Business rescue under the new companies act

INTRODUCTION

Insolvent companies or companies unable to pay their debts would in terms of the last Companies Act (ie 61 of 1973 ) find themselves either:

in liquidation; or
subject to a compromise (under Section 311); or
placed under judicial management.
Of these three choices liquidation was the most popular for, inter alia, the following reasons:

compromises – although attractive because of their speed, relative ease of Implementation and end result, creditors were not subject to a moratorium and exposed the company during these proceedings to liquidation (if not already in liquidation). On many occasions the company was placed under duress to purchase aggressive creditors’ claims for the compromise to succeed. This often led to the compromise failing and compromises generally being unattractive.
judicial management – this process required that creditors’ claims be paid in full. Lenders were reluctant to fund companies under judicial management without security where in most instances no assets or assets of value were available for such security. In addition judicial management required a very high level of proof for it to succeed. Judicial management was seldom, if ever, utilised by ailing companies.

The passing of the new Companies Act brought about a number of profound changes to company law, business rescue being one of them. Section 7(k) of the Act deals with the “purposes of Act”, as follows:

“the purposes of this Act are to –

(k) provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders”

The new Act thus brings about a totally new mindset for ailing companies, i.e a culture of rescue as an attractive and workable alternative to liquidations. Business Rescue applies to both companies and close corporations. The term “Financially distressed” is defined in Section 128(f). By definition for business rescue purposes a company is financially distressed if:

it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or
it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

The term “business rescue” is also defined in Section 128(b) and reads as follows:

“b. Business rescue – means proceedings to facilitate the rehabilitation of a company that is “financially distressed” by providing for –

1. temporary supervision of the company and of the management of its affairs, business and property;
2. a temporary moratorium on the rights of claimants against the company or in respect of property in its possession (not for property not in its possession per Section 133(1);
3. the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.”
1. Business rescue has its own chapter in the Companies Act, i.e Chapter 6 and it is divided into five separate parts:
- Part A which deals with – business rescue Proceedings (Sections 128 to 137)
- Part B – Practitioners’ functions and terms of appointment (Sections 138 to 143)
- Part C – Rights of affected persons during business rescue proceedings (Sections 144 to 149)
- Part D – Development and approval of business rescue plan (Sections 150 to 154)
- Part E which deals with compromise with creditors (Section 155)
1. In summary, the important aspects of business rescue are the following:
1. it applies to companies / close corporations that are “financially distressed” (as defined);
2. it applies to companies that are neither commercially insolvent (i.e in the sense that it is unable to pay its debt) nor factually insolvent (i.e the so called balance sheet insolvency) (this as held by Van Der Byl AJ in First Rand Bank Limited v Lodhi 5 Property Investments CC and others*;
3. it allows such companies and their assets to be placed under temporary supervision by a business rescue practitioner;
4. has the benefit of a temporary moratorium of rights of claimants against the company or in respect of property in its possession (one of the disadvantages of a Section 311 under the 1973 Act);
5. allows for the development and implementation if approved of a plan to rescue the company by restructuring its affairs, business, property, debts and other liabilities and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or if that is not possible will result in the business rescue practitioner giving a better return to creditors or shareholders (if applicable) than on liquidation of the company.
*This case is unreported at present
1. Before dealing with the other pertinent aspects of Chapter 6 you should retain to memory one further important definition regularly referred to in Chapter 6, and that is the definition of “affected persons”. An affected person is:
1. a shareholder or creditor of a company;
2. any registered trade union representing employees of the company; and
3. if any of the employees of the company are not represented by a registered trade union, each of these employees or their respective representatives.
WHEN SHOULD A COMPANY APPLY FOR BUSINESS RESCUE?
1. If you are insolvent (commercially or factually) it is too late. It must be taken as an evasive step prior to illiquidity or insolvency and where it appears reasonably likely that a company may become illiquid and/or insolvent in the ensuing six months.
2. The definition of financially distressed differs from the solvency and liquidity test as set out in Section 4 of the Act as insolvency and liquidity covers the ensuing twelve months (not six months).
3. There is much case law, dealing with Chapter 6 which is developing into a useful guide as to when and under what circumstances one should apply for business rescue. The leading case at present is a Western Cape High Court decision. The Judge was Eloff AJ. It is the case of Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 (Pty) Ltd. It sets out the nature of the evidence one should place before a Court for an application for business rescue to succeed. It states that in such an application the applicant must:
1. address the cause of the demise or the reasons for the failure of the company’s business;
2. offer a remedy for such demise which must have a reasonable prospect of being sustainable;
1. Furthermore, the business rescue plan must not merely prolong the agony of a company by substituting one debt for another without any glimmer of hope.
13.The applicant must set out a concrete and objectively ascertainable business rescue plan based on facts which are beyond mere speculation and that these facts should include:
1. the likely costs of rendering the company able to commence with its intended business or to resume the conduct of its core business;
2. the availability of cash resources to enable the company to meet its daily expenses and the nature of the funding on which the company will rely;
3. the availability of any other resources (such as raw materials and human capital);
4. the reasons why the proposed business rescue plan will have a reasonable prospect of success.
1. This case set the “onus” at high level. In this case (as with many subsequent cases) the application was lacking in these regards and the application for business rescue failed.
2. This case has been cited with approval in a number of subsequent decisions such as:
1. Koen & Another v Wedgewood Village Golf and Country Estate (Pty) Ltd (Judgment of Binns-Ward J);
2. Swart v Beagles Run Investments 25 (Pty) Ltd & Others (Judgment of Makgoba J);
3. Kovacs Investments 571 (Pty) Ltd v Investec Bank Limited & Another;
4. Anthonie Welman v Marcelle Props 193 CC (Judgment of Tsoka J)*.
1. In this last named case, at paragraph 28 of his judgment Tsoka J aptly states as follows:
“In my view, business rescue proceedings are not for the terminally ill …… Nor are they for the chronically ill. They are for ailing corporations, which, given time will be rescued and become solvent.”

