COVID-19 and the lockdown’s detrimental impact on businesses...is your business financially distressed?
While the government plans to pump money into the economy via its stimulus package, how long until it is business as usual? Uncertainty shadows South African business as they struggle to survive the lockdown and the certain economic repercussions of COVID-19’s assault on the economy. Best prepare your business for all possibilities, including restructuring.
Only businesses that are ‘financially distressed’ may be placed into business rescue. According to the Insolvency Act, financial distress means that:
it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or
it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months
Ways in which a business commences business rescue proceedings
A business commences business rescue proceedings in two ways:
Voluntarily through a board resolution
An affected person applies to the court for an order
Voluntarily commencing business rescue proceedings
Where a business decides to commence business rescue proceedings, it must:
file a form CoR123.1 with the Companies and Intellectual Commission (“CIPC”)
The form must be accompanied by:
A board resolution, with the intention of the commencing business rescue proceedings and appoint a person to be a business rescue practitioner if it has made a decision to appoint one
A statement which explains why the business has commenced business rescue proceedings and its prospects of rescue
Within 5 business days of filing these documents, the following must be published:
Notice of resolution
Appoint Business Practitioner
Within 5 business days of filing the documents with the CIPC, the business must appoint a business practitioner.
After the appointment:
Within 2 business days file notice of the appointment with the CIPC
Within 5 business days of filing this notice, publish a notice of appointment
Q&A on Business Rescue Proceedings
1. Why the need for business rescue?
Companies in financial distress are provided with the opportunity to ‘rescue’ (i.e. restructure or reorganize) their businesses with the effect that they operate successfully in the future or offer a better return for creditors than companies that end up liquidated would.
2. What exactly does business rescue mean?
Business rescue means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
the temporary supervision of the company, and of the management of its affairs, business, and property;
a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
3. Who qualifies as an affected person?
The Companies Act defines an affected person as:
a shareholder or creditor of the company;
any registered trade union representing employees of the company; and
if any of the employees of the company are not represented by a registered trade union, each of those employees or their respective representatives.
4. When do business rescue proceedings start?
Proceedings begin when:
where the company files a resolution to place itself under supervision or applies to the court for consent to file a resolution;
a person applies to the court for an order placing the company under supervision
during the course of liquidation proceedings or proceedings to enforce a security interest, a court makes an order placing the company under supervision.
5. What are the consequences if my business fails to adhere to the time periods?
If the business, voluntarily commencing business rescue proceedings, fails to publish notice of its resolution and statement and does not appoint a business practitioner, the following may occur:
The board’s resolution will lapse. The business will only be permitted to file an additional resolution after three months from the date the resolution was passed unless it can show good cause to a court of its non-compliance
An affected person can make an application to the court to set aside the board’s resolution on the basis that the business failed to comply with the procedure laid out in the Companies Act.
6. When do business proceedings end?
Proceedings end when:
the court sets aside the resolution or order that began those proceedings or has converted the proceedings to liquidation proceedings;
the practitioner has filed with the Commission a notice of the termination of business rescue proceedings; or
a business rescue plan has been proposed and rejected and no affected person has acted to extend the proceedings; or adopted and the practitioner has subsequently filed a notice of substantial implementation of that plan.
7. How long will business rescue proceedings last for?
Business rescue proceedings are envisioned to persist for 3 months. If a practitioner exceeds this period, the practitioner must:
prepare a report on the progress of the business rescue proceedings, and update it at the end of each subsequent month until the end of those proceedings; and
deliver the report and each update in the prescribed manner to each affected person, and to the court, if the proceedings have been the subject of a court order; or Commission, in any other case.
8. What is the process for the commencement of business rescue proceedings?
Irrespective of whether business rescue proceedings commence voluntarily by the company or by way of a court order through the efforts of an affected person, the following will occur:
A practitioner must, as soon as possible after the appointment, investigate the company’s affairs, business, property, and financial situation, and after having done so, consider whether there is any reasonable prospect of the company being rescued.
- If there is a reasonable prospect of rescue, the practitioner must inform the court, the
company, and all affected persons and apply to the court for an order discontinuing the
business rescue proceedings and placing the company into liquidation:
- If there no longer are reasonable grounds to believe that the company is financially
distressed, the practitioner must so inform the court, the company, and all affected persons
The practitioner must, within 10 business days of appointment, convene over a meeting with creditors at which the practitioner must inform the creditors whether the practitioner believes that there is a reasonable prospect of rescuing the company.
The practitioner must, within 10 business days of appointment, convene over a meeting with employees’ representatives, at which the practitioner must inform the employees’ representatives whether the practitioner believes that there is a reasonable prospect of rescuing the company; and must also give notice of the meeting to every registered trade union representing employees of the company. Employees not registered with a trade union, the company must give notice to the employees’ representatives or the employees.
The practitioner must prepare a business rescue plan. The final version must be published within 25 business days of the practitioner’s appointment.
9. What happens if my business is in financial distress but I do not commence business rescue proceedings?
Written notice, often referred to as a section 129(7)* notice, must be issued to all affected employees should the board of directors decide not to issue a board resolution when the business is in a state of financial distress.
The notice must stipulate the meaning of financial distress, how it applies to the company, and reasons as to why the board of directors has chosen not to pass a resolution to commence business rescue proceedings.
*Companies Act, 71 of 2008
10. Must the business practitioner fulfil the role of facilitator?
Business rescue proceedings should be concluded as expeditiously as possible in order to assist the company’s finances. The part of the process that requires employer-employee negotiation may very well stunt the urgency of the matter. Resolving this issue is relatively easy; it merely requires the appointment of a facilitator to assist with the negotiation process.
11. How can Mediate Works assist?
Mediate Works has a diverse panel of highly experienced experts from enquiry chairpersons, investigators, facilitators, mediators, counselors and lawyers to assist.
We have financial experts and facilitators who will be able to assist you and your company during these challenging times.
We have adapted our processes to comply with the law, and the need to comply with the current lockdown regulations. We use secure and efficient online platforms to deliver.