There are various reasons why a business may not perform well, and this will likely have an impact on its financial soundness. In this time of the COVID-19 pandemic there are indeed a lot of unprecedented challenges being faced by businesses the world over, necessitating the need to adopt and adapt to the new normal.
Under the immense weight of these challenges some had no choice but to close shop. While some governments put in place measures to provide for financial bailouts, some companies could still not access such funds due to qualifying criteria.
The Companies Act 71 of 2008 (the Act) introduced in Chapter 6 the Business Rescue procedure for financially distressed companies. A financially distressed company is one whereby in all reasonable indications it will not be able to settle its debts as they become due immediately within the ensuing six months, or that the company will reasonably become insolvent within the ensuing six months.
Business Rescue is therefore aimed at restructuring the affairs of the business to maximize chances of it returning to operating on financially sound footing. Alternatively, in a befitting case, it will be aimed at ensuring that creditors salvage better claims than had the company went for liquidation instead.
A specially qualified Business Rescue Practitioner (BRP) is appointed, whose task is to take over the temporary management of the company’s affairs and property.
The company’s affairs, debt, liabilities, business and property are restructured in accordance with a specially developed Business Rescue Plan, which the BRP must come up with after appointment and is adopted. This does not mean the Directors of the business cease to be so, they remain Directors but that their authority and functions will be subject to supervision and authority of the BRP where necessary, as per Section 137 of the Companies Act of 2008.
An automatic moratorium is placed on claims and rights of creditors against the company’s assets, and no legal action or executions may be taken against the company unless the BRP or the Courts have approved it first. Further, a creditor may not enforce their rights to a debt except to the extent provided for in the Business Rescue Plan which was developed and adopted.
With regards to employees, they continue the same terms and conditions unless they agree to changed conditions that seek to rehabilitate the company’s financial resources. This may indeed appear attractive to the employees as it will lessen the likelihood of retrenchments.
However, if the BRP’s adopted rescue plan has within its measure’s retrenchment of employees, such will need to be compliant with the Labour Relations Act, sections 189 and/or 189A.
The above are the basics of the measures that are within the process of Business Rescue to rehabilitate a company that is in financial distress.
We encourage companies to commence the Business Rescue process at the first reasonable foresight that it may be unable to satisfy its debt obligations or that it may become insolvent in the next ensuing 6 months. If commenced early, Business Rescue presents so many benefits that maximise the chances of returning the company to solvency.
Contact us for further guidance and assistance.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter. One should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice. The contents of this site contain general information and may not reflect current legal developments or address one’s peculiar situation. We disclaim all liability for actions one may take or fail to take based on any content on this site.
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