Is business rescue the lifebuoy your business needs?

Peter has recently inherited the family business from his father, becoming the fourth generation of Morgans in charge of the established Morgans Handcrafted Furniture company. Peter’s father, having passed away recently, left him in charge of the running of the sizable production warehouse and having learnt the trade under the guidance of his father, Peter has acquired all the skill needed to continue the established tradition of excellence.

A few years ago, Peter’s father brought in investors as shareholders into the family company to provide much needed capital to finance the purchase of the current warehouse. Concerned about the death of Peter’s father, these investors are now clamouring for returns on their investment. With a good order book, Peter considers buying them out, yet when he start delving into the financials he realises that many obligations, debts, suppliers and other creditors have not been properly paid by his father and many outstanding accounts have not been collected. In his later years, it becomes apparent that Peter’s father has let the financials slip and suddenly what Peter thought was a healthy and vibrant business, appears to be sinking in a sea of debt. But what to do? Must the family business be sold, assets be made to money, or even be declared insolvent?

The above scenario and many variations thereon are all too frequently encountered in today’s difficult economic times. Often, very good businesses flounder and are liquidated due to a temporary cash flow crisis. These businesses, with proper management could have been saved and remain profitable and viable units contributing to the economy. In many of these situations, all that would be required to correct the business is a short period during which financial obligations are limited to allow the business to right itself and move towards a position where it can pay its debts and remain solvent, rather than becoming insolvent and forever losing the potential the business could have achieved with a little careful nurturing.

It is exactly for these reasons that the new Companies Act introduced the concept of business rescue proceedings. Business rescue proceedings afford a company (or closed corporation) with similiar cash flow (and other) problems a window of opportunity to gain breathing space from creditors and financial obligations before succumbing completely to a spiral where the end of the business is a real possibility.

What are business rescue proceedings?

These are proceedings aimed at facilitating the rehabilitation of a company that is in financial distress. In other words, where a company appears to be in a position that it is reasonably unlikely that the company will be able to repay its debts as they become due in the next six months, the company is a likely candidate for undertaking business rescue proceedings. The intent of business rescue proceedings is not merely to afford a company a reprieve from creditors, but rather to provide a beneficial solution for all parties that have an interest in the future success of the business.

A company is placed under the supervision of an independent business rescue practitioner of its own choice, who must develop and implement a business rescue plan to restructure the company’s affairs, business, property, debt and other liabilities in order to assist in the rehabilitation of the company. An important consequence of these proceedings and aimed specifically at affording some breathing space to the company, is that during these proceedings no claims may be instituted against the company and the business rescue practitioner may even delay the fulfilment of contractual obligations.

How does a company get placed under business rescue?

The board of a company can place a company under business rescue simply by lodging a resolution to that effect with the Companies and Intellectual Property Commission (CIPC). No court application or creditor approval is required, and once a company is placed under business rescue, no action can be instituted against that company until the proceedings come to an end. This affords the company the opportunity to restructure its affairs and again become profitable. The Companies Act also provides for an affected person to apply to court for an order that a company undergo business rescue.

The Companies Act determines that should a company have reasonable grounds to believe that it is in financial distress and if there appears to be a reasonable prospect of rescuing the company, the board must make a decision as to whether or not to place itself under business rescue. Should the company decide not to place itself under business rescue, it must deliver a written notice to every affected person stating that the company is financially distressed and provide reasons as to why the company is not being placed under business rescue. Should the company not deliver such notice, the directors could be held liable if affected parties suffer losses. The Companies Act also prohibits the carrying on of business recklessly, and a failure to place a company that is in financial distress under business rescue, could amount to negligent conduct.

What is the role of the business rescue practitioner?

Central to business rescue proceedings is the business rescue practitioner who is appointed by the company once it is placed under business rescue. A business rescue practitioner is a specialised person registered as such with the CIPC.

The business rescue practitioner has wide ranging powers and in essence takes over full management and control of the company. The business rescue practitioner must meet with creditors and work with them to prepare a business rescue plan to restructure the company’s affairs, business, property, debt and other liabilities, and should the creditors of the company (which includes the employees of the company) vote in favour of the plan, it will be implemented and all the creditors will be bound by that plan. The intent of the plan is to maximise the likelihood of a company continuing its business by allowing the company to move to a position where it is able to repay its debts, or where this is not possible, to structure the company’s affairs in a manner that results in a better return for the creditors and shareholders of the company than would result from the immediate liquidation of the company.

For Peter the option of business rescue proceedings provides a much needed opportunity to remedy the financial difficulties which the family business is faced with and ensure the continuation of the business. Importantly, though, Peter should not delay in convening the board to consider business rescue proceedings as leaving the decision of business rescue too late, may result in the business moving beyond the point of no return where even an expert business rescue practitioner cannot save the business. To find out more about business rescue and how to commence the process of business rescue contact your attorney or the CIPC for more information.

October 25, 2012
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