The year 2020, or 20plenty as it was commonly referred to when the new decade commenced, has over the last few months, primarily as a result of the worldwide Covid-19 pandemic, turned out to be an unprecedented time in our history. This is not only true for South Africans, but for all countries and people across the globe. Various negative effects are culminating from and being amplified this virus, not the least of which are medical and economic in nature. All indications are that the world is facing the deepest recession and most challenging health and economic crisis in last 100 years, which will affect everyone at some point and in some way or another.Do we really have a problem?
In the wake of the Covid-19 pandemic and the uncertainty created by the initial and now extended national lockdown, it has become an undeniable reality for most businesses that difficult economic times lie ahead. Over the course of the next few months, many South African companies, including businesses that were profitable and successful prior to the influence of the pandemic, will experience varying degrees of financial distress and are fighting for survival.What are my options?
Business owners must consider options to ensure that their businesses survive and make it through this unprecedented time without the loss of all their cash and other reserves built up, in many instances, over a lifetime or more.
Current survival planning tactics considered by businesses range from staff retrenchments, salary cuts, expense reduction and mechanisms for continued income generation, to options for obtaining financial assistance. However, one option that is generally overlooked, discounted or too hastily dismissed are the tools provided for in terms of the Companies Act 71 of 2008 (“Companies Act”) and that were designed specifically for circumstances such as these. This includes the option of companies engaging business rescue proceedings, which is an efficient means to see companies through difficult times.What is business rescue?
Business rescue aims to assist companies in financial distress, irrespective of the reason for such distress. This option is available even where liquidation was never a consideration. Business rescue can be used to simply limit the depletion of resources currently located outside the company (such as the private assets of shareholders), or the incurrence of further debt.
Businesses are afforded, using this mechanism, an opportunity to reorganise and restructure, but more importantly, to come to satisfactory arrangements with creditors (or any person or entity to whom contractual and other obligations are due) with the aim of ensuring that the business successfully navigates through the storm. Although the term ‘business rescue’ may be associated as a precursor to liquidation, it is in fact a simple and effective option, to assist companies undergoing financial distress to appropriately plan for their rehabilitation and survive difficult times.What are the main effects of business rescue?
Business rescue proceedings aim to facilitate the rehabilitation of a company, with the following primary effects:
What is a business rescue practitioner?
- The temporary supervision of the company, and the management of its affairs, business and property, by a specialist business rescue practitioner.
- A temporary suspension of the rights of creditors and other claimants against the company and its property.
- The development and implementation of a business rescue plan which facilitates the restructuring of the company’s business, property, debt, other liabilities and equity, in order to ensure that the company makes its through its time of financial distress.
In order to drive the business rescue process, a business rescue practitioner must be appointed to assist the company. This is a person appointed to oversee a financially distressed company during business rescue and draw up a business rescue plan for the company, in line with its unique circumstances. This practitioner will, in terms of the Companies Act, have various powers and obligations in performing his or her mandate to formulate and implement a business rescue plan.
Engaging in business rescue proceedings has a significant impact on the creditors, shareholders, employees and third-party financial institutions involved with a company. It is therefore essential that a business rescue practitioner with sufficient qualifications, knowledge and experience is appointed to assist the company in this regard.When should a company consider business rescue?
A further question that arises, is when will a company be eligible to commence with business rescue proceedings? The primary consideration in this regard is whether or not the company is financially distressed. A company will be financially distressed if 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 (namely a state of commercial insolvency); or
- likely that the company will become insolvent within the immediately ensuing six months (namely a state of factual insolvency).
Ideally, a company should engage with a business rescue practitioner with a view to commence with business rescue proceedings as soon as possible after discovering that the company will unlikely be able to pay all of its debts as they become due and payable within the immediately ensuing six months. The sooner business rescue is commenced with, the greater the chances of success.Where do I start?
It is important to keep in mind that business rescue is not designed for insolvent companies or those that have no choice but to close their doors. It is specifically designed for businesses that are going through a difficult time financially, in order to assist those companies to stay in business while weathering the storm.
If your business is financially distressed, or may become financially distressed, it is advisable that you contact a specialist business rescue practitioner to discuss your options and engage the business rescue process.