Legal Articles

COVID-19 has wreaked immense havoc on our country, leaving behind an economic wasteland that no business – small enterprise or big corporation – is immune to.

No business could have been fully prepared for the enormous impact this microorganism would have on the economy, livelihoods and everything in between.

Business Rescue in South Africa

For approximately 10 weeks, many business owners, management and company directors have been sitting with their hands tied by an invisible virus, unable to trade, generate income or pay their employees.

The unfortunate reality here is that directors of a company remain obliged to fulfil their legal and fiduciary duties.

In other words, despite the immense financial pressure that South African businesses are under, they are not permitted to continue trading in a reckless manner, in insolvent circumstances or with gross negligence.

This is in accordance with section 22 of the Companies Act which remains in place.

Additionally, the Companies and Intellectual Property Commission (CIPC) will not prevent or prohibit any third party from claiming damages or losses, creating further stress for already vulnerable businesses in South Africa.

South African Businesses to Assess Their Position

Unfortunately, it has reached the point where businesses owners should take an honest look at their position and apply the financial distress test before considering what options they have.

The above-mentioned test will help businesses establish whether or not they are in financial distress before they make any hasty decisions.

Should it be decided by the majority of the board that a business or company is in fact in financial distress, they will have the following options to consider:

• Resolve to go into business rescue;
• File for liquidation if there is no prospect of trading out;
• To inform all parties who are affected why the board has elected not to resolve to enter business rescue

What is Business Rescue?

Business rescue is a plan that is developed to restructure a company’s affairs in such a way to rescue it from financial distress.

The two biggest considerations when determining whether or not business rescue is feasible are:

1. Whether the business is in fact in financial distress; and
2. Whether there are any reasonable possibilities of the business being profitable once again

In order for a company or a close corporation to be considered as financially distressed, one of the following must be true:

• There must be no prospect that the company will be in a position to pay its debts when they become due within the immediately ensuing six months; or
• It must be reasonably likely that the company will become insolvent within the six months

Although there have been numerous failed business rescues in South Africa, it is still a completely viable option for a business to potentially make it out of this stressful period relatively unscathed.

However, it’s important for business owners to understand their obligation to their stakeholders, their company and their staff members.

Failure to take the necessary steps discussed in this article may very well result in the board as well as those managing the company’s trade and affairs being personally liable for its debts.

Van Deventer & Van Deventer Incorporated – Attorneys in Pretoria and Cape Town

Businesses who have been largely impacted by the COVID-19 pandemic may be required to take the necessary steps which include an offer of compromise to creditors, business rescue or liquidation.

An honest assessment of the business as it stands is required to determine the best course of action going forward.

Our attorneys in Cape Town and Pretoria can provide you and your company legal advice and assistance with regards to business rescue procedures. Please contact us for more information.