What you need to know
Due to the COVID-19 pandemic worldwide, the South African government declared a national state of disaster on the 15th of March 2020 in terms of the Disaster Management Act 57 of 2002. Government imposed regulations to slow the spread of the novel virus by flattening the infection rate throughout our communities.
Numerous restrictions have been implemented in the nation-wide effort and South Africa’s economic landscape has been negatively affected with all industries facing financial distress and loss of income. All companies and employees, either providing or not providing essential services, must adhere to restriction on movement of people/goods and economic activity. As we enter a phased and strategic return to business conduct, the impact of the regulations and restrictions will have a long-lasting effect on the sustainability of most businesses in South Africa. The performance of contractual obligations is also at risk due to the moratoriums in business activity which the contracted parties have no control over.
Relief funds and loan options have been made available to businesses in distress by government and social partners. Whilst these funds may provide limited/temporary relief during the lockdown and phased re-opening of our economy, businesses must make critical decisions to ensure they survive in the post-lockdown economy. The uncertainty of what the post COVID-19 business landscape will have in store for our industries is overwhelming, resulting in many Companies feeling defenseless and with no alternative but to close their operations.
Is this the only option for businesses in South Africa? Not at all.
A valuable and business minded alternative is Business Rescue. This solution, as defined by the Companies Act 71 of 2008, facilitates the rehabilitation and temporary supervision or management of a company’s affairs. Business rescue will aid companies in financial distress with expert insights and effective solutions, while sustaining their operations during these testing economic times.
What is Business Rescue?
Business Rescue, as defined by the Companies Act 71 of 2008, aims to facilitate the rehabilitation of a company that is “financially distressed”. The temporary supervision of the Company, which includes but is not limited to:
Management of its Business affairs.
Management of its Business and property by a Business Rescue Practitioner.
A temporary moratorium (“stay”) on the rights of claimants against the company in respect of property in its possession and development and implementation (if approved) of a business rescue plan to rescue its business property, debt affairs, other liabilities and equity.
When should a Company commence Business Rescue?
A company should commence business rescue proceedings at the first signs of it being financially distressed, which is defined by the Act as, either when it is reasonably unlikely that a company will be able to pay its debts when they fall due for payment in the immediate subsequent six months or when it is likely that the company will become insolvent in the immediate subsequent six months.
In a recent decision made in the South Gauteng High Court, the court stated that “business rescue proceedings are not for terminally ill Companies, nor are they for chronically ill Companies. They are for ailing Companies, which given time will be rescued and become solvent”.
This is a clear indication that prior to placing a Company in Business Rescue, consideration should be given to the nature of the particular Company, the extent to which Business Rescue is the appropriate procedure for that Company and the extent to which Business Rescue would be far more beneficial to such Company instead of Liquidation of the particular Company.
What is the Role of a Business Rescue Practitioner?
Section 141 (1) of the Companies Act 71 of 2008, provides as follows:
“…Business Rescue Practitioner is required, as soon as possible after appointment, to investigate the company’s affairs, business, property and financial situation, and thereafter consider whether there is any reasonable prospect of rescuing the company…”.
Premised on the aforesaid, it is of paramount importance to utilize a practitioner who has the necessary skills, experience and ability to perform such a crucial role as your Business Rescue practitioner in order to ensure the most beneficial outcome of such proceedings.
The Power and function of the Business Rescue Practitioner during Business Rescue:
The Companies Act 71 of 2008, regulates the Power and function of a Business Rescue practitioner during Business Rescue proceedings. The appointed Business Rescue practitioner has full management control of the company and may delegate any power or function to relevant stakeholders while implementing the most appropriate Business Rescue plan.
How does the test for financial distress differ from the solvency and liquidity test?
Section 4 of the Companies Act sets out the “solvency and liquidity” test. It provides that a company will satisfy the solvency and liquidity test at a particular point in time if considering all reasonably foreseeable financial circumstances, such as;
- the assets of the company, or the aggregate of the assets of the company, fairly valued, equal or exceed the liabilities, or
aggregate liabilities of the company, fairly valued (factual insolvency), and it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of twelve months after the date on which the test is considered (commercial insolvency).
The difference between the test for “financial distress” and that of “solvency and liquidity” is that a company will be financially distressed if it is either factually or commercially insolvent while a company will be said to be solvent and liquid if it satisfies both factual and commercial solvency.
Thus, for financially distressed companies, the question is whether the company will be factually or commercially insolvent in the immediate subsequent six months.
Contact Smith Attorneys to schedule a consultation with one of our legal experts on Business Rescue proceedings and possible alternatives.
Telephone: +27 (0) 21 418 5020
No information provided herein may in any way be construed as financial or legal advice from Smith Attorneys and/or any of its personnel. Professional advice must be sought from Smith Attorneys before any action is taken based on the information provided herein, and consent must be obtained from Smith Attorneys before the information provided herein is reproduced in any way. Smith Attorneys disclaims any responsibility for positions taken without due consultation and/or information reproduced without due consent, and no person shall have any claim of any nature whatsoever arising out of, or in connection with, the information provided herein against Smith Attorneys and/or any of its personnel. Any information and reference provided herein are indicative and for information purposes only, and Smith Attorneys does not warrant the correctness, completeness or accuracy of the information provided herein in any way.