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Business Management
A Guide to Business Rescue in South Africa
2023-01-18
If a South African business experiences serious financial troubles, there is an option other than liquidation and ending the business. Business rescue is a specific process that is designed to save financially distressed companies.
Business rescue is a process that involves a business rescue practitioner temporarily taking over the business. They will need to create and implement a business rescue plan, which reveals how they will save the company.
In this guide, we cover what you need to know about the business rescue process in South Africa and the information included in the business rescue plan.
What is Business Rescue?
Business rescue is a procedure used to restore a financially troubled company. It is governed by the Companies Act of 2008 and enables a financially troubled company to be placed under the supervision of a business rescue practitioner while still being possibly viable.
A business rescue strategy must be created by the business rescue practitioner. The information included in the business rescue plan will be focused on reorganising the company's debt, selling off assets, restructuring the company, optimizing operations, or securing fresh funding. The procedure of business rescue aims to try and save the business and preserve the employment of its staff.
Business rescue is an alternative to liquidation, which entails selling off the business's assets and paying off its creditors with the proceeds. With business rescue, a financially distressed company still can continue to exist.
When is Business Rescue Applied to a Business?
When a company experiences serious financial issues, business rescue can be applied to it in one of two ways: voluntarily or involuntarily.
With a voluntary business rescue plan, the board of directors of the company resolves that business rescue is necessary. They will need to have reasonable grounds for showing that the company is financially distressed and that there is the possibility of rescuing the company.
In this case, a formal court application needs to be made by an "affected person” - which would be a shareholder, creditor, employee, or a trade union representing employees. An affected person can join the hearing of the business rescue application.
An involuntary business rescue plan can be ordered by the court. This happens if the court finds the business is financially distressed but there is still a reasonable opportunity for rescuing the company.
Information Included in the Business Rescue Plan
A business rescue plan needs to be created within 25 business days of the business rescue practitioner being appointed. The information included in the business rescue plan will reveal how the business rescue practitioner plans to rescue the company. This should cover how the company’s assets, liabilities, employees, and contracts will be treated during the business rescue process.
According to Section 150 of the Act, a business rescue plan should contain the following sections:
- Business background: This includes a list of all business assets, creditors, holders of the company’s securities, probably dividends if insolvency happens, and the business rescue practitioner's remuneration.
- Proposals: Details of any payment postponements to debtors, the extent of the company being released from debt payments, how the company will continue to operate and how it will treat its existing agreements. This section also includes how the creditors will benefit from the business rescue plan instead of the business undergoing a liquidation process, and how the business rescue plan will affect the company’s securities.
- Assumption and conditions: A statement of conditions for the business rescue plan to be operational, how the business rescue plan will end, and how employees will be affected by the plan.
Creditors in Business Rescue
During the business rescue process, business creditors have certain rights. These include receiving notice of the court proceedings and business rescue process, being able to participate in court proceedings, and making proposals for the information included in the business rescue plan.
Creditors have the right to vote on changes to the proposed business rescue plan. They can also form a creditors committee, which the business rescue practitioner can consult during the business rescue process.
Business rescue allows financially distressed companies to continue operating and get back on track. While the process may be difficult, it offers hope to companies that would otherwise liquidate.
If a business qualifies for business rescue, then the right steps must be taken in terms of the business rescue practitioner and the business rescue plan. If the plan is successful, it could help failing businesses to restart on a new, financially viable path.