The reality of Business Rescue after the lockdown

May 18, 2020 | FYI's

You have heard about Business Rescue, but do you know how it might help you (or a friend, or a customer, or a supplier)?

A national state of disaster was declared on 15 March 2020 and was followed by a nationwide lockdown for a period of 21 days on 27 March 2020. This lockdown was further extended and moved to level-4 lockdown and more businesses were allowed to open. But most of the country remained under strict and punitive lockdown regulations.

On the 13th of May, we were advised that the country would soon move to level-3 lockdown, except for certain Covid-19 hotspots that would remain at level-4, with their lockdown being gradually eased over time. There is no doubt that businesses will remain subject to some level of restriction for a long time to come.

The lockdown has affected all businesses and some more than others. Whether through limitations or prohibitions to trade, these restrictions have been felt throughout the business chain. And one must not forget the impact of the new regulations on Health and Safety in the work-place, that will add new layers of restrictions and costs to the way you do business.

The impact of all these factors could result in many businesses finding themselves in financial distress.

The Companies Act, 2008 provides for Companies and Close Corporations that are financially distressed to undergo Business Rescue Supervision in order to return them to a profitable situation, which is sustainable and in the best interests of all stakeholders.

A business is financially distressed when: 

  1. It is no longer liquid as it appears to be reasonably unlikely that the company will be able to pay all its debts as they become due and payable within the next six months; or
  2. It is no longer solvent as it appears to be reasonably likely that the company’s liabilities will exceed its assets (fairly valued) within the next six months.

It is important to note that if you are a Director or Member of a company or close corporation, you are required by statute to regularly assess the entity’s solvency and liquidity. Where you fail either test, you are compelled to act, and that may include entering Business Rescue. Failure to do this could result in you being personally liable to your creditors!!!  

What happens when a company enters Business Rescue Supervision?

  1. There is a temporary suspension of the management of the company’s affairs, business and property by the directors. The directors’ powers are assumed by the Business Rescue Practitioner;
  2. There is a temporary postponement of the rights of claimants against the company and in respect of the property in the company’s possession;
  3. The development and implementation (if approved) of a plan to rescue the company. The plan is presented in a manner that restructures the company’s affairs, business, property, debt and other liabilities, and equity to maximise the likelihood of the company continuing in existence on a solvent basis. Or failing which, results in a better return for the company’s creditors and shareholders than would have resulted from the immediate liquidation of the company.

Simply, the process is designed to allow the company breathing space during which its affairs can be restructured, with the primary aim of protecting the business and all its stakeholders (employees, customers, suppliers, shareholders, SARS…) by returning it to solvency and profitability.

The Business Rescue Practitioner (the “BRP”) is empowered to renegotiate agreements and credit terms and liabilities. This provision does not include employment contracts except to the extent that changes occur in the ordinary course of attrition or where the employees and the company agree on different terms and conditions, in accordance with the labour laws. All stakeholders are encouraged to compromise in such a manner that the business can be given the best possible chance to be viable again.

During the Business Rescue process, the Board of Directors must continue to perform their duties, subject to the authority of the Business Rescue Practitioner.

Employees’ interests are protected by the Act as it recognises them as creditors with a voting interest to the extent of unpaid remuneration.

It is important to note that Business Rescue is not a liquidation process, as efforts are made to restore the business to a healthy and sustainable position. This process is similar to the tried and tested Chapter 11 process used in the United States.

Please read our article on The Business Rescue Process for a detailed discussion of the required timeline.

As a firm, we believe that the Business Rescue Process, when used correctly, is a critical mechanism that will assist companies and our country to thrive. For this reason, Dave Rich was one of the first Senior Business Rescue Practitioners to be accredited by CIPC! We are proud of the number of businesses, jobs and money we have already saved through our appointment as Business Rescue Practitioners to distressed companies. As a firm, we only accept appointments that we believe are viable and in line with the spirit of the legislation.

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