Business rescue proceedings – the other side of the coin

July 1st, 2020
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In the uncertain economic times that South Africa (SA) is facing, combined with the financial strain that the worldwide COVID-19 pandemic is placing on most businesses, business rescue will unfortunately be the next course of action for most companies. It is a well-known fact that business rescue, which is set out in ch 6 of the Companies Act 71 of 2008 (the Act), entails the legal process that when a company suffers financial difficulties, it be restructured in such a manner to be able to carry on with business as a successful going concern, in other words, rescuing the business. However, there are two sides of the coin when it comes to business rescue proceedings.

Section 128(1)(b)(iii) of the Act entails a primary and secondary objective for business rescue proceedings to commence, and either one of those must be met for legal business rescue proceedings to commence. The primary objective is that the company’s debts, liabilities, assets etcetera, be restructured in such a manner that the company can continue to exist on a solvent basis. The secondary objective is that if the primary objective cannot be met, the restructuring of the company will provide affected persons with a better return than the liquidation of the company would have. The court confirmed in Collard v Jatara Connect (Pty) Ltd and Others [2017] JOL 38032 (WCC) that s 128(1)(b)(iii) of the Act contemplates two objectives for business rescue and that the achievement or fulfilment of any of these two objectives will constitute valid business rescue proceedings.

For a company to fully comply with business rescue proceedings, the company must either be –

  • financially distressed; or
  • unable to pay its debts.

The process to file for business rescue can be found on the Companies and Intellectual Property Commission’s website at www.cipc.co.za.

It is, however, important to remember that business rescue proceedings should not be abused or used as a ruse. In ABSA Bank Limited v Newcity Group (Pty) Ltd and Another Related Matter [2013] 3 All SA 146 (GSJ) the court held that the sole shareholder’s application to place his company in business rescue amounted to an abuse of the process. It held that the test to determine if a company should be placed in business rescue is if there is a reasonable prospect or a reasonable possibility of achieving a rescue of the company through the statutory objectives, in other words, the Act. Thus, the creditors and/or shareholders or any other affected person ought to receive a better return with business rescue proceedings than that of liquidation proceedings.

The outcome of business rescue is thus one of two options –

  • either the company is ‘rescued’ and can continue to conduct business as a successful going concern due to the fact that it has been restructured; or
  • the company will be liquidated.

Liquidation is an extreme recourse for companies that face severe financial difficulties. Business rescue can grant a company some much-needed breathing space to restructure its affairs and continue to, once again, conduct business as a successful going concern. However, in the event that a company cannot achieve that, business rescue might provide affected persons with a better return than liquidation would.

Elli Bissett LLM (UP) is a legal adviser and research assistant at Bissett & Partners Inc in Pretoria.

This article was first published in De Rebus in 2020 (July) DR 9.