South African companies can enter business rescue when facing financial troubles. This process, governed by the Companies Act 2008, chapter six, gives distressed firms breathing room to turn things around.
Operations continue under supervision, and creditors can’t pursue claims temporarily. The goal is to rehabilitate the company through restructuring so it can carry on trading. If that’s not viable, the focus becomes getting creditors better returns than liquidation.
Either way, it’s an alternative to bankruptcy that tries to save businesses or at least minimise losses. The outcome is never guaranteed, but it’s preferable to pulling the plug straight away.
Financial Distress and Business Rescue Proceedings
A company qualifies for business rescue if it is financially distressed, meaning:
- Upcoming debt repayments seem unmanageable within the next six-month period.
- Financial modelling shows the entity heading towards insolvency in the next half-year.
The rescue process kicks off either by the board’s voluntary resolution or when affected parties like creditors or staff make an involuntary application to the court.
Voluntary Initiation
A distressed company can self-initiate business rescue. The board passes a resolution believing financial trouble exists but the business is salvageable. After registering the resolution with the Companies and Intellectual Property Commission (CIPC), they designate a business rescue practitioner and inform affected parties like employees.
Court Application
If the board fails to act, creditors, shareholders, or employees can apply to the court to start business rescue. This is an option if they see signs of financial distress but think the company could still be saved under supervision. The court names a practitioner and provides instructions to follow.
1. The Support of Employees
Employees are integral to any organisation’s stability, particularly during the critical phase of business rescue. In South Africa, the Labour Relations Act and the Companies Act protect their rights, allowing them to engage actively in the rescue process.
Participation in the Process
Through unions or other representatives, employees must be kept informed and consulted during business rescue. They are considered “affected persons” under the law, giving them a voice alongside creditors and shareholders. Additionally, employees can share their perspectives on the company’s operations, offering insights that can help the business rescue practitioner (BRP) address internal issues and leverage opportunities.
Job Security
A primary objective of business rescue is to protect jobs, making employee involvement even more essential. While some restructuring might lead to job reductions or salary adjustments, the aim is to minimise these impacts compared to the more severe ramifications of liquidation, which could result in complete job loss. When employees see their interests aligned with the rescue efforts, they are more inclined to work collaboratively with the BRP on necessary adjustments.
Employee Claims
Under business rescue, employees’ claims for wages and other entitlements are classified as “preferent” in terms of priority. This means that their claims are prioritised over those of unsecured creditors. This preferential status helps secure the cooperation and trust of employees throughout the process.
2. Creditor Involvement
The cooperation of creditors is essential for a company to restructure its debts and remain operational. In South Africa, creditors have a hands-on role in this process.
Creditors as Affected Persons
Creditors are classified as affected persons, similar to employees, which gives them a legal right to take part in business rescue efforts. They should receive important updates regarding the start of the rescue process, the selection of the Business Rescue Practitioner (BRP), and the proposed rescue plan. This keeps them informed and involved every step of the way.
Voting Rights
Creditors have substantial influence when it comes to voting on the business rescue plan. A majority approval from creditors is required for the plan to move forward, which considers both their numbers and the total value of their claims. This is important because the plan must align with the creditors’ interests, ensuring they receive a better outcome than liquidation would offer. Secured creditors typically have greater influence during this stage.
Debt Restructuring
As part of the business rescue strategy, creditors may be asked to consider new payment options, debt write-offs, or extended repayment timelines. Their involvement is essential for finding a solution that works for everyone. If creditors are unwilling to compromise, the likelihood of a successful rescue diminishes, often leading to liquidation as the final outcome.
3. Business Rescue Practitioner (BRP)
The business rescue practitioner, chosen by either the company or the court, takes charge of the whole process, manages the company’s operations, and makes sure a solid rescue plan gets put in place.
Leadership and Control
Once appointed, the BRP assumes control over the company’s management, stepping in for its directors while still collaborating with them. This role encompasses substantial authority, as the BRP is responsible for making critical decisions regarding operations, financial matters, and restructuring initiatives. They engage in discussions with creditors, manage workforce relations, and outline a strategic business rescue plan.
