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Effects of Business Rescue

Dec 20,2021

What effect does business rescue have?

1. What happens to the directors during business rescue?

The directors of the company remain the directors. However, their powers and duties are constricted in that the business rescue practitioner has full management control over the company in substitution for the board of the company and its pre-existing management. In terms of section 137, the directors of the company –

  • must continue to exercise the functions of a director, subject to the authority of the practitioner;
  • have a duty to exercise any management function within the company in accordance with the expressed instructions or direction of the practitioner, to the extent that it is reasonable to do so;
  • remain bound by the requirements concerning the personal financial interests of the directors or related persons;
  • and to the extent that the director acts in accordance with subsections (b) and (c) of this section, are relieved from the duties of a director as set out in section 76 (standards of directors conduct), and the incurrence of personal liability set out in section 77 (liability of directors and prescribed officers), other than section 77 (3) (a), (b) and (c).

If any director of the company purports to take any action on behalf of the company that requires the approval of the practitioner, that action is void unless it is approved by the practitioner (section 137(4)).

The directors of the company have a general duty to co-operate with, assist and attend to the requests of the practitioner at all times during business rescue and to provide the practitioner with any information about the companies affairs as may be reasonably required (section 142).

As soon as practically possible after the commencement of business rescue proceedings, the directors of the company must deliver all books and records that relate to the company to the practitioner and which are in the directors’ possession. Within five business days after the commencement of business rescue proceedings, or such longer period as the practitioner may allow, the directors must provide the practitioner with a statement of affairs containing certain information as prescribed by the Act (section 142).

In terms of section 137(5) the practitioner may apply to court for an order to remove a director from his office if the director has –

  • failed to comply with the duties imposed on him by the provisions of chapter 6; or
  • by and act or omission, has impeded, or is impeding, (i) the practitioner in the performance of his powers and functions; (ii) the management of the company by the practitioner; or (iii) the development or implementation of the business rescue plan.
The directors of the company have a general duty to attend to the requests of the practitioner at all times during business rescue and to provide the practitioner with any information about the company’s affairs as may be reasonably required.

2. What effect does business rescue have on employees?

Section 136 of the Act regulates the interests of employees during business rescue. It provides that employees who were, immediately prior to the institution of business rescue, employees of the company will remain employed by the company on the same terms and conditions on which they were employed prior to the commencement of business rescue proceedings except to the extent that changes occur in the ordinary course of attrition or if different terms and conditions are agreed between the employee and the company in accordance with labour laws.

3. What effect does business rescue have on shareholders?

During business rescue proceedings, an alteration in the classification or status of any issued securities of a company, other than by way of a transfer of securities in the ordinary course of business, is invalid except to the extent that the court, or the business rescue plan, directs otherwise (section 137).

4. What effect does business rescue have on a creditor?

When business rescue proceedings commence, the company continues to operate as before, but under the supervision of the business rescue practitioner and the creditors will need to comply with their obligations to supply goods or services to the company in the same manner in which they did prior to the commencement of business rescue proceedings, unless the agreement between the company and the creditor regulates the relationship between the parties in the event of an insolvency or business rescue

However, it is understandable that unsecured creditors and lenders during business rescue would be wary of continuing to service or supply goods to the company on the same basis on which they did prior to a business rescue as their claims will be satisfied last in accordance with the order of preference for the payment of claims prescribed by the Act (S135(3)(a)(ii)).

Further, if a company’s obligations towards another have been suspended, or cancelled on application by the practitioner to court, the agreement regulating the relationship between the company and its creditor may prescribe the way in which the relationship between the parties will ensue in the event of an insolvency or the commencement of business rescue. Failing this, it is likely in practice, that the reciprocal party to an agreement will not perform its obligations if the practitioner has suspended the performance of the company’s obligations or cancelled the agreement and the other party will have a claim for damages in terms of section 136(3).

