BUSINESS RESCUE PROCEEDINGS AND
COMPROMISE
LEARNING UNIT 8
Introduction….
• The Companies Act of 2008 provides for business rescue proceedings
of financially distressed companies.
• A company is financially distressed if it appears reasonably unlikely
that it will be in a position to pay all its debts that are due and
payable
• OR appears likely that the company will become insolvent within the
next 6 months.
Continued….
• Business rescue is temporary -provides for the suspension of claims
against the company while restructuring takes place in a supervised
environment.
• The supervisor is called a business rescue practitioner.
Definition by Companies Act of 2008
Companies Act of 2008 (section 128(1)(b) defines business rescue as:
• Proceedings to facilitate the rehabilitation of a company that is
financially distressed by providing for:
1. The temporary supervision of the company, and of the management
of its affairs, business and property
2. A temporary moratorium on its rights of claimants against the
company or in respect of property in its possession.
Continued…
3. The development and implementation, if approved, of a plan to
rescue the company by restructuring it affairs, business, property, debt
and other liabilities, and equity in manner that maximises the
likelihood of the company continuing in existence on a solvent basis
• OR if it is not possible, to result in a better return for creditors or
shareholders of the company than would result from the immediate
liquidation of the company
Continued…..
3 elements of business rescue:
1. Supervision of the management of the company by the business
rescue practitioner
2. A moratorium on the enforcement of claims against the company
3. Development and implementation of a business rescue.
Financially Distressed Company –Section
128(1) (f)
A company will be financially distressed in the following:
1. 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 6 months
OR
2. If it appears to be reasonably likely that the company will become
insolvent (meaning , its debts are likely to be more than its assets)
within the immediately ensuing 6 months
Initiation of Business Rescue Proceedings
Business rescue proceedings may be initiated in the following:
1. Through a resolution by the board of directors of the company
2. By an affected person or court order
1. Initiation by board of directors
• Board of the company may take a resolution to initiate voluntary
business rescue proceedings
• The board must have reasonable grounds to believe that:
(a) The company is financially distressed
(b) There appears to be a reasonable prospect of saving the company
NOTE:
• Resolution becomes effective when it is filed with CIPC
• Resolution may not be adopted if liquidation proceedings have
already commenced.
Continued….
Once the resolution has been adopted, the company must:
1. File Form 123.1 with a copy of the board resolution with the CIPC
2. Publish within 5 business days the resolution to every affected
person
3. Appoint a business rescue practitioner within 5 business days after
the resolution has been filed
4. File a notice of the appointment with the CIPC within 2 days of
having made the appointment
5. Publish notice of the appointment to every affected person within 5
business days of having filed the notice with the CIPC
Setting aside the resolution or appointment of business
rescue practitioner:
• Companies Act provides for opposition to the resolution of the board,
as well as for the setting aside of the appointment of the business
rescue practitioner.
1. Setting aside resolution
• An affected person may approach the court to set aside the
resolution of the board.
OR
• The court can also do so if it regards this as just and equitable.
Continued….
Grounds for setting aside resolution:
i. No reasonable basis for believing the company to be financially
distressed
ii. No reasonable prospects of rescuing the company
iii. The procedural requirements were not met
Continued…
2. Setting aside appointment of practitioner
• An affected person may also apply to court to set aside the
appointment of the business rescue practitioner on the ground that
the business rescue practitioner:
i. Does not meet the requirements set out for a business rescue
practitioner in section 138
ii. Is not independent of the company or its management
ii. Lacks the skills that are necessary to supervise the rescue of the
particular company
2. Initiation by an affected person
• Affected person can apply to court to have the company placed under
business rescue.
