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LAWS2008A: WITS PLUS: BUSINESS ENTERPRISES LAW
JU KUEBLER
TOPIC 07 – BUSINESS RESCUE
1. The concept of business rescue
2. Commencement
2.1. Board resolution
2.2. Court order by an affected person
2.3. Court has a discretion
3. Legal consequences of commencement of business rescue proceedings
3.1. Moratorium on legal proceedings
3.2. Post commencement finance
3.3. Effect on contracts
3.4. Effect on shareholders/directors
4. Business Rescue Practitioner
5. The Business Rescue Plan (no need to know the content of the BRP)
6. Termination of Business Rescue Proceedings
Prescribed Readings
Davis et al Chapter 12
Learning Outcomes
o Understand what business rescue is and what it provides for.
o Have an understanding of the different ways business recue can be initiated (By
board resolution vs court order)
o Know the requirements for the initiation of business rescue both by board
resolution and by court order.
o Know and understand the effect of business rescue on the following:
• Control of company / board of directors
• Creditors
• Employees
• Shareholders
• Agreements/Contracts with outsiders
o Know what is meant by an affected person in respect of business rescue
proceedings.
• Understand the following aspects related to the business rescue practitioner (BRP):
o What qualifications are necessary to become a BRP.
o Under what conditions can a BRP be removed / replaced.
o What powers and duties does a BRP have.
o How is a BRP remunerated.
• Understand the effects of the approval / rejection of a business rescue plan.
• Know under which conditions business recue can terminate.
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1. THE CONCEPT OF BUSINESS RESCUE
Introduction
• Companies will fail;
• Many factors effect whether or not a company is successful or fails
• There are many reasons why companies fail / do well:
o Demand
o Poor marketing strategies
o Poor management
o Etc. …
• failing companies can either be taken over or liquidated
• Liquidating a company often has many negative consequences including employees
loosing their jobs, creditors not being paid in full, services not being finalised by the
company; shareholders do not receive any returns.
• Also note: liquidations are permitted for both solvent and insolvent companies.
• Also reality: company stops trading, does not pay its creditors, creditors let it be
because otherwise they might end up with an empty judgement (after having
incurred legal expenses), liquidating a company without funds – creditor pays to lead
enquiries, litigation, etc.
• New trend: rescuing failing companies (can be highly effective for example where a
company's bad performance will only be temporary (eg. bad management decision
and a consequent temporary money shortage).
• Whether or not business recue is successfully depends on the perspective you
looking at this question:
o +- 10% of companies placed under business rescue are in fact rehabilitated;
o But business rescue preserves work place, at least temporary;
o Some services can be finalised & contracts completed under business
rescue;
o Some suppliers can supply a company under business rescue;
o The business of a company might be able to be sold as a going concern;
o Business Rescue Practitioners have work;
o Some creditors might receive a dividend / a larger dividend than if a company
was immediately liquidated.
• Moreover, a company's business may eventually be sold as a going concern, which
is often better for the stakeholders than a liquidation.
• Some recent examples: SAA, Group 5,
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What is business rescue? s128(1)(b)
• Business rescue is a procedure facilitating the rehabilitation of a company, where
the company is insolvent or may immediately become insolvent.
• The procedure allows for
o temporary supervision of management
o temporary moratorium on the rights of claimants against the company (i.e.
creditors)
o development and implementation 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.
2. COMMENCEMENT OF BUSINESS RESCUE
• Can be initiated voluntary (by the board of directors) (s129) or by court order on
application by an affected person (s131).
• In both instances, there must be a reasonable prospect of rescuing the company
and the company must be financially distressed (or re court application failed to pay
an amount re employment or it is just and equitable).
2.1. BOARD RESOLUTION
• Voluntary Initiation of Business Rescue - by the board of directors (majority decision)
if:
• Reasonable grounds for the directors to believe that the company is
financially distressed (s128(1)(f), 12.2 Oxford)
– = company seems to be unable to pay ordinary debts becoming
due in the ordinary 6 months OR
– = if it reasonably appears that the company will become
insolvent in the coming 6 months;
• AND there is a reasonable prospect of the company being rescued.
• Company must notify CIPC and 'inform' every effected person => business
rescue becomes effective on filing with CIPC
• Company then cannot initiate liquidation proceedings.
• Who is an affected person? SH, creditor, registered trade union representing
the employees
• The company must appoint a business rescue practitioner
• Business rescue practitioner to meet requirements ito s138 and provide his
written consent
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• CIPC to be notified (else business rescue resolution becomes null & void)
• If the board has reasonable grounds to believe the company is financially
distressed it must either pace the company under business rescue of send a
notice to affected persons, why it is not going to place the company under
business rescue (COR 123.3)
• Setting aside of business rescue resolution or appointment of business
rescue practitioner – application to court see basis [Link] textbook:
o No reasonable basis to believe that the company is financially
distressed;
o No reasonable prospect that the company will be rescued;
o Failure by the company to comply with s129
• Removal of practitioner
o Does not fulfil requirements ito s138
o Is not independent
o Lacks the skills
• Court can make an order on the stipulated grounds or because it finds it just
and equitable to do so
2.2. By Court Order
• An affected person can apply to court
• Application must be served on the company, the CIPC and each affected person.
