In a recent article, we highlighted the different ways one could close a business using deregistration or liquidation. Now, we’d like to highlight an alternative option, business rescue.
“Business Rescue” is defined in section 128(1)(b) of the Companies Act 71 of 2008 (“Companies Act”) as proceedings to facilitate the rehabilitation of a company that is financially distressed. This is done by providing for the development and implementation of a plan to rescue the company by restructuring its affairs, business, property, debt and equity in a manner that maximises the likelihood of the company continuing on a solvent basis. If that is not possible, results in a better return for the company’s creditors and shareholders than would result from the immediate liquidation of the company.
Essentially, business rescue is a legal process aimed at rehabilitating a company in financial distress. Under the supervision of an appointed business rescue practitioner, business rescue is considered an opportunity to restructure and organise a company’s affairs without having to deregister or liquidate. An often overlooked solution when the business cannot continue or be saved is a wind-down in business rescue. Here, when circumstances dictate, the business rescue practitioner is charged with the realisation of the assets of the company and the distribution of the nett proceeds to creditors and potentially shareholders.
What defines “financial distress”?
According to the Companies Act, a company is financially distressed when it appears 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 when it appears reasonably likely that the company will become insolvent within the immediately ensuing six months.
What are the benefits of a wind-down in business rescue?
Firstly, liquidations are notoriously long and drawn out, often taking more than 18 months to complete. A wind-down in business rescue has the potential to be completed in a number of months.
Secondly, a business rescue practitioner is remunerated based on an hourly tariff compared to liquidators that are entitled to between 3 and 10% of the sales proceeds. Other cost savings such as realisation fees are also likely to be less than.
Thirdly, the proceeds from the sale of assets in a business rescue are likely to be higher as the business rescue practitioner may be able to sell assets out of hand compared to the general approach employed in liquidation of taking all assets to auction under fire sale conditions.
Lastly, the business rescue practitioner will take immediate control of the assets and ensure their safekeeping. Delays in the liquidation process often mean that a liquidator is only appointed months after the commencement of the liquidation increasing the risk of misappropriation.
How can a company be placed in business rescue?
A company can be placed in business rescue either through a board resolution or through an application to court by affected persons (shareholders, employees and creditors).
Thank you to Adriaan Smuts, Turn around Specialist from BREX (Business Rescue Exchange), for his valuable contribution to this article.
If you’d like to know more about business rescue and how we can help you, please do get in touch.
Business Rescue Exchange (BRX): +27 11 100 2552 / [email protected]
Gunston Strandvik Mlambo Attorneys: +27 21 702 7763 / [email protected]