• Notice of the application must be lodged to the CIPC and to every
affected person
The court can grant the order if it is satisfied that:
i. The company is financially distressed
ii. The company has in respect of an employment related matter,
failed to make due payment
iii. It is just and equitable to do so for financial reasons
iv. A reasonable prospect of rescuing the company exists
The Business Rescue Process
The practitioner must:
1. Investigate the company’s affairs, business, property and financial
situation
2. Be allowed sufficient time by the court to form an opinion as to
whether the company appears to be financially distressed or whether
there is a reasonable prospect of rescuing it
3. In a case where there is no reasonable prospect to save the
company, inform the court, company and affected persons accordingly
and apply to the court to discontinue rescue proceedings and to place
the company into liquidation
Continued…
4. In a case where the company is no longer financially distressed,
inform the court, company and affected persons accordingly and apply
to terminate the rescue proceedings
5. Report the following to the appropriate authorities for investigation:
• All voidable transactions
• Failure by directors in respect of material obligations
• Reckless trading, fraud or other breaches of the law relating to the
company
Continued…
6. Convene within 10 days of appointment a meeting of creditors
7. Obtain proof of claims of creditors against the company
8. Prepare the business rescue plan in consultation with company
management, affected persons and creditors
9. Convene and preside over a meeting with creditors to approve the
business rescue plan
Continued…
10. Convene a meeting of any class of holder of company securities if the
rescue plan affects their rights
11. Exercise the functions of a director in providing express instructions or
direction in respect of their management functions to the directors of the
company
12. Prepare and deliver a progress report to affected persons, the court and
to CIPC if the business rescue process has not been finalized within 3
months.
• The progress report must be updated monthly until the process is
terminated.
• The practitioner must then file a notice of substantial implementation with
the CIPC
Continued…
The Business Rescue Plan
• The business rescue plan is prepared by the practitioner in
consultation with company management, affected persons and
creditors
• The plan is then published within 25 business days after appointment
of the practitioner
• Within 10 business days after publication, the practitioner must
convene the meeting of creditors to consider the plan
• On meeting, the practitioner must provide information, invite
contribution an allow voting on the plan
Continued…
• If approved, the plan binds the company and every creditor of the
company
• The plan will be approved if 75% of the creditors’ voting interest
voted in favour of the plan
• 50% of these creditors must be of independent creditors
• The company must then implement the plan
Legal Consequences of Business Rescue
Proceedings
• The commencement of business proceedings has profound legal
consequences for company in the following:
i. General moratorium
• Most civil legal proceedings are stayed (paused) until the end of the
business rescue process
• Claims against the company may only be enforced with the consent of
the business rescue practitioner or leave of court.
• Creditors can enforce debts only in so far as the rescue plan provides
Continued….
ii. Protection of property interests
• The power of a company to deal with or dispose of its property is
restricted.
iii. Post-commencement finance
• Where a company under business rescue obtains finance, it is
permitted to use its assets as security
• These creditors will have preference over any other unsecured
creditor excepts employment related payments.
Continued….
iv. Employees and employment contracts
• Employees remain employees on their existing T’s & C’s
• However employees and the company may in accordance with
applicable labour legislation agree to different terms and conditions
• Employees are preferred unsecured creditors i.r.o unpaid
remuneration
v. Other contracts with the company
• The business rescue practitioner may suspend, partially or entirely
any other contract of the company
Continued…
• The practitioner may apply to court to cancel, partially or entirely, any
agreement to which the company is a party to, on terms that are just
& reasonable
• The other party to the agreement or contract may claim damages
only but not specific performance.
vi. Position of shareholders
• Generally no change in rights
• Shareholders play a fairly limited role in business rescue proceedings
except when their rights will be altered.
Continued….
vii. Position of Directors
• Directors continue to hold office & perform their functions but under
the authority & instructions of practitioner
• Directors must co-operate with instructions of the practitioner
• May be removed from office if they fail to co-operate
viii. Position of affected person
• As far as the rights of affected parties are concerned, each creditor,
employee and securities holders are entitled to notice of court
proceedings, decisions and meetings regarding the business rescue
proceedings
Continued…
• They are entitled to be consulted, to participate formally and
informally, to attend and present submissions at meetings and where
applicable to vote for the approval or rejection of the business rescue
plan.
Business Rescue Practitioner
Powers & Duties:
• The practitioner takes over full management of the company but may
delegate to director
• The practitioner must investigate the affairs of the company & decide
whether there are reasonable prospects of being rescued.
• The practitioner must develop and Implement a business rescue plan
Qualification of a practitioner:
I. Practitioner must be a member of a regulated legal, accounting or
business management (e.g. attorney, chartered accounted)
Continued…..
II. Is not subjected to a probation order
III. Is not disqualified from acting as a director
IV. