Business Rescue FAQs
In this FAQ summary we answer questions from South African business owners and leaders who are potentially facing financial distress, insolvency or restructuring.
Our insolvency, business rescue & restructuring team is ready to assist with advice for directors, business owners, employees and creditors during the various phases of the business rescue process.
What does it mean when a company is in ‘financial distress’?
‘Financial distress’ means it is reasonably unlikely that a company will be able to pay its debts when they fall due for payment in the immediately ensuing six months, or when it is likely that a company will become insolvent in the immediately ensuing six months.
Should a company consider business rescue or liquidation if it finds itself in financial distress?
If a company is in financial distress but there appears to be good prospects that, given some time, the company will be able to trade out of the financially distressed circumstances, then business rescue should be pursued and it should be pursued at the first signs of financial distress.
If a company is in financial distress but there are no prospects that the company will be able to trade out of those circumstances, then a company should consider liquidation.
What is business rescue?
Business rescue is a legal process aimed at rehabilitating a company in financial distress. This is done under the supervision of an appointed business rescue practitioner who manages the company’s affairs and business in accordance with an approved business rescue plan. The goal is to help a company trade out of its financially distressed circumstances. If business rescue fails, the prospect of liquidation will then have to be explored.
Who are the 'affected persons' in terms of business rescue?
Affected persons are the shareholders, creditors and employees of a company in business rescue, as well as registered trade unions representing the employees of a company.
What is the effect of business rescue on the directors of a company?
During business rescue proceedings, the directors continue to act and exercise management functions but are subject to the authority and direction of a business rescue practitioner. The directors are always expected to attend to the business rescue practitioner’s requests and provide any reasonable requests for information. Any action taken by a director that requires the business rescue practitioner’s approval will be void if such approval was not obtained.
What is the effect of business rescue on the shareholders of a company?
Shareholders are permitted to vote on the business rescue plan only when the plan seeks to change the rights associated with the class of securities they hold or as creditors in instances where they have made loans to the company. During proceedings, any alteration in the classification or status of any of the issued securities of the company except by way of transfer of securities in the ordinary course of business is invalid, unless the court otherwise directs or such alteration has been approved in the business rescue plan.
How is a company placed in business rescue?
There are two ways in which a company can be placed in business rescue, namely by way of a board resolution (voluntary business rescue) and by way of an application to court (compulsory business rescue).
A company can be placed in business rescue voluntarily by the board of directors adopting and filing a resolution to commence business rescue proceedings and placing a company under the supervision of a business rescue practitioner. The resolution is passed by the board if:
- there are reasonable grounds to believe that the company is financially distressed; and
- there appears to be a reasonable prospect of rescuing the company financially.
A company can be placed in compulsory business rescue when an affected person makes an application to the High Court for an order placing the company in business rescue where:
- the company is financially distressed;
- the company has failed to pay any amount in terms of an obligation; or
- it is just an equitable to do so for financial reasons and there is a reasonable prospect of rescuing a company.
What is the next step after a company’s board resolves to place a company in business rescue?
The board must file its resolution to place the company in business rescue with the Companies and Intellectual Property Commission (CIPC). The board must then appoint a business rescue practitioner within five business days after having filed the resolution with CIPC.
When must the board resolution appointing a business rescue practitioner be filed with the Companies and Intellectual Property Commission (CIPC)?
The resolution by the board of a company appointing a business rescue practitioner must be submitted to CIPC within two business days of the resolution having been passed.
When should each affected person be notified about business rescue?
Affected persons (shareholders, creditors, employees and trade unions) must be notified within five business days after the appointment of the business rescue practitioner.
Who supervises a company’s business rescue?
The business rescue of a company is supervised by an appointed business rescue practitioner.
Can a business rescue practitioner be removed from office?
Yes, a business rescue practitioner may be removed by a board resolution or by order of court.
The court may remove a business rescue practitioner from office on any of the following grounds:
- incompetence or failure to perform the duties of a business rescue practitioner of a particular company;
- failure to exercise the proper degree of care in the performance of the business rescue practitioner’s functions;
- the engaging in illegal acts or conduct by the business rescue practitioner;
- if the business rescue practitioner is no longer qualified for office;
- the business rescue practitioner has a conflict of interest or lack of independence from the company or its management; or
- the business rescue practitioner is incapacitated and unable to perform the functions of that office and is unlikely to regain that capacity within a reasonable time.
How is the business rescue practitioner remunerated?
The business rescue practitioner is entitled to charge an amount payable by the company in business rescue for the remuneration and expenses of the business rescue practitioner in accordance with a standard tariff that is prescribed by the Minister of Trade and Industry. The business rescue practitioner may enter an agreement with the company providing for further remuneration related to the adoption of a business rescue plan or the inclusion of any matter within such a plan.
What function does the business rescue practitioner perform?
The business rescue practitioner is responsible for the temporary supervision of a company in financial distress, the management of a company and its affairs. The business rescue practitioner must develop and implement a business rescue plan to rescue a company by restructuring its business, debt, affairs, liabilities and equity, etc.
What is a business rescue plan?
A business rescue plan is the plan developed and enacted during the business rescue of a company. It details how a business rescue practitioner plans to rescue a financially distressed company after consulting the creditors and other affected persons of a company.
When must the business rescue plan be published by a company?
The business rescue plan must be published by a company no later than twenty-five days after the date on which the business rescue practitioner is appointed.
Who approves the business rescue plan?
The business rescue plan must be approved by the affected persons of a company in business rescue (the shareholders, creditors, employees and trade unions).
When must a business rescue practitioner convene a meeting of the creditors and any other holders of a voting interest to consider the proposed business rescue plan?
A business rescue practitioner must convene this meeting within ten business days of the publication of the business rescue plan.
Can an affected person object to business rescue proceedings?
Yes, an affected person of a company in business rescue (the shareholders, creditors, employees and trade unions) may apply to court for an order setting aside the resolution to commence business rescue.
On what bases can an affected person of a company in business rescue object to business rescue proceedings?
The grounds upon which an objection may be made by an affected person (a shareholder, creditor, employee or trade union) are if:
- there was no reasonable basis for the belief that a company was financially distressed;
- the business rescue of a company holds no reasonable prospects of success;
- there were procedural irregularities in commencing the business rescue of a company;
- the appointment of a business rescue practitioner does not satisfy the eligibility criteria in terms of the Companies Act;
- the business rescue practitioner does not satisfy the independence criteria;
- the business rescue practitioner does not satisfy the skill requirements needed considering a company’s circumstances; or
- if there were any procedural irregularities in commencing business rescue, generally.
What is the duration of business rescue?
The business rescue of a company should last for a period of three months.
When do business rescue proceedings end?
The business rescue proceedings end when:
- the court sets aside the resolution or order that began the business rescue proceedings or when the court converts business rescue of a company into liquidation proceedings; or
- the business rescue practitioner files a notice of termination of business rescue of a company with Companies and Intellectual Property Commission (CIPC); or
- a business rescue plan has been proposed and rejected and no affected person has acted to extend the business rescue of a company; or
- a business rescue plan has been adopted and the business rescue practitioner has subsequently filed a notice of substantial implementation of the plan.