WHO’S IN THE DRIVER’S SEAT DURING BUSINESS RESCUE?
10 June 2019
The term “business rescue” is described in section 128(1)(b) of the Companies Act, 2008 (“the Act”) as proceedings initiated to facilitate the rehabilitation of a company that is financially distressed by providing temporary supervision of the company and the management of its affairs, business and property so as to develop and implement an approved plan to rescue the company. It is apparent from the Act that the company must be in financial distress and that there should be a reasonable prospect of rescuing the company in order to potentially qualify for business rescue.
This then begs the question. “When will a company be financially distressed?” An analysis of this question essentially boils down to the application of a two-pronged test:
- Firstly, a determination that the company is reasonably unlikely to be in a position to pay all its debts as and when they become payable in the succeeding six months; and
- Secondly, a determination that the company is reasonably likely to become insolvent within the succeeding six months.
Once a company has fallen to its knees such that both the criteria contemplated above are met, the management of the company (should a reasonable prospect of rescuing the company exist) has the option to place the company under voluntary business rescue as opposed to liquidating the company. Management facing this decision should be asking themselves whether this is the better, smarter and more economically viable route to choose?
A delusion seems to exist amongst business leaders that the business rescue route is simply a way to buy some time to allow the company to get back on its feet whilst it enjoys protection from creditors’ claims. Another misconception is that the business rescue practitioner will simply occupy a passenger seat as some form of consultant and assist the management of the company (in business rescue) in steering the ship in the right direction during the course of business rescue proceedings.
The reality is that the business rescue practitioner will assume a role in the driver’s seat, because the management must in its entirety be surrendered to the new “driver” of the company viz the business rescue practitioner. In terms of section 140(1) of the Act the business rescue practitioner has the following general powers and duties:
- Has full management control of the company in substitution for its board and pre-existing management;
- May delegate any power or function of the practitioner to a person who was part of the board or pre-existing management of the company;
- Remove from office any person who forms part of the pre-existing management of the company; or
- Appoint a person as part of the management of a company, whether to fill a vacancy or not; and
- Is responsible to-
- Develop a business rescue plan to be considered by affected persons, in accordance with Part D of this Chapter; and
- Implement any business rescue plan that has been adopted in accordance with part D of this Chapter.
It is crystal clear that the practitioner does not merely assist the management of the Company on the road to recovery, but rather assumes full control of the affairs of the company. The practitioner’s power extends to elements such as removing persons from office and requiring directors of the company to surrender their company credit cards.
South Africa has a market-based economy and if companies cannot be competitive in the marketplace, those companies are quite often either taken over by other, stronger companies or wound up. A company experiencing a temporary setback that has the potential to survive if it’s given some breathing space to overcome its financial hurdles should consider filing for business rescue. When one considers the harsh socio-economic impact of liquidation upon a company’s shareholders, creditors, employees, suppliers, distributors and customers, we would encourage the exploration of business rescue as an alternative where a real and genuine prospect of rescuing the business exists.
It is however of critical importance that the business leaders in a market-based economy familiarise themselves with the provisions of the Act relating to the rights and responsibilities of all the role-players involved during business rescue proceedings to prevent both abuse of business rescue proceedings as well as a misunderstanding of the purpose of such proceedings.