Reg 124 re service on affected persons is problematic.
• The court can grant the order if
− the company is financially distressed
− OR the company has failed to pay an amount re employment
− OR it is just and equitable to do so
− AND there is a reasonable prospect of rescuing the company – uncertainty:
balance to try to ensure that a company is not just placed under business
rescue without a reasonable prospect of recover vs recognising that the
business rescue practitioner will only be able to work out a plan and really
ascertains same 12.4.2 textbook.
Reasonable prospect not defined – see [Link] textbook
See case law, What is success – better return for stakeholders (which
stakeholders) or rescuing the company
2.3. Court has a Discretion in many respects
• Court has a discretion to grant order: “may place company under business rescue”
not “must”.
• Court can also order during the course of liquidation proceedings the company can
be put under supervision.
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• Places liquidation proceedings on hold until such time a s the court has refused the
application for business rescue – uncertainty as to the meaning of liquidation
proceedings.
• If a court makes an order placing a company under business rescue it may also
appoint an interim business rescue practitioner.
3. LEGAL CONSEQUENCES OF COMMENCEMENT OF BUSINESS RESCUE
PROCEEDINGS
3.1 Moratorium on legal proceedings
refer to 12.5.1 Oxford
Company is restricted to dispose of its property - refer to 12.5.2 Oxford
3.2. Post-commencement finance
A company can use unencumbered assets for security; employees paid first, business
rescue practitioner paid even before;
Employment contracts are protected – Labour law is applicable;
3.3. Effect on contracts
Can be suspended by the practitioner (not employment contracts) or cancelled by
application to court on terms which are just and reasonable in the circumstances;
3.4. Effect on shareholders and directors and creditors
No change in rights, but SH may participate in decisions about business rescue if their
interests will be affected
Effect on directors – must co-operate with the business rescue practitioner, are excused
from certain duties if they act under instructions of the business rescue practitioner;
Creditors have voting rights
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A summary: The key elements in the business rescue process (FYI ONLY)
• A business rescue practitioner (BRP) is appointed
• Investigation of prospect of recovery of a company must be undertaken by BRP
• BRO to investigate whether there was any contravention of the Act and if there was
direct the management to take steps to recover money
• Meetings of creditors within 10 days of appointment of BRP
• Creditors have rights (includes right to information and to vote on the BRP)
• Employees have rights (their employment contract remain in place and any
dismissals/retrenchments to be done in line with labour legislation)
• Securities holders have rights
• Business Rescue Plan - after consultations the BRP must prepare a business rescue
plan containing prescribed info (s150(2)). Plan must be published within 25 days of
appointment of practitioner.
• Meeting at which creditors and other holders of voting interests will vote on the plan
• The plan will be approved IF 75% (greater majority) of creditor's votes are in favour
• if the plan alters the rights of holders of a class of the company's securities => they
also need to approve the plan
• Plan adopted (effect)
o => binds creditors, the company, holders of the Company's securities.
o legal proceedings: during business rescue no legal proceedings against the
company may be started or continued, without the written consent of the
practitioner or a court (few exceptions)
o property dealing: dealing in property is limited
o contracts with the company: practitioner can cancel or suspend, partially or
conditionally, any provision in a contract to which the company is a party at the
start of the business rescue period. Other party will only have a claim for
damages. (employment contracts are the exception).
o directors and shareholders: directors remain in place but must listen and follow
business practitioners instruction in as far as possible. Duties of directors
remain in place, however, where a director acts on express instructions from
practitioner => duties apply to practitioner.
o Existing debt: can be discharged (if creditor had agreed ito business rescue
plan), cannot be enforced immediately before plan and during plan.
• Termination:
o when the court sets aside the resolution
o when court converts business rescue to liquidation proceedings
o when the practitioner has filed a notice of the termination of the proceedings
o when a business rescue plan has been rejected
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4. THE BUSINESS RESCUE PRACTITIONER
• The Act regulates the qualifications, appointment, removal, replacement and powers
and duties of business rescue practitioners.
• Qualifications of a business rescue practitioner: Section 138 lays out the six
requirements – see 12.6.1 Oxford:
o Be a member in good standing of a legal, accounting or business management
profession accredited by the Commission;
o Be licensed by the Commission to practise as a business rescue practitioner;
o Not be subject to an order of probation ito the Companies Act;
o Not be disqualified from acting as a director of a company;
o Not have any other relationship with the company that would lead a reasonable
and informed third party to conclude that his/her integrity, impartiality or
objectivity is compromised by that relationship; and
o Not be related to a person who has such a relationship.
