In the face of economic uncertainty and mounting financial distress, many South African businesses seek legal avenues to avoid liquidation. One such mechanism is the business rescue process, introduced through the Companies Act 71 of 2008.
This process is designed to offer a lifeline to financially distressed companies, allowing them time to restructure and ultimately return to solvency, thereby preserving jobs and maximizing creditor returns.
What is Business Rescue?
Business rescue is a legal procedure aimed at rehabilitating a financially distressed company. According to Section 128 of the Companies Act, a company is financially distressed if it appears reasonably unlikely that it will be able to pay its debts as they become due within the ensuing six months, or if it is likely to become insolvent within that period.
The goal of business rescue is either to return the company to solvency or, if that is not possible, to achieve a better return for creditors and stakeholders than would result from liquidation.
Initiating the Business Rescue Process
A company can enter business rescue either voluntarily or through a court order:
- Voluntary Initiation: The board of directors may resolve to begin business rescue if the company is financially distressed and there is a reasonable prospect of recovery. This resolution must be filed with the Companies and Intellectual Property Commission (CIPC) and accompanied by a notice to affected parties, including employees, shareholders, and creditors.
- Court-Ordered Rescue: An affected party—such as a creditor, shareholder, or employee—can apply to the court to place a company under business rescue. The court must be satisfied that the company is financially distressed and that there is a reasonable prospect for rehabilitation.
Role of the Business Rescue Practitioner
Once business rescue is initiated, a business rescue practitioner (BRP) is appointed to oversee the process.
The BRP must be licensed and is responsible for managing the company, developing a rescue plan, and communicating with stakeholders. The existing board and management remain in place but their powers are subject to the authority of the practitioner.
The Business Rescue Plan
Within 25 business days of appointment, the BRP must prepare and present a business rescue plan, unless an extension is granted. This plan outlines:
- The financial position of the company
- The causes of its financial distress
- Proposals for restructuring or operational changes
- Estimated returns to creditors
The plan must be approved by at least 75% of the voting interests of creditors, with at least 50% of independent creditors voting in favor.
Impact on Creditors and Contracts
Once business rescue proceedings begin, a temporary moratorium on legal proceedings against the company is imposed.
This protects the company from creditor actions while it works on recovery. Certain contracts may also be suspended or renegotiated under the guidance of the BRP.
Ending Business Rescue
Business rescue can be terminated in several ways:
- Successful implementation of the rescue plan
- A court order ending the process
- The BRP filing a notice that there is no longer a reasonable prospect of rescue
- Conversion into liquidation if recovery is deemed impossible
While business rescue has proven beneficial in many instances, it has also faced criticism for lengthy delays, misuse by directors to avoid creditors, and lack of oversight in some cases.
The success of the process largely depends on the skills of the practitioner and the cooperation of stakeholders.
Conclusion
The business rescue process in South Africa offers an important mechanism for corporate recovery. When properly implemented, it can preserve jobs, protect creditor interests, and give companies a second chance.
However, the system requires careful application, transparent communication, and skilled administration to achieve its intended outcomes.
Article by Gugu Nkosi
The above is intended for educational and informational purposes only. For professional legal advice, please reach out to our team.
