Business Rescue – What every business owner should know

By applying the tools and protection provided for in the Companies Act written into law last year, business owners can manage their business risks and rescue it before they hit rock bottom.

By Juan Engelbrecht

Donald Trump, whose successes and failures have been widely published, described his second Chapter 11 reorganisation in terms of the US bankruptcy code as a sign of success, not failure. On his return to Apple, Steve Jobs faced a huge task to turn the business around and build it to the richest company in the world. Closer to home Whitey Basson had turned an ailing Checkers brand into a powerhouse retailer with R72-billion sales per annum.

In South Africa there is a certain stigma attached to insolvency as it is generally regarded as a sign of failure and insolvent debtors are often suspected of being reckless, dishonest or both. This view, however, may be changing as more high profile businesses apply for business rescue as a means of avoiding liquidation. An example of such is the Blyvooruitzicht Gold Mine who successfully reversed their fortunes through business rescue and it is with interest that we observe the progress of 1Time Airlines who has also applied for business rescue during September 2012.

Under the Companies Act 71 of 2008 ‘business rescue’ is defined as proceedings to facilitate the rehabilitation of a company in financial distress by providing for:

• The temporary supervision and management of the company by a business rescue practitioner;
• A temporary moratorium on the rights of claimants against the company or property in its possession; and
• The development and, if approved, the implementation of a rescue plan that aims to maximise the potential of the company to continue on a solvent basis by restructuring its affairs, business, property, debt, other liabilities and equity.

A company is ‘financially distressed’ when it appears to be reasonably unlikely that it will be able to pay all of its debts as they fall due and in the immediately ensuing six months, or if it appears to be reasonably likely that the company will become insolvent within six months.

In terms of business rescue an ‘affected person’ is defined as:

·         A shareholder or creditor of the company;

·         Any registered trade union representing employees of the company; and

·         All employees of the company or their representatives, if they are not represented by a registered trade union.

 How does the business rescue model work?

There are two ways of initiating business rescue proceedings:

1. Voluntary Business Rescue

Business rescue proceedings may be initiated by the company if the board resolves to voluntarily be placed under supervision. This will happen if the board has reason to believe that the company is financially distressed and there appears to be a reasonable prospect of rescuing the company. Such a resolution may not be adopted if liquidation proceedings have already been initiated by or against the company, and takes effect only when it is filed with the Companies and Intellectual Property Commission (hereafter referred to as the ‘Commission’). When the resolution has been adopted, the company must publish a notice thereof in the prescribed manner to every affected person (shareholders, creditors and all employees, whether represented by a registered trade union or not), appoint a business rescue practitioner and notify the Commission and those affected by the appointment.

2.  Business Rescue proceedings instituted through the High Court

Alternatively, an affected person may apply to the court for an order to place the company under supervision and commence business rescue proceedings. A copy of an application brought by an affected party must be served on the company and the Commission and each affected person must be duly notified.

What you should know:

Each affected person has the right to participate in the hearing of an application to begin business rescue proceedings.

After considering an application by an affected person, and if there is a reasonable prospect for rescuing the company, the court may commence business rescue by placing the company under supervision. The court must also appoint an interim practitioner subject to ratification by a majority of the independent creditors according to their voting interests at the first meeting of creditors. (How the voting interest of creditors is calculated is explained below.)

After adopting the resolution to implement business rescue proceedings, but before adopting a business rescue plan, an affected person may apply to a court with the requisite jurisdiction to set aside the resolution or the appointment of the practitioner or an order requiring the practitioner to provide security in order to secure the interests of the company and any affected person.

The rights of affected persons during business rescue proceedings

·         For the purposes of business rescue proceedings, employees may in certain circumstances be considered preferred unsecured creditors of the company.

·         Creditors are entitled to notice of, and participation in, all court proceedings, decisions and meetings. Creditors also have the right to vote to approve, reject or amend a proposed business rescue plan, and if rejected, they have the right to propose an alternative rescue plan, or make an offer to acquire the interests of any/all creditors who voted against the proposed plan.

·         Creditors may establish a creditor’s committee and are entitled to consult with the practitioner during the preparation of the business rescue plan. Voting by creditors occurs as follows:

o   Secured or unsecured creditors have voting interests equal to the value of the amounts owed to them; and

o   Concurrent creditors who would be subordinated in a liquidation have a voting interest equal to the amount they could reasonably expect to receive. (The practitioner will request such amounts to be independently and expertly appraised and valued).

• All shareholders, i.e. the holders of any issued security of the company, are entitled to receive notice of, and participate in, all court proceedings, decisions and meetings. If a proposed business rescue plan alters the rights of any class of holders of securities, then, at a meeting of such security holders, each person is entitled to vote to approve or reject the proposed business rescue plan. If the business rescue plan is rejected, such holders may either:

o   Propose the preparation of an alternative business rescue plan, or

o   Present an offer to acquire the interests of any/all of the creditors or other holders who voted against the implementation of the proposed business rescue plan.

In the next issue we consider the impact of certain actions that may be instituted by franchisees and franchisors and whether they fall within the definition of an ‘affected party’.

www.businessrescuesolutions.co.za

juan@businessrescuesolutions.co.za

+27 71 679 9226