Corporate Law: New Companies Act 71 of 2008, Business Rescue Process

12 February 2014

The ultimate goal in repealing the Companies Act, No. 61 of 1973, was to ensure that the regulatory framework for enterprises of all types and sizes promoted growth, employment, innovation, stability, good governance, confidence and international competitiveness.

The Act has,amongst other things been modernized and it has been aligned with the best international practices. This applies in particular to public companies, communications and corporate governance. At the same time, it has been harmonized with other South African legislation, such as the Promotion of Access to Information Act (PAIA) and the Electronic Communications and Transactions (ECT) Act. It has been simplified and made less prescriptive to make it easier to understand.

The rules relating to pre-incorporation contracts have been simplified, making it possible for any person to enter into a pre-incorporation contract. Fewer statutory forms are required to incorporate a company. Rather than a

Memorandum and articles of association, a company's constitutional documents will now consist of one document only, the Memorandum of Incorporation (MoI). The MoI sets out the rights, duties and responsibilities of shareholders, directors and others in relation to the company.

One of the notable features of the New Companies Act is the remedial process of business rescue.

What is "Business Rescue Procedure (BRP)"

BUSINESS RESCUE is a procedure that facilitates the rehabilitation and restructuring of a company that is undergoing financial difficulties. The business rescue procedure aims to maximize the possibility of the business to remain solvent. The Act defines business rescues as the proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for-:

  1. The temporary supervision of the company, and of the management of its affairs, business and property
  2. A temporary moratorium on the rights of claimants against the company or in respect of property in its possession and
  3. the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximizes the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company's creditors or shareholders than would result from the immediate liquidation of the company

The ACT Defines Financial Distress as:

  1. When 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 ensuring six months or
  2. When it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

The court having jurisdiction for BRP is the High Court. BRP shares many similarities with its predecessor, the old judicial management of failing companies however it provides additional remedies in the reversal of a company from being financially distressed to becoming solvent.

The Aim of Business Rescue Procedure

The current economic climate is placing businesses under severe pressure, resulting in large numbers of enterprises going out of business, filing for bankruptcy or turning to business rescue as a possible lifeline.

The Business Rescue regime aims to be more workable and effective than judicial management of failing companies and differs from it in that BRP is mostly self-administered by the company, under independent supervision of the business rescue practitioner and within the prescribed provisions as set out in the Act, and subject to court intervention at any time on application by any of the stakeholders.

What makes Business Rescue to standout amongst other remedies?

The most distinctive aspect of Business Rescue is that shareholders, employees, manufacturers, and suppliers are all regarded as stakeholders and may make an application for any company to be placed under business rescue and to take part in the company's strategy to remain solvent, this application will most likely result in the appointment of a practitioner.

Company Resolution to Begin Business Rescue Proceedings

The board of a company may resolve that the company voluntarily begin business rescue proceedings and place the company under supervision, if the board has reasonable grounds to believe that-:

  1. The company is financially distressed and
  2. There appears to be a reasonable prospect of rescuing the company.

Subsection (2) of the Act states that a resolution contemplated in subsection (1) may not be adopted if liquidation proceedings have been initiated by or against the company and has no force or effect until it has been filed.

Within five business days after a company has adopted and filed a resolution, as contemplated in subsection (1), or such longer time as the Commission, on application by the company, may allow, the company must-:

Publish a notice of the resolution, and its effective date, in the prescribed manner to every affected person, including with the notice a sworn statement of the facts relevant to the grounds on which the board resolution was founded

and appoint a business rescue practitioner who satisfies the requirements of section 138, and who has consented in writing to accept the appointment.

It should be noted that a company that has adopted a resolution to begin business rescue procedure cannot later adopt a resolution to commence liquidation proceedings. After the adoption of such a resolution, but before the adoption of a business rescue plan, an affected person may apply to the appropriate Court for an order to set aside the resolution to set aside the appointment of the practitioner or to require the practitioner to provide security to secure the interests of the company and any affected persons.

The resolution may be set aside in the event that there is no valid reason for concluding that the company is financially distressed there is no reasonable prospect for rescuing the company or the company failed to satisfy the procedural requirements in relation to the adoption of such resolution.

However, in the event that liquidation proceedings have already begun at the time an application for business rescue procedure is brought such application will suspend those liquidation proceedings until the court has adjudicated upon the application or until the BRP ends. In addition, the court may make an order at any time during the course of any liquidation proceedings or proceedings to enforce any security against the company.

BRP has tremendously aided the rehabilitation of struggling but viable companies. The number of liquidations in May 2013 has dropped by a huge 51.7% compared to those of May 2012. However, one should note that not every company that is financially distressed is a suitable candidate for business rescue BRP has been subject to some abuse which can be demonstrated by the number of High Court judgments dismissing applications for rescue, instead of granting a liquidation order. Furthermore, the Courts have held that business rescue proceedings are not for the terminally ill. Nor are they for the chronically ill. They are for ailing corporations, which, given time, will be rescued and become solvent.

In conclusion, despite the abuse of the BRP in Chapter 6 of the New Companies Act, there is no doubt that the BRP is a great alternative to the old judicial management of failing companies as it allows all stakeholders to participate in the BRP under the supervision of a neutral practitioner and it ensures that all

affected parties have a say in the BRP. Thus, if the underlying principals are in place, or can be fixed by the business rescue practitioner, the BRP is a great alternative to judicial management of failing companies.

During a recently concluded web survey it was found that only 25 percent of jobs were lost in the business rescue process. The rescue process effectively saved 75 percent of jobs, where in the case of liquidation all jobs would most probably have been lost. Statistics from the Companies and Intellectual Property Commission (CIPC) earlier this year, however, reveal that the real rate of success of all businesses that have concluded their rescue operations is between 12 percent and 15 percent.

During 2012, the number of voluntary liquidations decreased by 24.5 percent, while the number of compulsory liquidations fell by 16.8 percent in the same period. This gives some credence to the interpretation that companies are benefiting from chapter 6 of the Act.

Thabo Dipela

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