5. Can a company be sued during business rescue?

Section 133 of the Act regulates the institution of legal proceedings against the company and the enforcement of any action against the company during business rescue. This is commonly referred to as the “statutory moratorium” or “stay” that is placed on a company from the moment that business rescue proceedings commence.

During business rescue proceedings, no legal proceedings (legal or arbitration proceedings), including enforcement action (execution of a court or other order) against the company or in relation to its property, that belongs to it or which is lawfully in its possession, may be commenced or proceeded with in any forum (court or arbitral forum).

However, there are certain instances in which one would be able to commence or proceed with any legal proceedings or enforcement action against the company, in terms of section 133(a) to (f), namely –

  • with the written consent of the practitioner;
  • with the leave of the court (and in accordance with any terms the court consider suitable);
  • as a set-off against any claim made by the company in any legal proceedings, irrespective as to whether those proceedings commenced before or after the business rescue proceedings began;
  • criminal proceedings against the company or any of its directors or officers; or proceedings concerning any property or right over which the company exercises the powers of a trustee; or proceedings by a regulatory authority in execution of its duties after written notification to the business rescue practitioner.

6. Can one enforce a suretyship or guarantee during business rescue?

Section 133(2) provides that during business rescue proceedings, a guarantee or surety provided by the company in favour of any other person may not be enforced by any person against the company except with the leave of the court and in accordance with any terms that the court considers to be just and equitable.

In a recent decision of the Western Cape High Court, in the case of Investec Bank Ltd v Bruyns 2011 JDR 1563 (WCC) the court considered the meaning of section 133 and the status of a surety and guarantee provided by the company, or by another person or entity in favour of the company, during business rescue. It held that –

  • section 133(2) is unambiguous in that it prohibits a third party from enforcing a suretyship or guarantee, provided by the company, against the company, during business rescue; and
  • the statutory moratorium that arises for the benefit of a company does not automatically arise for the benefit of a surety provided in favour of the company on the basis that the statutory moratorium is a personal defence that arises for the benefit of the principal debtor (ie the distressed company) and not for the benefit of a surety.

7. What effect does business rescue have on contracts?

Section 136 also aims to regulate the position of the company in respect of its obligations in terms of any existing contracts that may apply at the time the business rescue proceedings commence.

Section 136(2) provides that the business rescue practitioner may, during business rescue proceedings, and despite any provision to the contrary in an agreement, –

  • entirely, partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company that –
  • arises under an agreement to which the company was a party at the commencement of business rescue proceedings; and
  • would otherwise become due during the proceedings;
  • apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any obligation of the company contemplated above.

The proviso to the above is that, in terms of section 136(2A), a business rescue practitioner must not, suspend or cancel respectively, any provision of an employment contract or an agreement to which section 35A or 35B of the Insolvency Act 24 of 1936 (transactions on exchange and agreements providing for termination and netting) would apply if the company had been liquidated. Further, if a practitioner suspends a provision of an agreement relating to security granted by the company to a creditor, that provision continues to apply for the purposes of section 134.

8. Does the party to the contract that has been suspended or cancelled, have any claim against the company?

Section 136(3) provides that any party to an agreement that has been suspended or cancelled, or any provision which has been suspended or cancelled, may assert a claim against the company only for damages.

9. What effect does a distribution during liquidation have on a subsequent business rescue?

Section 141(2)(c) provides that if at any time during the business rescue proceedings the practitioner concludes that “there is evidence, in the dealings of the company before the business rescue proceedings began, of voidable transactions, or the failure by the company or any director to perform any material obligation relating to the company, the practitioner must take any necessary steps to rectify the matter and may direct the management to take appropriate steps”. The phrase “voidable transaction” is not defined by the Act and it is not yet clear whether or not such a phrase will take on the meaning ascribed to impeachable dispositions in terms of the Insolvency Act 24 of 1936. It is also not clear for what period of time prior to the commencement of business rescue proceedings transactions will be held to be voidable.

We believe that the distribution of money or the sale of assets, in the ordinary course of liquidation proceedings (and particularly in the order of preference to the creditors), and prior to a business rescue commencing, would not be held to be a voidable transaction in the business rescue unless a business rescue practitioner can identify an element of fraud or dishonesty in the process. It would appear that a practitioner would act upon a “voidable transaction” which occurs prior to a business rescue (and not in the ordinary course of a liquidation) and which becomes known to him during business rescue.

Section 136(3) provides that any party to an agreement that has been suspended or cancelled, or any provision which has been suspended or cancelled, may assert a claim against the company only for damages.

Post-Commencement Finance

1. What is post-commencement finance?

Post-commencement finance is finance provided to the company once business rescue proceedings have commenced.

Section 135(1) of the Act also provides that any remuneration, reimbursement for expenses or other amount of money relating to employment that becomes due and payable by a company to an employee during business rescue, is also considered to be post commencement finance.

2. Who can provide post-commencement finance?

Section 135(2) of the Act provides that “during business rescue proceedings, the company may obtain financing other than as contemplated in subsection (1)…” From this it appears that the Act does not prescribe who in fact may provide the finance.

3. Can post-commencement financiers obtain security for their finance?

Any finance provided by a post-commencement financier may be secured by utilising any asset of the company to the extent that it is not already encumbered (section 135(2)).

Post-commencement finance is finance provided to the company once business rescue proceedings have commenced.

Business Rescue Plan

1. What is a business rescue plan?

A business rescue plan is a plan developed and, if approved, implemented by the business rescue practitioner, which details the manner in which the practitioner envisages that the company will be rescued. The plan is the culmination of the business rescue process.

2. What must a business rescue plan contain?

Section 150 of the Act provides a framework for what the business rescue plan should look like. It provides that a plan must contain sufficient detail to assist affected persons in deciding whether or not they wish to accept or reject the plan. The business rescue plan must contain –

  • background (including a list of assets, which assets are secured, list of creditors indicating secured, statutory preferent and concurrent creditors in terms of the laws of insolvency, probable dividend should insolvency ensue, list of all holders of the company’s securities, a copy of the written agreement concerning the business rescue practitioner’s remuneration and a statement whether the business rescue plan includes a proposal made informally by a creditor of the company);
A business rescue plan is a plan developed and if approved, implemented by the business rescue practitioner, which details the manner in which the practitioner envisages that the company will be rescued.
  • proposals (including the nature and duration of any specific moratorium, extent to which the company is to be released from payment of debts, the extent to which any debt is proposed to be converted to equity in the company or another company, the ongoing role of the company and the treatment of any existing agreements, property of the company available to pay creditors’ claims in terms of the plan, the order of preference in which the proceeds of the property will be applied to pay creditors if the business rescue plan is adopted, the benefits of adopting the business rescue plan as opposed to the benefits that would be received by creditors of the company if the company were to be placed in liquidation and the effect that the business rescue plan will have on the holders of each class of the company’s issued securities); and
  • assumptions and conditions (including a statement of the conditions that must be satisfied for the business rescue plan to come into operation and be fully implemented, effect on employees and their conditions of employment, the circumstances in which the plan will end and a projected balance sheet for the company and a statement of income and expenses for the ensuing three years).
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3. How is a business rescue plan adopted?

A proposed business rescue plan will be approved on a preliminary basis if it is supported by the holders of more than 75% of the creditors’ voting interests that were voted and when the votes in support of the proposed plan included at least 50% of the independent creditors’ voting interests, if any, that were voted (section 152(2)).

4. What happens if a business rescue plan is adopted?

A business rescue plan that is adopted is binding on the company, the creditors of the company and every holder of the company’s securities whether or not such a person was present at the meeting, voted in favour of the adoption of the plan or, in the case of creditors, had proven their claims against the company (section 152(4)).

Section 154 reiterates the binding effect of an approved plan. It provides that once a business rescue plan is implemented in accordance with its terms, a creditor will lose its right to enforce the relevant debt or a part of it on the basis that it has acceded to the discharge of the debt. The creditor will also be precluded from enforcing a debt that arose prior to business rescue, against the company, unless the business rescue plan provides otherwise.