Objectivity
A key responsibility of the BRP is to ensure that the rescue process is conducted fairly. They must maintain their independence, allowing them to represent the interests of all parties involved—creditors, employees, and shareholders. This balanced approach is critical to achieving a sustainable solution for the company.
Skills and Expertise
A BRP needs a diverse skill set because business rescue can be complicated. They should have knowledge in legal, financial, and operational areas. A BRP with the right expertise can better identify the problems the company faces, find opportunities for recovery, and implement effective solutions that promote a successful turnaround.
Development of the Business Rescue Plan
The task of developing a business rescue plan lies with the BRP. They will collaborate with creditors, employees, and management to outline a path for recovery. This plan may involve operational adjustments, expense reductions, and restructuring finances to regain stability.
Implementation of the Plan
Once the rescue plan is in place, the BRP supervises its execution. They focus on guiding the company to follow the outlined strategies and adhere to the specified timelines, maintaining the direction of the recovery efforts throughout the process.
Reporting to Stakeholders
The BRP must keep stakeholders updated on the status of the rescue process. Frequent updates are critical for maintaining transparency and building trust among all involved. By providing clear information about progress, the BRP helps everyone stay informed about the company’s journey toward recovery.
4. Expert Legal Advice
Having solid legal advice makes a huge difference in business rescue. It ensures the company follows all the right steps and stays protected from legal pitfalls.
Regulatory Compliance
There’s a specific set of rules under the Companies Act that businesses need to follow during rescue. A good legal team makes sure all the boxes are ticked, helping the company avoid unnecessary legal trouble that could drag the process down.
Contractual Obligations
Contract issues are a common part of business rescue. Legal experts step in to manage these disputes, working with the company to resolve problems and, when necessary, defending it against claims.
Risk Mitigation
The legal risks during business rescue, like creditor demands or employee concerns, need to be handled carefully. Legal advisors can identify and manage these risks, reducing the chance of complications.
5. Workable Business Rescue Plan
When a company faces challenges, having a robust recovery plan is vital. This plan should be clear and focused on what the business can realistically accomplish.
Detailed Assessment
The first step is to evaluate the company’s financial standing closely. This will help pinpoint what led to the current problems and outline potential solutions like reducing expenses, negotiating debt, selling off non-core assets, or pivoting to a new business model that’s more viable.
Stakeholder Approval
Once the analysis is done, the next step is to ensure that all key parties, particularly creditors and employees, are on board. The plan should demonstrate that creditors would benefit more than they would from a liquidation scenario. Addressing the concerns of employees and shareholders is also essential for broad support.
Implementation Timeline
Finally, the plan should include a clear timeline with specific goals. This gives a sense of direction and helps track progress. The business rescue practitioner (BRP) will be in charge of making sure everything runs smoothly, using realistic expectations about market conditions and the company’s available resources.
6. Post-Commencement Finance (PCF)
Post-commencement finance is the funding a business can secure after starting the rescue process. This kind of financing plays a significant role for several reasons:
Operational Continuity
A key reason for obtaining post-commencement finance is to support daily operations during the restructuring phase. Access to these funds helps ensure that the business can continue its activities and keep generating revenue as it works on recovery.
Creditor Confidence
Securing post-commencement finance can enhance the trust of creditors and stakeholders. It serves as a signal that the business has backing, which can facilitate discussions on how to restructure existing debts.
Investing in Recovery
The funds obtained through post-commencement finance can be used to invest in key areas that support recovery. This includes initiatives like marketing, research and development, or upgrading equipment. Such investments can lead to growth and innovation, putting the company on a stronger path forward.
Attracting New Investments
Successfully managing the business rescue process while showcasing recovery potential can draw the attention of new investors. Their willingness to invest additional capital can provide much-needed support for the company’s financial health.
Final Word
Business rescue offers a lifeline to organisations that find themselves in a tight spot. It helps them bounce back and work towards a more stable future. When stakeholders join forces and focus their efforts, it encourages resilience and rekindles the company’s commitment to growth and sustainability.
When you consider post-commencement finance, you can find the backing needed to stabilise and expand your operations. Geddes Capital is here to partner with you on your journey, focussing on what matters most: your success.