter distributing the proceeds in order of priority. In these unprecedented times, many businesses are evaluating the viability of continuing to trade in the current economic climate and creditors their options to recover unpaid debt without the lengthy process of issuing summonses. Directors and stakeholder should consider the procedures outlined above when deciding the appropriate course of action.