Business rescue is a legal process designed to rehabilitate a financially distressed company. If your company is struggling to meet its financial obligations, business rescue could be a viable option. According to Section 129 of the Companies Act (71 of 2008), a company can enter business rescue only if it is financially distressed and there is a reasonable prospect of it being saved.
What is Financial Distress?
Financial distress occurs when a company is unlikely to pay its debts as they become due within the next six months or when it is likely to become insolvent within that same period. Recognising these signs early is crucial for determining whether business rescue is the right path.
Objectives of Business Rescue
The primary aim of business rescue is to provide temporary supervision of the company and its affairs, ensuring the company's business and property are managed by a qualified business rescue practitioner. This process also includes a moratorium on the rights of claimants against the company or its property, providing much-needed breathing space.
A business rescue plan is then developed and implemented, focusing on restructuring the company's business, property, debt, affairs, liabilities, and equity. The goal is to maximise the likelihood of the company continuing to operate on a solvent basis.
Key Considerations for Business Owners and Shareholders
Recognising the signs of financial distress early is the first step in considering business rescue. If your company is having trouble paying its debts on time or faces a high likelihood of insolvency, it's time to act. Early intervention can significantly increase the chances of a successful rescue.
Once financial distress is identified, engaging a business rescue practitioner is essential. This professional will temporarily supervise the company, manage its affairs, and develop a feasible rescue plan. The practitioner's expertise is critical in navigating the complexities of business rescue and crafting a strategy that works.
Assessing the viability of business rescue involves evaluating the company's assets, liabilities, operational structure, and market conditions. This assessment helps determine whether there is a reasonable prospect of saving the company and ensures that the rescue plan is realistic and achievable.
Case Law Insights
The purpose of business rescue is highlighted in the case of Oakdene Square Properties (PTY) Ltd and others v Farm Bothasfontein (Kyalami) (Pty) Ltd. Here, the court emphasised that business rescue aims to facilitate the company's continued existence in a state of solvency and ensure a better return for creditors.
In Swart v Beagles Run Investments 25 (Pty) Ltd and others, the court underscored the importance of initiating business rescue proceedings at the first sign of financial distress. The applicant in this case avoided payments to the respondent and provided no explanation to creditors, indicating a high likelihood of insolvency within six months. Therefore, the court deemed it essential to commence business rescue proceedings immediately.
Understanding the Business Rescue Plan
Understanding the business rescue plan is vital for all stakeholders. The plan outlines how the company's business, property, debt, affairs, liabilities, and equity will be restructured. It's important to engage with this plan actively, providing input and support where necessary to maximise the likelihood of continued operation.
Business rescue is a powerful tool for companies facing financial distress. By recognising the signs early, seeking professional advice, and engaging actively in the rescue process, company owners and shareholders can turn around their fortunes and steer the company back to solvency.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.