5. What happens if a business rescue plan is rejected?

Section 153 of the Act deals with the instance in which a plan is rejected. If a business rescue plan is rejected the practitioner may seek a vote of approval from the holders of voting interests to prepare and publish a revised plan or advise the meeting that the company will apply to court to set aside the result of the vote on the grounds that it was inappropriate. If a practitioner does not take the aforesaid action, an affected person may take such action (section 153(1)(a) and (b)), failing which the practitioner must file a notice of the termination of the business rescue proceedings (Form CoR152.2).

Further, any affected person or combination of affected persons may make a binding offer to purchase the voting interests of one or more persons who opposed the adoption of the plan, at a value independently and expertly determined, on the request of the practitioner, to be a fair and reasonable estimate of the return to that person or those persons, if the company were to be liquidated (section 153(1)(b)(ii)).

Claims

1. How are claims submitted for proof to the business rescue practitioner?

It is not necessary to prepare a claim in the same format as with liquidation proceedings (ie by deposing to an affidavit) but standard proof of claim forms have been used to submit claims to the business rescue practitioner. It is not necessary to file a formal affidavit. A statement detailing the claim together with supporting certificates of balance and documents would be sufficient proof of the claim.

The Act does not specify a time by when a claim should be submitted. However, section 147(1)(a)(ii) refers to the business rescue practitioner being in a position to “receive proof of claims by creditors” at the first meeting of creditors. The business rescue practitioner would then either accept or reject such claims. All claims that have been accepted by the business rescue practitioner would be included in the plan (section 150(2)(a)(ii)). The only voting which would occur by creditors would be in terms of section 152(2) on the business rescue plan and at a meeting convened for that purpose in terms of section 151.

What is the order of preference for the payment of claims during a business rescue?

During business rescue proceedings, the claims of creditors rank in the following order of preference and will accordingly be paid out in this order

  • practitioner’s remuneration, expenses and claims arising out of the costs of the business rescue proceedings (section 135(1));
  • remuneration, reimbursement for expenses or other amounts of money relating to employment, due and payable by the company to an employee during business rescue (post-commencement finance);
  • the claims of secured lenders or creditors before business rescue. The Act is not clear about where those creditors should fall in the ranking of claims and this has given rise to some debate;
  • secured claims by post-commencement financiers, lenders or creditors in the order in which the claims were incurred (section 135(3)(a)(i));
  • claims in respect of the Insolvency Act 24 of 1936; unsecured claims by post commencement financiers, lenders or creditors during business rescue in the order in which they were incurred (section 135(3)(b));
  • remuneration of employees which became due and payable before business rescue commenced; and
  • unsecured claims of lenders or creditors before business rescue (section 135(3)(a)(ii)).

3. What happens if business rescue proceedings are superseded by liquidation proceedings?

If business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of section 135 will remain in force, except to the extent of any claims arising out of the costs of liquidation. That is, that the liquidators fees and expenses will rank in priority to that of the business rescue practitioner’s fees (section 135(4)).

Interplay Between Business Rescue and Liquidation

1. Are liquidations still an option?

Business rescue is recognised as a valuable part of the Act. Section 7(k) of the Act states that among the objectives of the Act is the aim to “provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders”.

There has been a move away from a culture of liquidation to a culture of rescue, in that if a company is not able to be restored to a position of solvency, then the next best option is for it to at least achieve a better result for the creditors than would arise from liquidation. Liquidation is still an option, but it is the last resort

2. What is the interplay between business rescue proceedings and liquidation proceedings?

If liquidation proceedings have already commenced, an application to court for business rescue will suspend the liquidation proceedings until the court has adjudicated on the application or when business rescue proceedings end when the court grants an order applied for (section 131(6)).

Further, the Act provides that a court may grant an order placing a company under business rescue at any time during the course of any liquidation proceedings or proceedings to enforce any security against the company (section 131(7)). This section has given rise to some debate. It seems to suggest that even a company that has been liquidated, may subsequently be placed under business rescue. It has been suggested that compelling reasons would need to be placed before a court before such extreme action is taken.