17.As already stated Van Der Byl AJ has ruled that factually and commercially insolvent companies should not apply to court for business rescue as “… the Court will in all probability issue an(d) (sic) order dismissing the application together with an order placing it under liquidation as envisaged in Section 131(4)(b)”.

18.Well just as we thought we had an understanding of what the courts were looking for along came a change. This manifested in the form of a Western Cape decision by Gangen J in M. Van Niekerk v Seriso 321 CC and Others^. This case dealt with an application in terms of Section 131(1). First Rand Bank, a secured creditor, intervened and insisted that the corporation (Seriso 321 CC) be placed in liquidation because the applicant had failed to place before the court a “workable business rescue plan” which it appears was the case.

* This case is unreported at present

^ This case is unreported at present

Gangen J rejected the argument and insisted that the facts of this case suited “business rescue” and the purpose for which it was enacted. This case if it is to be followed has lowered the onus to succeeding in an application to court for business rescue and is authority for the view that only the gist or outline of the plan need be made out at the time if filing that must appear to be workable. The detail of the plan is the function of the business rescue practitioner which he can only prepare once the company is placed under business rescue.

What is the current position?
- Each case is determined on its own facts – the courts analyse the business, the reason(s) for failure, assets, liability and the proposed plan.
- The facts must be such that they persuade a court that there is a reasonable prospect of a company being rescued.
WHO CAN APPLY FOR BUSINESS RESCUE? 18. A board of directors if the such board has reasonable grounds to believe that:
1. the company is financially distressed; and
2. there appears to be a reasonable prospect of rescuing the company.
19. An affected person (remembering that this includes an employee) can apply to court to place a company/close corporation under business rescue. 20. A company that has adopted such a resolution may not adopt a resolution to begin liquidation proceedings unless the resolution has lapsed or the business rescue proceedings have ended as determined in accordance with Section 132(2) (which I deal with next).

WHEN DOES BUSINESS RESCUE BEGIN AND WHEN DOES IT END?

21 Business rescue begins when:
1. the company per its board (not shareholders) (which includes members of a close corporation per Section 131(1)(a) of the Act as read with Section 66 of the Close Corporations Act):
  1. files a resolution to place itself under supervision per 129(3); or
  2. applies to court for consent to file a resolution in terms of Section 129(5)(b);
  1. Per Section 132(2) business rescue ends when:
  1. the Court:
    1. sets aside the resolution or order that began those proceedings;
    2. has converted the proceedings to liquidation proceedings;
    1. is no longer financially distressed; or
    2. can’t be rescued;
    1. It is envisaged that a business rescue proceeding must begin and end within three months failing which the practitioner must prepare a report on progress for delivery to the commission, where appropriate the court and each affected person.
    A SUMMARY OF PERTINENT ASPECTS OF CHAPTER 6
    1. Section 133:
    1. The following are the important features of business rescue:
      1. During business rescue proceedings no legal proceedings including enforcement action against the company or in relation to any property belonging to the company or lawfully in its possession may be commenced or proceeded with in any forum. This is subject to the following exceptions:
        
        with the written consent of the practitioner;
        
        with the leave of court;
        
        by way of set off of any claim made by a company under business rescue in any legal proceedings;
        
        criminal proceedings against the company or its directors or officers;
        
        proceedings concerning any property or right over which the company exercises the powers of a trustee;
        
        proceedings of a “regulatory authority” (as defined);
        
        25.Section 134:
        
        Protection of property interests
        
        During business rescue a company may not dispose of or agree to dispose of property except:
        
        in the ordinary course of business (e.g the sale of its stock);
        
        a bona fide transaction at arms length for fair value approved in advance and in writing by the practitioner; or
        
        in a transaction contemplated within and undertaken as part of the implementation of the business rescue plan as approved in terms of Section 152.
        
        property in a creditor’s possession as a result of an agreement made in the ordinary course of the company’s business. Such creditor “may continue to exercise any right in respect of that property as contemplated in the agreement subject to Section 136” [134(1)(b)]
        
        Post commencement finance:
        
        Persons may advance funds or stock to a company during business rescue. Such financing may be secured against any unsecured assets (highly unlikely there are any such assets).
        
