Business rescue, as defined by the Companies Act 2008, aims to facilitate the rehabilitation of a company that is “financially distressed” by providing for: the temporary supervision of the company and management of its affairs, business and property by a business rescue practitioner,

A temporary moratorium (“stay”) on the rights of claimants against the company or in respect of property in its possession and the development and implementation (if approved) of a business rescue plan to rescue the company by restructuring its business, property, debt, affairs, other liabilities and equity in order to achieve a better return for the company’s creditors or shareholders than would result from a liquidation of the company. (Section 128)

The act defines the words “financially distressed” to mean that it appears reasonably unlikely that the company would be able to pay all of its debts as they become due and payable for the upcoming six months (commercial insolvency) or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months (factual insolvency). (Section 128)

There are two ways in which a company can be placed in business rescue:

  • When the board of directors resolves that the company voluntarily commences business rescue proceedings; or
  • When an affected person makes a formal application to the High Court for an order placing the company under supervision and commencing business rescue proceedings.

An affected person can be a shareholder, creditor, employee (or their representative) or a registered trade union representing employees of the company. Affected persons have various rights within the business rescue process and any of these affected persons can bring about business rescue proceedings.

The act sets out who may be appointed as a business rescue practitioner, the qualifications required and their duties and responsibilities. A business practitioner must be a member in good standing of a legal, accounting or business management profession, and should have a strong financial background, no conflicts of interest with the business – accredited by the commission and must be licensed by the commission.

The practitioner is required to reduce the debt burden in order to enable the company to continue trading. They are required to investigate the company’s affairs, business, property and financial situation, and thereafter consider whether there is any reasonable prospect of rescuing the company. A business rescue plan must be drawn up by the practitioner and will then be put to a vote by the creditors. Once successfully voted in, the business rescue practitioner must implement and oversee the business rescue plan in an attempt to save the company.

During business rescue proceedings, the practitioner must notify the company, the court and affected persons that there is:

  • Reasonable prospect of the company to be rescued
  • No reasonable prospect for the company to be rescued or no longer reasonable grounds to believe that the company is financially distressed; or
  • Evidence, in the dealings of the company before the commencement of business rescue proceedings, of voidable transactions or a failure by the company or any director to perform any material obligation relating to the company and the practitioner must direct the management of the company to take steps to rectify the problem; or
  • Reckless trading, fraud or other contravention of any law relating to the company, and the practitioner must forward the evidence to the appropriate authority for further investigation and possible prosecution and direct the management to take any necessary steps to rectify the matter (including recovering any misappropriated assets of the company).

Once a company commences business rescue proceedings either voluntarily (section 129) or by an order of court (on application by an affected person) the following actions are prescribed by the act:

  • The practitioner must investigate the affairs of the company as soon as possible after the commencement of business rescue.
  • Within 10 business days after being appointed, the practitioner must convene a meeting of the creditors and a meeting of the employees and advise them of the prospects of rescuing the company.
  • The business rescue plan, as proposed by the practitioner, must be published by the company within 25 days after the date on which the business rescue practitioner was appointed.
  • The business rescue practitioner must convene a meeting of the creditors and any other holders of a voting interest, for the purpose of considering the proposed plan, within ten business days of the publication of the business rescue plan.

Section 130 provides that at any time after the adoption of a business rescue resolution, an affected person may apply to court for an order – setting aside the resolution on the grounds that:

  • There is no reasonable basis for believing that the company is financially distressed;
  • There is no reasonable prospect for rescuing the company; or
  • The company has failed to satisfy the procedural requirements in section 129;
  • Setting aside the appointment of the practitioner on the grounds that the practitioner does not satisfy the requirements of section 138, is not independent of the company or its management or lacks the necessary skills, having regard to the company’s circumstances, or requiring the practitioner to provide security (in an amount and on terms and conditions that the court considers necessary to secure the interests of the company and any affected person).

A director of a company that votes in favour of a resolution may not apply to court to set aside the resolution or the appointment of the business rescue practitioner unless such person can satisfy the court that he acted in good faith on the basis of information that has since been found to be false or misleading.

They 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.

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 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, employed by the company will remain with the company according to the same terms and conditions 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.

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.

STEP BY STEP GUIDE TO MEDIATION IN THE HIGH COURT – RULE 41A

A plaintiff or applicant must file a Rule 41A Notice indicating either his/her agreement or opposition to referral of a dispute for mediation. This notice would accompany service of the summons or application.

A defendant or respondent must file a Rule 41A Notice indicating either his/her agreement or opposition to referral of the dispute for mediation.

These Notices shall be without prejudice and shall not be filed with the Registrar of the Court.

The parties may at any stage of the proceedings refer their dispute to mediation, provided that leave of the Court is necessary if the hearing of the matter has commenced.

A judge or Rule 37A case management judge may in terms of Sub Rule (3)(b) direct parties to consider referring a dispute to mediation.

Once there is an agreement to refer a dispute for mediation, the parties are required to file a Joint Minute that records their decision to mediate the dispute or any aspect of the dispute.

The time limits for pleadings, notices and affidavits are suspended from the date of filing the Joint Minute until the conclusion of the mediation, provided that any party who believes the suspension is being abused may approach the court to lift the suspension.

The mediation must be concluded within 30 days of the date of the signature of the Joint Minute filed, provided that a court may on good cause extend the period.