Business Rescue…Financially Distressed?

COVID and the economic downturn and impact it has had on businesses are an unfortunate reality faced by many businesses across South Africa.

Section 128(1)(f) of the Companies Act 71 of 2008 defines “financially distressed” in reference to a particular company at any particular time as meaning that:

• (i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or

• (ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

Importantly, Section 129(7) of the Companies Act provides that if the board of a company has reasonable grounds to believe that the company is financially distressed, but the board has not adopted a resolution to place a company into business rescue, the board must deliver a written notice to each affected person, setting out the criteria referred to in section 128(1)(f) that are applicable to the company, and its reasons for not adopting a resolution placing the company into business rescue.

Business rescue is intended to facilitate the rehabilitation of a company which has a reasonable prospect of trading out of its financially distressed circumstances. During business rescue, a company is placed under supervision of a Business Rescue Practitioner who steps into the shoes of the company’s directors by managing the businesses affairs and operations. Business rescue places a temporary moratorium on the rights of creditors against the company and (unlike liquidation), the business continues to trade throughout the business rescue process. Business rescue is driven by the company’s majority creditor/s who vote on a business plan to rehabilitate the business.