Business rescue explained: How, when and for whom it works

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  • Since South African Airways went into business rescue, the process has been in the spotlight. 
  • Lockdown means many more business owners now find themselves battling to stay afloat.
  • But experts warn that few rescues are successful - you should know when it's a waste of time.
  • Business rescue is best for businesses that are struggling, not those beset with chronic issues.

The ongoing attempts to save state-owned South African Airlines has put the business rescue process as an option for a business in distress in the spotlight in recent months.

Additionally, the devastating impact of the coronavirus lockdown, especially on small and medium size enterprises (SMEs), has resulted in a large number of businesses experiencing some level of financial distress.

Few succeed

George Nell, a senior business rescue practitioner at Corporate Business Rescue, says national figures show that approximately 10% of business rescues are successful.

"As with all statistics, if you take real bad apples out of the equation, the success rate will go up to 30%. 

"Be that as it may, the positive side is that the successfully rescued businesses mean the SA economy is left with 10% to 30% more taxpaying entities [...] than if the company went into the other alternative, namely immediate liquidation," says Nell.

Save jobs

Nell believes there's room for government and unions to support the rescue process, as this could result in jobs being saved.

"Business rescue has a big role to play in a struggling economy like South Africa.

"Correctly utilised business rescues should be embraced and supported by government and the unions in the sense that the ultimate aim of business rescue is to rescue struggling companies and leave them as financially viable entities who can pay taxes and employ thousands, if not hundreds of thousands, of employees."

Tobie Jordaan, a director at Cliffe Dekker Hofmeyr who specialises in business rescue, insolvency and restructuring, agrees, saying the business rescue process is not just about saving a company or ensuring better returns for creditors, but to try to preserve employees' jobs. 

Ailing - not chronically ill

But Jordaan stresses that business rescue is for "ailing companies", not for "chronically ill companies".

Liquidation, he notes, is better suited for "chronically ill companies".

Kylene Weyers, a senior associate in the same department at Cliffe Dekker Hofmeyr, says that since the financial crisis in 2008, the need to restructure companies in financial distress increased.

"The aversion to killing companies off by way of the liquidation process has been recognised for decades and this process has been seen as a poor outcome – for companies, its stakeholders and for the economy," says Weyers.

This led to the incorporation of a business rescue process in the Companies Act in 2011.

"Business rescue now offers a unique option for saving companies that are in financial distress as it provides for the restructuring of companies that are reasonably unlikely to be able to pay all of its debts as they become due and payable, or where it appears to be reasonably likely that the company will become insolvent, within the immediately ensuing six-month period."

So what is business rescue?

Business rescue basically provides three important things:

  • The temporary supervision and management of the company by a business rescue practitioner (BRP), who takes full management control of the business, meaning full control is taken away from the board and the BRP is accountable to creditors;
  • A temporary moratorium on the rights and claims of creditors against the company or in respect of property in its possession;
  • The development and implementation, if approved, of a business rescue plan to rescue the company by restructuring its affairs.

The objective and purpose of business rescue is twofold. Firstly, it is to restructure the affairs of the company in order for it to continue in existence on a solvent basis.

Secondly, if it is not possible for the company to continue on a solvent basis, the business rescue process would aim to achieve a better return for the company's creditors and shareholders than an immediate liquidation of the company would.

Who should opt for business rescue?

Jordaan suggests a company should begin business rescue proceedings at the first signs of being financially distressed as defined by the Companies Act.

That is, either when it is reasonably unlikely that the company will be able to pay its debts when they fall due for payment in the next six months, or when it is likely that the company will become insolvent in the next six months.

According to Richard Marcus, also a director at Cliffe Dekker Hofmeyr specialising in business rescue, restructuring and insolvency, business rescue works best when:

  • It is not left too late – Far too many businesses struggle on for too long and leave nothing to save. Timely intervention is essential.
  • The business rescue process is supported by most of the creditors – particularly larger creditors such as banks or major suppliers. Business rescue is a creditor-driven process.
  • There is a real plan to save the business – or at least viable components of that business.
  • The business is able to run, even if in reduced form, during business rescue – This requires money, either from existing cash flow or reserves, or post-commencement finance.
  • Assets may be realised more optimally – In this case, from the creditors' perspective, even if the business cannot be saved, assets may still be realised more economically and efficiently than would be the case in liquidation.

What does the process involve?

Jordaan says that, once a company commences business rescue proceedings either voluntarily (by way of a board resolution) or by an order of the court (on application by an affected person) the following actions are prescribed by Companies Act:

  • The business rescue practitioner must investigate the affairs of the company as soon as possible after the start of business rescue;
  • Within 10 business days after being appointed, the practitioner must convene a meeting of the creditors and a meeting of the employees and advise them of the prospects of rescuing the company;
  • The business rescue plan, as proposed by the practitioner, must be published by the company within 25 days after the date on which he or she was appointed (or a longer time as may be allowed by the creditors or the court);
  • The practitioner must convene a meeting of the creditors for the purpose of considering the proposed plan, within 10 business days of the publication of the business rescue plan.

Possible outcomes

The business rescue proceedings will end when:

  • The court sets aside the resolution or court order that began the business rescue proceedings or when the court converts business rescue proceedings into liquidation proceedings;
  • The business rescue practitioner files a notice of termination of the business rescue proceedings with the Companies and Intellectual Property Commission (CIPC);
  • A plan has been proposed and rejected and no affected person has acted to extend the proceedings in any manner contemplated by the act; or
  • A plan has been adopted and the practitioner has subsequently filed a notice of substantial implementation of the plan with the CIPC.

The plan will be approved if it is supported by the holders of more than 75% of the creditors' voting interests that were voted and at least 50% of the votes are of the independent creditors' voting interests - that is not related to the company.

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