        Money owed to them will be treated as post commencement financing. The ranking (i.e for payment) of post commencement financing will be paid out according to the following order:
        
        first the practitioner’s remuneration and expenses will be paid out including costs of business rescueproceedings;
        
        secured creditors;
        
        employees for pre rescue claims and who worked for no remuneration during business rescue who will all be treated equally; and then the
        
        post commencement financiers in the order in which they loaned and advanced their monies; and finally
        
        all unsecured claims against the company
        
        27.Section 136:
        
        The effect of business rescue on employees and contracts:
        
        Employees will continue to be employed on the same terms and conditions except:
        
        where changes occur in the ordinary course of attrition, e.g. summary dismissals etc; or
        
        in accordance with applicable labour laws where the employees agree different terms and conditions.
        
        28.Section 137:
        
        Functions and duties of directors during business rescue include but are not limited to the following:
        
        A director must continue to exercise the functions of directors subject to the authority of a practitioner.
        
        A director has a duty to the company to exercise any management function in accordance with the express instructions or direction of the practitioner.
        
        A director remains bound by the requirements of Section 75 (concerning disclosure of personal financial interests).
        
        To the extent that a director acts in accordance with his management functions and Section 75 he is relieved from the duties of a director as set out in Section 76 and the liabilities set out in Section 77 other than Section 77(3)(a), (b) and (c).
        
        Each director must attend to the requests of the practitioner at all times and provide the practitioner with information about the company’s affairs as may be reasonably required.
        
        Any action taken by a director without the practitioner’s approval which requires the approval of a practitioner is void unless approved by the practitioner (Section 137(4) and Section 218).
        
        A practitioner may apply to court for an order removing a director from office on the grounds that the director has failed to comply with this chapter 6 or by act of omission is impeding or has impeded the practitioner in the performance of his powers and functions of practitioner, management of the company by the practitioner or the development and implementation of the business rescue plan.
        
        Section 140:
        
        Powers and duties of practitioner:
        
        The role of business rescue practitioner is a very powerful one. He/she must act responsibly. The practitioner has the following powers, inter alia:
        
        full management control of the company in substitution for its board and pre-existing management;
        
        he/she may delegate any power of function to a person who was part of the board or pre-existing management;
        
        he/she may remove from office any person who forms part of the pre-existing management of the company or appoint a person whether to fill a vacancy or not.
        
        The practitioner’s remuneration:
        
        The practitioner’s remuneration is dealt with in the regulations to the Act. It is dependant on whether the company is classified as a small, medium or large one per the companies PIS. In large companies the practitioner is entitled to an hourly charge of R2,000.00 per hour or R25,000.00 per day.
        
        Section 150
        
        A business plan when submitted is to be divided into three sections:
        
        Part A – background;
        
        Part B – proposals;
        
        Part C – assumptions and conditions.
        
        Within 10 (ten) days of publishing the plan (35 days from appointment) the practitioner must convene a meeting to consider the business rescue plan. If the plan does not affect shareholders’ rights and is on a preliminary basis approved by the holders of more than 75% of creditors’ voting interests that voted and the votes of at least 50% of independent creditors’ (as defined) voting interests it is taken as accepted and is final.
        
        If it is not approved on a preliminary basis it is rejected and may only be considered further in terms of Section 153
        
        If it affects the rights of shareholders and has been approved by requisite vote of creditors the shareholders must vote (153(3)(cc)(i) and (ii)). If they vote in favour the plan is finally adopted. If they oppose it the plan is rejected and can only be dealt with in terms of Section 153.
        
        A business plan that is adopted is binding on the company and each of its creditors and every holder of the company’s securities whether or not such person:
        
        was present at the meeting;
        
        voted in favour of the adoption of the plan;
        
        in the case of creditors had proven their claims against the company (at the first meeting of creditors (Section 147)).
        
