If a company/close corporation is in financial trouble and all possible avenues to save the business have been exhausted, there is one last option available, lodging an application for Business Rescue
Only a company/close corporation that is “financially distressed” can be placed under Business Rescue.
The Act defines the words “financially distressed” to mean that:
- It seems reasonably unlikely that the business will be able to pay its debts in the normal course of business within the next six months, or
- It seems reasonably likely that the business will become insolvent in the next six months.
To determine whether a company is financially distressed; either a cash flow or a balance sheet test can be applied. The business rescue process is meant to be used at the earliest moment, when a company is showing signs that it could soon become insolvent but where it has not yet reached the stage of insolvency. The sooner a company is placed in Business Rescue, the greater the chance of the company being successfully rehabilitated.
What is the aim of a business rescue plan?
The aim of placing a company/close corporation under business rescue is to give the business some breathing space to implement the business rescue plan and give the business a fair chance to become a going concern again.
Alternatively, if the business is liquidated despite the business rescue proceedings, the aim is to hopefully have a higher return available for the creditors and shareholders than would have been the case if the business was liquidated before undertaking any business rescue proceedings.
To give a business the maximum chance of recovering its finances and to continue operating as a solvent enterprise, the business rescue plan normally restructures a business’ assets, liabilities and equity, as well as its way of doing business.
What does a business rescue practitioner do?
The appointed business rescue practitioner will investigate the business’ situation and propose a business rescue plan. After the business rescue plan has been approved by the creditors and shareholders, the business rescue practitioner will implement the plan. The reason why the creditors and shareholders must approve the business rescue plan is that they will withhold their rights against the business to claim payment as long as the business is operating under the business rescue plan.
After implementing the business rescue plan, the business rescue practitioner will temporarily oversee and manage the business together with the current management.
The business rescue practitioner also takes over dealing with the creditors and shareholders. In addition, the business rescue practitioner will communicate with registered trade unions which represent employees of the business. If there are employees who are not members of any registered trade union, the business rescue practitioner will deal with these employees or their representatives as well.
Once the business has been placed into Business Rescue by either, a resolution of the board to voluntarily put the business into business rescue proceedings under the supervision of a Business Rescue Practitioner or by order of the court upon application by an affected person, the company must file Form CoR123.1 with the Companies and Intellectual Property Commission (“CIPC”) together with the relevant supporting documents.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.