• Removal of business rescue practitioner – only by court order based on grounds
stipulated ito s139.
Can be brought by an interested person or on the courts own initiative
s139 grounds:
o Incompetence or failure to perform duties;
o Failure to exercise proper degree of case in the;
o Engaging in illegal acts or conduct;
o No longer meeting s138 requirements;
o Having a conflict of interest;
o Becoming incapable and unable to perform the functions and being unlikely to
regaining that capacity within a reasonable time.
• Powers and Duties of the business rescue practitioner:
o Management responsibilities:
▪ Taking full responsibility of the management of the company;
▪ BRP may delegate any of his powers or functions to directors or other
members of management;
o Investigation and monitoring the company’s affairs with a view to ending
business rescue proceedings:
▪ As soon as possible after being appointed, the BRP must decide if the
company has a reasonable chance of being rescued.
▪ If he finds not (at any time), then he must inform the court, the company
and all affected persons and apply to court to have the business rescue
proceedings end and for the company to be placed in liquidation.
▪ If the BRP finds that the company is no longer under financial distress,
he must end business recue.
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▪If the investigation leads to evidence of voidable transactions or failure
by a director to perform material obligation, then the contravention must
be notified to the appropriate authority.
o Developing and implementing a rescue plan;
o Accepting liability for a breach of duty;
• Remuneration – as per Tariff set by the Minister & can enter into a contingency fee
agreement with the company to be paid if a specified result is achieved. Must be
approved by the creditors. Reimbursement of actual costs and expenses such as
valuations, auctioneers, advisors, etc,
5. THE BUSINESS RESCUE PLAN
12.7 Oxford
• BRP Plan must be prepared after consultation with creditors, affected persons and the
management of the company;
• A plan must contain all information that affected persons may need to decide whether
they should accept or reject a plan;
• However, as per Commissioner of South African Revenue Services vs Beginsel,
substantial compliance with s150(2) will suffice because not all the details required by
s150(2) will apply in every case.
• Three parts:
o 1. PART A – Background
▪ Essentially showing the current financial situation of the company
o 2. PART B – Proposals
▪ This part contains the proposes measures to assist the company in
overcoming its problems;
o 3. PART C – Assumptions and conditions
o End: Certificate re information appears to be correct and current and that the
projections were made in good faith.
• Publication of the plan – within 25 days of the appointment of the practitioner or longer
as approved by the court or creditors.
• Meeting to consider the plan within 10 days of publication of the plan:
o At the meeting the business rescue practitioner must explain the plan and
whether he believes that there is a reasonable prospect of the company being
rescued;
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o Plan is adopted if supported by more than 75% of the creditors in value and at
least 50% in value of independent creditors; if rights of SH are altered by the
plan, the approval of the SH must also be obtained.
• Effects of Approval
o Will become binding on the company and the creditors;
o Some uncertainty as to the liability of sureties to the company;
o Enforcement of a debt only in accordance with the plan;
o BRP must implement the plan.
• Effects of Rejection
o The practitioner can apply to the creditors to approve a new plan or inform the
company that the company will apply to court to have the vote set aside.
o If the BRP does neither: Affected person present at the meeting may either ask
for the approval from the crs for a proposal that the BRP prepares a revised
plan or can apply to court for an order setting assisted the result of the voting;
o Last alternative: One or more affected persons may make an offer to purchase
the voting interests of any of the persons who opposed the plan.
o Else a creditor can apply to court to have the company liquidated;
o If none of the above occurs, the BRP must file a notice with the CIPC that the
business rescue proceedings are terminated;
6. TERMINATION OF RESCUE PROCEEDINGS
• Best chance of success of business recue is if it is started early and completed in the
shortest possible period. The 2008 Act does thus envisions the proceedings to take
about three months. This is unrealistic, and is more 6 to 18 months, which is also
highly unrealistic:
• Egs. - SAA: 17 months
- LE-SEL RESEARCH (RF) (PTY) LTD: Since January 2018 (64 months +)
- Vitrex Group: +-55 months, then the BRP brought a liquidation application
to court and succeeded
• s132(2) business rescue proceedings are terminated in any of the following ways: see
12.8 Oxford:
o when the court sets aside the resolution or order that commenced business
rescue;
o when the court converts business rescue to liquidation proceedings;
o when the BRP has filed a notice of the termination of the proceedings
o by a business rescue plan being adopted and substantially implemented, as
confirmed by the BRP in a filed notice.
o when a business rescue plan has been rejected and no further steps are taken.