Business Rescue – yes or no?

The devastating economic impact of Covid-19 and the SA national lockdown has adversely impacted many businesses across South Africa, and an end is not yet in sight. There has been extensive news coverage of businesses in Business Rescue, including SAA, Comair and Edcon. If you are a business owner or occupy an executive role in business, do you understand the meaning of “Business Rescue” and how it applies to you and/or your business? In this blog, we explain the concept and touch on implications for certain stakeholders potentially impacted by a rescue process.

The concept…

The Companies Act 71 of 2008 provides for the efficient rescue and recovery of companies in financial distress, in a manner that balances the rights and interests of all relevant stakeholders. The Act allows such companies to reorganise and restructure their businesses to facilitate such businesses returning to a sustainable position.

A company is in “financial distress” when…

The Act defines financial distress as being applicable when a company:

• Is unlikely to be able to settle all of its debts as they become due, within the immediately ensuing 6-month period (i.e. it is “commercially insolvent”)
• Is likely to become insolvent within the immediately ensuing 6-month period (i.e. it is “factually insolvent”)

At the first sign of either distress signal becoming evident, the company should be placed into business rescue. The rescue process should not endure beyond a period of 3 months and, with the assistance of a business rescue practitioner, a plan would be constructed to either return the company to commercial insolvency or formalize commencement of liquidation proceedings, should commercial insolvency be impossible.

It should be noted, however, that a financially distressed company should only be placed in business rescue provided funds are available for future trading and the underlying business is economically viable.

The effect…

On the business

• The business rescue practitioner assumes oversight of the company operations and has full management control over the company in substitution of the Board of Directors and pre-existing management.

On Directors

• Required to co-operate with and assist the business rescue practitioner in servicing the rescue process.
• Can be removed from office if their actions impede or in any manner frustrate the rescue process.
• Remain accountable for decisions taken affecting the business prior to the commencement of the rescue process.

On Employees

• Terms and conditions of employment in effect prior to the commencement of the rescue process remain in effect, except to the extent that such conditions are changed in accordance with labour legislation (including retrenchment and restructure) as a consequence of the rescue process.

On Creditors

• Although the intention is that the company in rescue continues to operate as prior thereto, except that it is under management of the business rescue practitioner, it is in practical terms unlikely to be a case of “business as usual” as unsecured creditors are at risk of supplying goods or services without compensation.
• It is wise to ensure that the agreement between a creditor and its customer regulates dealings in the event of insolvency or business rescue.

On Shareholders

• Classification or status of listed securities, other than by way of a transfer of securities in the ordinary course of business, is invalid unless directed as such, as a consequence of the business rescue proceedings.

Before commencing on a business rescue process, it is important to understand how your business could be impacted by this decision and equally if your company serves another suspected of entering rescue proceedings. Whereas your rights are determined by legislation, there are practical considerations.

If business rescue is on your horizon, although the MMS Group does not serve in a practitioner capacity in business rescue matters, our Management Consulting team can assist you in making the decision that will best serve the interests of you as an affected party. Reach our team through our website