INSOLVENCY PRACTITIONERS: WHAT YOU NEED TO KNOW ABOUT BUSINESS RESCUE IN SOUTH AFRICA
As insolvency practitioners in South Africa, we work with sequestrations of individuals, liquidations of companies, and business rescue operations. It is the latter upon which we focus in this article to help you decide whether or not to apply for business rescue/administration, enter into a compromise with creditors with the help of insolvency practitioners in South Africa, or to voluntary liquidate your financially distressed company.
WHEN IS BUSINESS RESCUE APPLICABLE?
If a South African company is financially distressed, but it is possible to bring it back to a solvent state through restructuring, the sale of assets, and other measures, then business rescue is applicable. For the most part, business rescue operations are relevant to medium and large firms and when the rescue operations are in the interest of South Africa and the public. For smaller companies, compromise settlements with creditors with the help of insolvency practitioners are often recommended if alternatives to liquidation are sought.
To qualify for business rescue in South Africa, the company must be in financial distress, insolvent, or likely to become insolvent within the next six months. It must be possible to bring it back to a state of solvency and this must be more beneficial to the affected parties than liquidation of the company’s assets.
WHAT IS NEEDED TO ENTER BUSINESS RESCUE IN SOUTH AFRICA?
For voluntary placement into business rescue, the board of directors must adopt and file the resolution for business rescue. This means they agree that the business be placed under the supervision of an appointed business rescue practitioner or practitioners. We recommend consulting with our insolvency practitioners on the topic of the role, requirements, and obligations of the rescue practitioner. In addition, the required forms and documentation must be submitted to CIPC and relevant parties.
Where it is a compulsory business rescue, the shareholders, creditors, or employees who wish to have the company placed in business rescue must submit an application to court. If granted, similar procedures to voluntary business rescue in South Africa are applicable. A company or person that qualifies for the role of rescue practitioner is appointed.
WHEN CAN A COMPANY NOT ENTER VOLUNTARY BUSINESS RESCUE?
If another party has already submitted an application for the compulsory liquidation of the company, or if the company has already commenced with voluntary liquidation, then the company cannot enter voluntary business rescue. This is also true if a compulsory business rescue application of the company has already been submitted. In any of these situations, it is best to consult with our insolvency practitioners in South Africa regarding the best and legally compliant way forward.
WHEN DOES THE BUSINESS RESCUE START?
The commencement date depends on whether it is a compulsory or voluntary business rescue. In the instance of compulsory, it starts once the relevant documents, as needed with a compulsory business rescue application, have been submitted to court. In the instance of the voluntary option, it starts when the relevant documents have been submitted. Consult with our insolvency practitioners regarding the documents needed in this regard.
HOW LONG DOES THE PROCESS TAKE?
The business rescue process in South Africa is supposed to take three months in accordance with the requirements of the new Companies Act. However, it is possible for an extension of the proceedings. The process can thus take up to 24 months to complete. Several factors are taken into consideration regarding extension of the procedures beyond the 90 days or three months period. The period can be extended if the creditors, shareholders, and affected parties do not give their cooperation, or when the practitioner needs to get regulatory approvals, or where the practitioner is in the process of getting a buyer for the company’s assets. Other reasons can also lead to an extension of the period. For more information on this matter, consult with our insolvency practitioners.
ROLE OF THE BOARD OF DIRECTORS UNDER BUSINESS RESCUE
Since the idea is to get the company out of its insolvency state, a qualified rescue practitioner takes over the management of the company. The board of directors relinquishes their rights to the practitioner. They can participate in the management of the company or the board can be dissolved. However, this does not mean the directors no longer have duties or obligations. They still have certain responsibilities. They may not make decisions or enter agreements, which require the permission of the business rescue practitioner. Any such agreements will be void.
CAN INSOLVENCY PRACTITIONERS BE APPOINTED AS BUSINESS RESCUE PRACTITIONERS IN SOUTH AFRICA?
Yes. If they meet the requirements, the insolvency practitioners can act as business rescue practitioners, if appointed to the positions.
BY WHEN MUST ALL CLAIMS BE SUBMITTED IN THE CASE OF A BUSINESS RESCUE IN SOUTH AFRICA?
Unlike with liquidations related to insolvency proceedings, where creditors must submit their claims at the first and second meetings, the business rescue practitioners can set final dates for claims. The creditors can generally submit claims up to the publication of the final business rescue plan. With no set period in which claims must be submitted, the practitioner usually considers the particular circumstances, creditor positions, amounts, and more regarding submission deadlines. Here too, we recommend seeking legal advice on the matter from our insolvency practitioners in South Africa.
HOW ARE EMPLOYEES AFFECTED?
The employees continue to work for the company in South Africa. Their positions are not affected, unless restructuring requires retrenchments to prevent the company from staying in a state of insolvency. Should retrenchments be required, then the relevant procedures must be followed in compliance with labour legislation in South Africa.
HOW THE COMPANY’S AGREEMENTS ARE AFFECTED
As our insolvency practitioners can explain in more detail, the pre-existing agreements into which the company entered usually stay in place. Where business rescue practitioners deem it necessary to cancel such pre-existing agreements, they need the permission of the court. The affected parties to the agreements can bring claims for damage against the company.
WHAT IS THE IMPACT ON THE SOUTH AFRICAN COMPANY’S SHAREHOLDERS?
Shareholders keep their shares in the company even when it is under business rescue.
CAN A CREDITOR COMMENCE WITH LEGAL ACTION AGAINST THE COMPANY?
Our insolvency practitioners in South Africa can also provide more information on this topic, but generally, legal proceedings against the company are stayed once it enters business rescue. This provides the practitioner some time to restructure assets and debts to save the company from a state of insolvency.
MAIN ASPECTS OF THE BUSINESS RESCUE PLAN OF A COMPANY IN SOUTH AFRICA
The practitioner consults with all the relevant parties, including shareholders, affected persons, and creditors. The company’s assets, liabilities, potential for avoiding insolvency, the complexity of agreements, and more are taken into consideration before the business is rescue plan is drafted. The plan includes the company background, the practitioner’s proposed plan for getting the company out of the state of insolvency, and how the practitioner plans to deal with aspects, such as employees to be retrenched, assets to be sold, and more.
APPROVAL OF THE BUSINESS RESCUE PLAN
With specific duties and regulations pertaining to business rescue practitioners in South Africa, the creditors have the assurance that before the rescue plan can take effect, the practitioner must set up a meeting with them within ten days of the rescue plan being published. The plan must be approved by the creditors through a vote. However, it is possible for a plan to be implemented if the vote is set aside. It is best to seek legal guidance from our insolvency practitioners regarding this process and the requirements since the plan is binding on all creditors once approved.
COMPANY STATUS AFTER BUSINESS RESCUE
Once the proceedings have concluded successfully the company can go on as normal.
WHERE TO GET HELP WITH BUSINESS RESCUES IN SOUTH AFRICA
Seek legal guidance from our insolvency practitioners regarding business rescue operations in South Africa.