Explainer: How business rescue works

Many people want to know how business rescue works now that a business rescue practitioner has been appointed for the Rea Vaya bus operator, Piotrans. The South African Post Office is also in business rescue after some of its creditors applied for its provisional liquidation because it failed to pay its bills.

According to law firm Cliffe Dekker Hofmeyr, business rescue provides a company with breathing space to restructure its affairs under the management of a business rescue practitioner who drafts a business rescue plan to take the business forward.

The proceedings aim to help a company in financial distress by allowing it to reorganise and restructure its affairs, assets, equity, debts, property, and liabilities.

Therefore, Chapter 6 of the Companies Act gives the company various procedural and substantive protections and advantages during the procedure.

The objectives of the process are to restructure the affairs of the company in an attempt to ensure that it continues to exist on a solvent basis, or if it is not possible, to ensure a better return for the company’s creditors and shareholders than an immediate liquidation would.

ALSO READ: Rea Vaya bus operator placed under business rescue

Objectives of business rescue

Chapter 6 provides these tools to achieve these objectives:

• the temporary supervision of the company and the management of its affairs, business, and property by a business rescue practitioner
• a temporary moratorium on the rights of claimants against the company or in respect of property belonging to the company or lawfully in the possession of the company and
• the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs.

There are two ways to place a company under business rescue. For a voluntary process, the board of directors can pass a resolution to place the company under business rescue under Section 129 of the Companies Act if the company is financially distressed and there is a reasonable prospect of rescuing the company.

A company will be financially distressed in terms of Section 128(1)(f) of the Companies Act if it appears reasonably unlikely that the company will be able to pay all of its debts within the immediately ensuing six months or if its liabilities will exceed its assets within the ensuing six months.

For compulsory business rescue proceedings, an affected person can apply to court to place the company under business rescue under Section 131 of the Act. An “affected person” is defined in Section 128(1)(a) of the Act as a shareholder or creditor of the company, any registered trade union representing employees of the company, and any employee not represented by a registered trade union.

The affected person must satisfy the court that there is a reasonable prospect of rescuing the company and that the company is financially distressed or has failed to pay over any amount in terms of an obligation under or in terms of a public regulation or contract regarding employment-related matters or that it is otherwise just and equitable to do so for financial reasons.

When a company has been placed under business rescue, there are legal consequences for a number of the company’s activities and stakeholders, including creditors. The objective is to protect a company while the practitioner tries to return it to a viable position.

ALSO READ: Post Office business rescue plan: no more Sassa, 6 000 to be retrenched

Primary consequences of business rescue

The primary consequences of the process rescue are:

• civil legal proceedings against the company, including enforcement action, are stayed until the end of the process
• the disposal of the company’s property is restricted
• the refinancing of the company is facilitated by allowing for unencumbered company assets to be used to secure loans
• employment contracts are generally protected
• other contracts of the company may be cancelled, or the company’s obligations may, in certain circumstances, be entirely, partially or conditionally suspended.