Background on business rescue
Business rescue is a mechanism provided for in terms of the Companies Act 71 of 2008 (“the Companies Act”) which is aimed at facilitating the rehabilitation of a company that is financially distressed. The essense of business rescue is to assist a financially distressed company through the reorganisation and restructuring of its affairs and obligations.
Ways in which a company can be placed under Business Rescue
There are two ways in which a company can be placed under business rescue namely (i) voluntary business rescue (ii) compulsory business rescue. Both of these processes are distinct and are regulated in terms of different sections of the Companies Act.
Voluntary business rescue in terms of section 129 of the Companies Act
In terms of section 129 of the Act, once the board of directors has reasonable grounds to believe that the company is financially distressed, and that there appears to be a reasonable prospect of rescuing the company, the board may adopt a resolution to place the company under business rescue.
The resolution must be filed with the Companies and Intellectual Property Commission (“CIPC”), whereupon business rescue proceedings commence. Within the prescribed time periods, the company is required to appoint a business rescue practitioner (“BRP”) and notify all affected persons of the commencement of business rescue proceedings.
Affected persons include the company’s creditors, shareholders and employees, or their respective representatives, as contemplated in the Act.
Compulsory Business Rescue
An alternative mechanism by which a company may be placed under business rescue is by way of an application to court, as contemplated in section 131 of the Companies Act 71 of 2008. An affected person may bring such an application on the basis that the company is financially distressed, or on the grounds that the company has failed to pay amounts due under an obligation in terms of an agreement to which it is a party.
If the court is satisfied that the company is financially distressed, or that it has failed to meet its payment obligations, and that there is a reasonable prospect of rescuing the company, the court may grant an order placing the company under business rescue and appointing a business rescue practitioner.
Repercussions of placing a Company under Business Rescue
Section 133 of the Act introduces a general moratorium on legal proceedings against a company once business rescue proceedings have commenced. In practical terms, this means that no civil proceedings, including enforcement action, may be instituted or continued against a company under business rescue, or in respect of its property, without the written consent of the business rescue practitioner (“BRP”) or the leave of the court. This moratorium is intended to afford the company temporary breathing space to facilitate its rehabilitation.
An important consequence of the statutory moratorium is its effect on prescription. Section 133 expressly provides that the running of prescription in respect of any claim against a company under business rescue is suspended for the duration of the proceedings. Creditors are therefore protected from the risk of their claims prescribing while they are legally precluded from enforcing them.
Business rescue proceedings also have a material impact on contractual relationships. In terms of section 136 of the Act, a BRP is empowered to suspend, either in whole or in part, any obligation of the company arising under an agreement that was in force at the commencement of business rescue proceedings. This power may be exercised notwithstanding any contractual provision that purports to prohibit such suspension. The rationale for this provision is to enable the BRP to restructure the company’s affairs in a manner that maximises the prospects of rescue.
Parties whose rights are adversely affected by the suspension of contractual obligations are not left without recourse. While enforcement action against the company is stayed by the moratorium, affected parties may assert claims for damages and participate in the business rescue process in accordance with the Act.
Taken together, sections 133 and 136 reflect the balancing act at the heart of business rescue: providing the company with protection and flexibility to rehabilitate, while safeguarding the legitimate interests of creditors and counterparties. Understanding the scope and limits of these provisions is essential for parties dealing with companies under business rescue.
Conclusion
Business rescue proceedings may be brought to an end in several ways. Firstly, business rescue proceedings may terminate when the business rescue practitioner files a notice of termination in terms of the Act. This occurs where the BRP concludes that the company is no longer financially distressed and that there is accordingly no longer a basis for the continuation of business rescue proceedings.
Secondly, business rescue proceedings may be terminated by an order of court. This may arise where the court sets aside the resolution adopted by the board of directors to place the company under business rescue, or where the court sets aside a prior order placing the company under business rescue.
Lastly, business rescue proceedings will come to an end if the company is placed under liquidation. These termination mechanisms underscore the flexible nature of business rescue proceedings and reflect the Act’s objective of balancing the rehabilitation of distressed companies with the interests of creditors and other affected persons.
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