Where a business is financially distressed, Business Rescue offers a good alternative to liquidation. Business Rescue creates a legal bubble in which the business is afforded time to implement a turnaround strategy.

The following are some critical points for consideration when looking at business rescue:

1 – Business rescue entails the rehabilitation of a company that is financially distressed. A company is financially distressed if it is reasonably unlikely that:

a) it will be able to pay all its debts as they become due and payable within the following six months; or

b) its liabilities will exceed its assets (insolvency) within the next six months.

2 – When a company begins to experience financial difficulties, the directors must determine whether the company should continue trading or whether such trading would be reckless as contemplated in section 22 of the Companies Act. Whilst the Companies and Intellectual Property Commission (CIPC) has issued a practice note stating that will no invoke section 22 on a company, the directors still have an onus to adhere to the Companies Act themselves.

3 – Where the board of directors has established that the company is under financial distress, the next decision they need to make is whether there is a reasonable prospect of rescuing the company. A reasonable prospect that a company can be rescued will only exist where there are reasonable prospects of either restoring the company to a solvent state or at least facilitating a better deal for creditors and shareholders than they would secure from liquidation.

4 – If the board of directors has reasonable grounds to believe that the company is financially distressed but has not placed the company under business rescue, the board must deliver a written notice to each affected person (shareholder, creditor, registered trade union and employee) setting out its reasons for not placing the company under business rescue. A decision to send out a notice must be given due consideration since it advises all stakeholders that the company may struggle to settle its debts as they fall due. This can impact trading activities of the business very negatively:

a) Creditors may change their payment terms or place the business on stop supply.

b) It can lead to labour action as it may cause concern amongst employees and trade unions.

c) Financiers may withdraw debt facilities from the business, further reducing available working capital.

5 – Where the board of directors have not chosen to place a financially distressed company under business rescue, the shareholders, creditors, registered trade unions and any of the employees are within their rights to apply to place the company under business rescue.

6 – The resolution by the board of directors to commence business rescue proceedings has no effect until it has been filed with the CIPC. The business rescue proceedings only formally commence on the date of the filing of the board resolution.

7 – Once business rescue proceedings commence, the appointed business rescue practitioner is conferred full managerial control of the company in substitution for the board of directors and pre-existing management. The pre-existing management will continue to function during the process but under the authority of the business rescue practitioner. The business rescue practitioner must develop and implement the business rescue plan. In addition, the business rescue practitioner has the power to remove from office any person who forms part of the pre-existing management of the company or appoint a person as part of the management of a company.

8 – When identifying an appropriate business rescue practitioner, one must consider whether they have appropriate industry experience and hold sufficient expertise in business turn around. Often practitioners with certain professional backgrounds are appointed, that are aligned to the legalities and compliance of the process rather then the turn around of the business. A good business rescue practitioner must be strategic and able to drive organisational change.

9 – In some instances, there are more appropriate courses of action that may lead to better shareholder value protection or a better dividend to creditors. Your business advisor and turn around specialist must be able to guide you through these alternatives which may include a trade sale, new investors, the refinancing of plant and equipment or the sale of non-core assets.