If business rescue proceedings have commenced by way of an application to court, the company may not adopt a resolution for its liquidation until business rescue proceedings have terminated. The company must notify all affected persons of the order of the court within five business days of the date of the order (section 131(8)).

3. How does the test for financial distress differ from the solvency and liquidity test?

Section 4 of the Act sets out the “solvency and liquidity” test. It provides that a company will satisfy the solvency and liquidity test at a particular point in time if considering all reasonably foreseeable financial circumstances –

  • the assets of the company, or the aggregate of the assets of the company, fairly valued, equal or exceed the liabilities, or aggregate liabilities of the company, fairly valued (factual insolvency); and
  • 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 twelve months after the date on which the test is considered (commercial insolvency)
There has been a move away from a culture of liquidation to a culture of rescue.

The difference between the test for “financial distress” and that of “solvency and liquidity” is that a company will be financially distressed if it is either factually or commercial insolvent while a company will be said to be solvent and liquid if it satisfies both factual and commercial solvency. Further, for financially distressed companies, the question is whether or not the company will be factual or commercially insolvent in the immediately ensuing six months.

4. What is the difference between an insolvency practitioner and a business rescue practitioner?

Insolvency practitioners and business rescue practitioners are not the same. Each is appointed to fulfil different roles, which can be summarised as follows –

  • insolvency practitioner – a liquidator in any winding-up shall recover and reduce into their possession all the assets and property of the company, movable and immovable, and shall apply the proceeds so far as they extend in satisfaction of the costs of the winding-up and the claims of creditors, and shall distribute the balance among those who are entitled thereto (section 391 of the Companies Act 61 of 1973); and
  • business rescue practitioner – a business rescue practitioner is responsible for investigating the company’s affairs, business, property and financial situation in order to consider whether there is a
  • reasonable prospect of the company being rescued (section 141(1)).

Thus, a different skill set is required for an insolvency practitioner. Prior to the enactment of the Act there was some debate as to whether or not insolvency practitioners could take appointments as business rescue practitioners. Although there are many insolvency practitioners who qualify for appointment as business rescue practitioners, a new profession was created. Only licensed practitioners may be appointed.

5. Can a business rescue practitioner be appointed as a liquidator and vice versa?

Section 140(4) of the Act provides that to the extent that business rescue proceedings are terminated by a court placing the distressed company into liquidation, any person who acted as a business practitioner during the business rescue may not be appointed as a liquidator. This section is unambiguous. A business rescue practitioner may not act as a liquidator.

However, the Act does not suggest that a liquidator may not be appointed as a business rescue practitioner if a company goes into business rescue subsequent to liquidation. It seems as though the liquidator could take appointment as a business rescue practitioner if he satisfies the requirements for qualification under section 138 of the Act.

General Considerations

1. Are companies filing for business rescue or making application to court?

Business rescue is well underway. CIPC, established in terms of section 185 of the Act, is tasked with the administration of voluntary business rescue filings (section 129) and matters related therewith and has to date received many filings for voluntary business rescue. A number of formal applications have also been made to court (section 131). Although there have been very few instances in which the courts have granted orders for business rescue, the judgments that have emanated from the courts have been informative and instructive in paving the way for the efficient application of business rescue.

Although there have been very few instances in which the courts have granted orders for business rescue, the judgments that have emanated from the courts have been informative and instructive in paving the way for the efficient application of business rescue.

2. Does business rescue interrupt prescription?

If a person has a claim against the company and the enforcement of the claim is subject to a time limit, the time limit prescribed for the enforcement of such a claim will be suspended for the duration of the business rescue proceedings (section 133(3)).

3. Can a close corporation be placed under business rescue?

Section 66 (1A) of the Close Corporations Act 69 of 1984 provides that the business rescue provisions of the Act apply equally to close corporations as they do to companies. Read more on The Basics of Business Rescue here

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