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Business Rescue: First Aid for Failing Companies

Companies (and close corporations) in financial distress may now, courtesy of the new Companies Act, opt in appropriate circumstances for “Business Rescue” rather than liquidation.

The concept of a business rescue is new to SA but this kind of legislation is not uncommon in international practice. It brings SA up to speed with major international players. On the local front, it is important to realize that the fundamental aim of the Act is to save jobs and protect the rights of affected parties.

The business rescue plan serves as an alternative to liquidation and seeks to replace the current unworkable judicial management process. In theory, this is welcome news all around. In laymans terms the Act states that companies opting for business rescue will have the management of their affairs and assets placed under temporary supervision of a business rescue practitioner.

Some alarm has been raised over the cherry-picking clause which gives the business rescue practitioner powers during the proceedings to cancel or suspend agreements to which the company was a party. It affects creditors, loans, and funding arrangements. Originally it was feared that rescue practitioners could exercise these powers to honour only those agreements that were most favourable to a financially distressed company.

But, fear not, the legislation of the Companies Act specifically states that no employment contracts can be suspended or terminated during the process of a business rescue plan. Furthermore, the business rescue practitioner must first approach the High Court before any contracts or agreements are cancelled. The practitioner would also need to approach the Court to cancel stock exchange contracts and securities.

The Act places an increased obligation on directors, and specifically protects and prohibits a company from trading recklessly and under insolvent circumstances. Those who trade their companies in contravention of this prohibition will be guilty of a criminal offence and, if convicted, liable to a fine or imprisonment for up to 10 years.

So if you don’t want to find yourself on the wrong side of the law we have broken down the basic structure of the Act and made some notes:

Directors: Any director of a company in financial difficulty should take proper advice on what to do sooner rather than later. Failure to act correctly, and in time, could expose you to personal liability for the company’s debts – and even perhaps to criminal prosecution.

Creditors: If you are a creditor of a company subject to business rescue proceedings, take advice immediately on your best course of action, with particular emphasis on the following questions: –

1. Is the chosen business rescue practitioner suitably qualified and independent?
2. Should you – and if so how can you – participate in the rescue proceedings being administered by the practitioner? Creditor participation could include –

1. Formation of a creditors’ committee (to be consulted by the practitioner during the development of the business rescue plan)
2. Voting on any proposed rescue plan
3. Proposing an alternative plan of action

1. Are you affected by the practitioner’s powers to suspend (and in some cases cancel) existing contracts?
2. Should you – if asked – provide “post-commencement finance” (as either a financier or trade creditor)? And if so –

1. Where will your new claim rank for payment?
2. If the company has any unencumbered assets, should you take security over them?

Other significant changes in the new Act worth noting include:

* Abolishment of par-value shares;

Provisions of shareholders agreement that are inconsistent with the founding documents, the memorandum of incorporation are void;

* Requirement of detailed disclosure , by a director, of directors? remuneration for certain companies;
* Not all companies are required to be audited;
* Minimum number of directors a company can appoint to a board could change.

E.g. A private company that also has an audit committee must have at least four directors, and a public company that is also required to have a social and ethics committee will have to appoint six directors.

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