Considering business rescue

Directors wanting to address problems in financially distressed companies need to be proactive, diligent, and aware of all options available to them, including the option of business rescue, its value, and the importance of its timing.

Since its introduction in the Companies Act (the Act) in 2011 as a mechanism, business rescue has gained acceptance as a viable alternative to liquidation for financially distressed companies and businesses.[1] With its successful implementation, companies like SAA, Comair and Edcon have been allowed to recover and to maintain their status as going concerns, thereby preserving jobs, and aiding economic recovery. Companies with their backs to the wall after the looting and damage in Kwa-Zulu Natal and Gauteng might therefore consider business rescue as a solution as opposed to an informal restructuring – which could result in aggressive creditors filing for liquidation, or as an enforced last resort, liquidation.

Overview

With business rescue a business practitioner who understands business is appointed to allow the company to trade back to solvency, and/or to deliver a better dividend to creditors than that which they would have received with liquidation proceedings.

The advantages of business rescue include:[2]

1. The publication of a business rescue plan, the intention of which is to restructure and rescue the business.
2. Business rescue imposes a statutory moratorium on claims against the company, except with the written consent of the business practitioner or by leave of court.
3. After its commencement, finance/funding is sought, from banks and third parties and when obtained, provides the finance necessary to prop the business up as a sustainable entity during the restructuring process.
4. It enables a compromise of burdensome debt and allows for a fresh start, as creditors will get less, but more than they would have in liquidation.
5. It allows for a suspension/cancellation of prejudicial contracts.
6. It protects directors from reckless trading - because the company is handed over to practitioners and the reckless trading provision is no longer relevant.
7. It allows for the mothballing of the business – for example Comair planes were placed in short term active storage pending the recommencement of scheduled flight operations,[3] thereby ringfencing costs, and helping the ability the company to hold out until the resumption of business.
8. A reset, or restructure could see asset sales and sell offs by companies with strong balance sheets, continuing in a slimmed down form, or entertaining into merger and acquisition negotiations.

When? A question of timing

In terms of section 128(f) of the Companies Act:

(f) ‘‘financially distressed’’, in reference to a particular company at any particular time, means that –

1. it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months; or
2. it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months;

The test essentially allows a six-month window, whereby looking ahead, the directors still see value to be had in the company. They need to be proactive, diligent, and aware of options available to them. It can be a very close call and some court decisions have adopted a narrow interpretation of “financially distressed”. Unfortunately, if business rescue is left too late, and the company is clearly insolvent, no finance will be forthcoming and liquidation is the only option, with directors potentially finding themselves being held liable for reckless trading in terms of section 22 of the Act.

Once decided upon however, it is very important that they involve experienced turnaround specialists/attorneys who are skilled in restructuring and saving what is left.

[1] Companies Act No. 71 of 2008: Chapter 6 https://www.gov.za/documents/companies-act
[2] See Business Rescue in the Time of Covid-19 – Dr Eric Levenstein at https://www.youtube.com/watch?v=Qy8xHgt4Ecs
[3] Comair Limited https://www.comair.co.za/business-rescue