Business Rescue is aimed to aid in the effective turnaround of a failing company. The Business Rescue Proceedings were introduced to South African Law with the commencement of the New Company’s Act 71 of 2008 on the 1st of May 2011.Business Rescue is largely self-administered by the managing directors of the company, under supervision of the Business Rescue Practitioner.
According to the Act the aim of the proceedings is:
1 To provide for temporary supervision of a financially distressed company;
2 To place a temporary moratorium on the rights of claimants against the company;
3 To develop and implement an approved plan to rescue the company.
Shareholders, employees, manufacturers and suppliers are regarded as stakeholders and have the right to make application for any company to be placed under business rescue and to participate in the turnaround strategy. The Business Rescue Practitioner is appointed to turnaround the Company and has the power to suspend any agreement excluding contracts of employment.
A Company qualifies for business rescue if it is financially distressed, in that :
1 It appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing 6 months, or
2 It appears to be reasonably likely that the company will become insolvent within the immediately ensuing 6 months, and
3 The business is still economically viable.
Business Rescue will be successful if a proper turnaround strategy, agreed to by all the stakeholders, is drafted and implemented by a Business rescue Team.
In order to establish whether Business Rescue will be the correct procedure for your Company, an assessment of the business needs to be conducted.
The outcome of the assessment can have three possible outcomes:
1. To implement a turnaround strategy without placing the Company under Business Rescue;
2. To place the Company under Business Rescue and implement a business rescue plan;
3. To liquidate the Company.
The Act provides that a company must not carry on its business;
- With gross negligence;
- With the intent to defraud any person or;
- For any fraudulent purpose.
The meaning of reckless trading is much wider than it was in the old Company’s Act. ‘Reckless trading’ was previously understood as ‘not being able to pay debts as they fall due’. It was accepted that a company was not trading recklessly merely because it is technically insolvent. However, where a company (now) trades under any insolvent circumstance, it amounts to breach of the new Act, and directors’ personal liability may follow.
The test for recklessness has both objective and subjective elements. It is objective, to the extent that the defendant's actions are measured against the standard of conduct of a notional reasonable person. Accordingly, a defendant's honest but mistaken belief as to the prospects of payment of a claim by the company when due is not determinative of whether he was reckless; if a reasonable person or business in the same circumstances would not have held that belief, the defendant's bona fides is irrelevant. The test is subjective, to the extent that it must be postulated that the notional person belongs to the same group or class as the defendant, moving in the same sphere and having the same knowledge or means of knowledge. Acting 'recklessly' consists in 'an entire failure to give consideration to the consequences of one's actions, in other words, an attitude of reckless disregard of such consequences'.
A healthy company will be solvent and liquid. A company is solvent when a company’s assets exceeds its liabilities and requires an examination of the balance sheet. A Company is liquid when a company is able to satisfy its debts as they become due and payable, and requires an examination of the cash flow statement. For purpose of the Act, a company satisfies the solvency and liquidity test if it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the date on which the test has been done.
You are not allowed to trade if the company is insolvent, this will constitute reckless trading.
• The board/ members of the company must resolve to place the business under business rescue. Any affected party may also make application to place the company under business rescue. An affected party would also include; creditors, employees or any other stakeholder that is directly affected by the company.
• 5 days after resolution the application to go under business rescue must be filed with the CIPC.
• Alongside the application for business rescue, the application for the appointment of a business rescue practitioner must be made.
• 10 days after acceptance of the application to go under business rescue, notification to hold the 1st creditors meetings must be issued.
• Notice to all affected parties and confirmation date/ time/ venue of 1st creditors meeting must be issued.
• A BRP (Business Rrescue Plan) must be completed in 25 days.
• A 2nd creditors meeting is convened where the creditors have the opportunity to vote on the business rescue plan.
• If the business rescue plan is rejected, BRP (Business Rescue Practitioner) has 10 days to modify / revise the business rescue plan.
• In the event that the revised business plan is rejected by the creditors, application may be made to the courts for the approval of the business rescue plan.
• On approval of the business rescue plan, the business rescue team will then implement the plan.
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watch this space