This post was written by Shirley Fodor during her time as a partner at Jacobson Attorneys
Perhaps the most controversial aspect of the New Companies Act relates to the introduction of certain provisions relating to the assistance of financially distressed companies.
Every economy shows business successes and failures. A business may fail for a variety of reasons, and not just because of poor management. This is completely normal. The difficulty faced when a company fails is the ripple effect it has on its employees, suppliers and creditors.
For some time the international community has been leaning away from the liquidation of companies in financial distress to a business rescue type process, whereby the company is essentially given a second chance.
It terms of section 128(1) of the New Companies Act the objective of the business rescue process is to facilitate the rehabilitation of a financially distressed company by providing for the supervision and management of a company (on a temporary basis), placing a moratorium on the rights of claimants against the company or in respect of its property and the development and implementation of business rescue plan, or if that is not possible, to achieve a better return for the company’s creditors than if the company had been liquidated at the outset.
A company is considered to be financially distressed when:
- there is reason to believe that the company will not be in a position to pay all of its debts as and when they become due and payable over the next six months; and
- it is likely that the company will be insolvent within the next six months.
Business rescue procedures may be commenced either by a resolution of the directors of the company or by court order. For obvious reasons the directors will only be in a position to take such a resolution and there appears to be a reasonable prospect of rescuing the company. If there were no such reasonable grounds and no business rescue practitioner has been appointed, the resolution may be set aside by order of court.
So what does that mean?
A business rescue practitioner is appointed to the company and will assume the full management function of the company. He may remove directors if he feels this is necessary and he may delegate certain of his functions to the remaining directorate and management. Once the business rescue practitioner has had an opportunity to investigate the affairs of the company, he must develop a business rescue plan, and if adopted, oversee the implementation thereof.
For as long as the corporate rescue proceedings are ongoing, a moratorium is placed on most civil proceedings and additional proceedings may be started only with the permission of the business rescue practitioner. The court time periods or enforcement periods do not apply against the company during the business rescue.
The property of the company is protected in that it may only dispose thereof in the ordinary course of their business, as part of an approved rescue plan or with the specific consent of the business rescue practitioner.
The assets of the company may be used as security for funding required during the business rescue period. Employees are on the top of the pecking order for payment of their salaries as their contracts are not effected by the business rescue proceedings and any retrenchment process which is undertaken will still be governed by the relevant labour legislation.
What happens to creditors?
The creditors are entitled to be notified of and participate in all elements of the business rescue process and play a crucial roll in the approval (or rejection) of the business rescue plan.
Whenever there is a decision which requires the input of the creditors, each creditor will be entitled to the a vote equal to the value of his claim against the company. In order to facilitate this process, the creditors may form a committee to represent their interests and allow them to prove their claims against the company.
What is a business rescue plan?
As the name implies it is a roadmap on how to potentially save the company from liquidation and set it back on the path of financial success. In order to be effective the business rescue plan must contain all of the information that any person affected by the business rescue would need in order to determine whether the business rescue plan should be accepted.
The plan itself is divided into three sections: an introduction and background, proposals, assumptions and conditions and a certificate which must be provided by the business rescue practitioner.
The plan must contain a list of all of the assets and liabilities of the company together with all security provided by the company. In the event that the company may ultimately be liquidated, versus the potential benefits of approving the business rescue plan must also be disclosed.
The bulk of the business rescue plan will be devoted to proposals on how to assist the company and must detail any moratoria imposed, how the company will be released from certain of its debts. In this regard it should be borne in mind that the business rescue practitioner may cancel or suspend, whether in whole or in part almost any agreement that the company has entered into. This entitlement depending on how it is utilised may have severely negative consequences on the creditors.
Unless a court dictates otherwise, the business rescue plan mist be completed within 25 business days after the resolution or court order is granted.
If the creditors accept the business rescue plan then they are all bound by it and the business rescue practitioner must then take all the necessary steps to implement the business rescue plan.
It is intended that all business rescue procedures must be undertaken within 3 months. The business rescue practitioner may apply for additional time from the court and the business rescue practitioner must deliver monthly reports on the progress of the proceedings to all affected persons, the court or to the Commission until the business rescue proceedings are terminated.
Much like its predecessor, the New Companies Act contains a mechanism to enter into a compromise with its creditors or a scheme of arrangement (as discussed previously). The primary difference is that the court is no longer an active participant in the process, but merely sanctions the compromise once the parties thereto have reached an agreement on the terms thereof.
In terms of section 155(1) of the New Companies Act, the provisions relating to compromises do not apply to a company undergoing business rescue procedures.
The remaining provisions largely fall in line with the Old Companies Act and will not be discussed in any detail, save to state that the proposal which must be approved by all affected parties by means of a special resolution, which once obtained must be submitted to the High Court for sanction, provided that it is just and equitable for the court to do so.