        Section 153
        
        If a business rescue plan is not adopted the business rescue practitioner can seek a vote of approval from the holders of voting interests to prepare and publish a revised plan or apply to Court to set aside the vote on the basis that it was inappropriate. (watch this space) (Advanced Business Technologies & Engineering Co (Pty) Ltd(in business rescue)v Aeronautique Et Technologie 2012 JDR 0345 (GNP)where Tuchten at paragraph 7 states with regard to the word inappropriate in this section: “this term is not defined. I share the view expressed in Hennochsberg on the new Companies Act that it is not clear what the legislature envisaged by the term “inappropriate” in Section 153(1)(a)(ii). The essence of a vote is that it reflects the voters perception of his own interests. One can test this by reference to a political vote; to suggest that a political vote could in any circumstances be characterised as inappropriate is ludicrous. Fortunately, I do not in these interlocutory proceedings have to decide whether the legislature intended that a court, singularly, ill-equipped to do so, is required to substitute its own view for how the members of the class in question ought to have voted to satisfy the requirements of inappropriateness. The lack of clarity about what the legislature intended is regrettably compounded by the provisions of Section 153(7). On a literal reading of that sub-section, whilst the business rescue practitioner is restricted to bringing an application to attack the result of a vote on the grounds that it was inappropriate, the Court is enjoined by ss(7) not to consider whether the result of the vote was inappropriate but whether it is reasonable and just to set the vote aside, having regard to the factors mentioned in the sub-section. My prima facie conclusion on the meaning of this rather ill-drafted measure is that a court must proceed in an application for an Order under section 153 of the new CompaniesAct as follows:the Court must first determine whether the result of the vote under attack, viewed as at the date of the vote was inappropriate;if the conclusion is that the result of the vote under attack, viewed as at the date of the vote, has not been shown to have been inappropriate, then the applicant for relief will have failed to establish a jurisdictional fact prerequisite to the right to relief and the application must fail;if the conclusion is that the result of the vote under attack, viewed as at date of a vote, has indeed been shown to have been inappropriate, then the Court must proceed to determine whether it is satisfied that, viewed as at the date of the hearing before the Court, it is reasonable and just to Order that the vote be set aside;the scope of the evidential material relevant to the decision of reasonableness and justice is not limited to what influenced the voter or voters to vote as they did or what was available on the day the vote was taken.”
        
        If the practitioner does not attend to the above any affected person can do so. In addition, an affected person or combination of affected persons may make a binding offer to purchase the voting interests of one or more persons who oppose adoption of the business rescue plan at a value independently and expertly determined, on the request of the practitioner, to be a fair and reasonable estimate of the return to that person, or those persons, if the company were to be liquidated.
        
        A revised business plan is voted upon as with the original plan, i.e in terms of Section 152.
        
        A practitioner can evaluate any claims purchased by any affected party to determine whether he should make any necessary revisions to his business rescue plan.
        
        If the business rescue practitioner or any affected person does not take any of the aforegoing steps the business practitioner must file a notice of termination of business rescue proceedings.
        
        A business rescue plan may provide that if it is implemented in accordance with its terms and conditions a creditor who has acceded to the discharge of the whole or part of the debt owing to the creditor will lose the right to enforce the relevant debt or part of it.
        
        If a business rescue plan has been approved and implemented in accordance with Chapter 6 a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except to the extent provided for in the business rescue plan.
        
        33.Section 155
        
        Compromise by creditors:
        
        This Section can only be implemented if the company is not under business rescue. It can be implemented irrespective of whether or not the company is financially distressed. It can be made by a board of a company or a liquidator of a company that is being wound-up. They may propose an arrangement or compromise of its financial obligations to all of its creditors, or to all of the members of any class of its creditors, by delivering a copy of the proposal and notice of meeting to consider the proposal to:
        
        every creditor of the company, or every member of a relevant class of creditors whose names or address is known to, or can reasonably be obtained by, the company; and
        
        the commission.
        
        must be filed by the company within five business days with the CIPC;
        
        be attached to each of copy of the company’s memorandum of incorporation that is kept at the company’s registered office or elsewhere as contemplated in Section 25;
        
        is final and binding on all of the company’s creditors or all of the members of the relevant class of creditors as the case may be as at date at which it is filed.
        
        CONCLUSION
        
        Statistically business rescue has up to date not been that successful. Most applications brought to court appear on the whole to have been lacking in formality and or content and have been dismissed.
        
        I believe that business rescue will be utilised more frequently in the appropriate circumstances enabling many financially distressed (not insolvent) companies to be rescued.
        
        There is certainly room for business rescue in our law and it is a most welcome right afforded to financially distressed companies as an alternative to judicial management or worse still to liquidation. Business rescue now brings South Africa into line with a number of commercially advanced countries such as the United States, the United Kingdom and Australia.
        
        CHANGE YOUR MINDSET:
        
        do not always think liquidation “first”
        
        “first think” business rescue or offer of compromise