When Should A Business Initiate Business Rescue Proceedings? | Legal Articles

 

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When Should A Business Initiate Business Rescue Proceedings?

The Business Rescue procedure was introduced into the South African legal discourse by Chapter 6 of the Companies Act 71 of 2008.

In essence it is a cosmetic craft of the Judicial Management mechanism under the Companies Act 61 of 1973. Section 128 (1) (b) of the Companies Act 71 of 2008 defines it as “proceedings to facilitate the rehabilitation of a company that is financially distressed”.

The Purpose of Business Rescue Proceedings

The main purpose of business rescue proceedings is to maximize the likelihood of restoring the business to solvency.

Consequences of Business Rescue Proceedings

The business rescue procedure involves the re-organisation and restructuring of the affairs, assets, equity, debts, property and liabilities of a distressed company so that it may resume normal business operations in solvency through such interventions as the interim management of the company’s affairs by a Business Rescue Practitioner, the suspension of creditor rights against the distressed company as well as the development of a business rescue plan that seeks to restructure the company’s affairs and increase the prospects of solvency.

It is clear that the procedure is aimed at rescuing a business that is facing shut down, and therefore it is within this spirit that the Companies Act 71 of 2008 prescribes shorter time frames as measures to encourage the expedient implementation of measures to save the business. At the centre of these efforts will be a plan developed by the Business Rescue Practitioner, and approved by the creditors, to restructure the affairs of the business so that it can be restored to solvency.

Due to the rehabilitative nature of this procedure, it follows that time is of essence and therefore at the first sight of financial distress the company must take measures towards business rescue procedures otherwise the situation might present that interventions such as business rescue will not measure up to the dire situation the distress has gone. In the case of Welman v Marcelle Props 193 CC JDR 0408 (GST) the court emphasised the need for businesses to commence with business rescue proceedings when it becomes glaring that the business is under financial distress and not wait until the business is really going under.

The Court in Van Niekerk v Seriso 321 CC & Another (2012) ZAWCHC 63 noted that business rescue must be preferred over winding up if the indications are that the business can be saved from shutdown. Where it is reasonably certain that business will not be able to pay its debts within the next foreseeable next 6 months, it is advised that business rescue procedures be commenced.

Initiating Business Rescue Proceedings

The business rescue procedure is initiated through an application of Court by an affected party when it is realised that the business is financially distressed.

Alternatively, the procedure may be initiated by a resolution of the board of directors as per section 129 (1) of the Companies Act who must file such with the companies and intellectual property commission (CIPC) so that its status will reflect accordingly, notify all affected parties and the appointment of a Business Rescue Practitioner will then have to follow, within 5 days after adoption of the resolution.  

Van Deventer & Van Deventer Incorporated – Liquidation Attorneys South Africa

Our assistance puts you in a position to decide when liquidation or business rescue is preferable after thorough guidance on the indications that matter. Contact us to find out more.

 

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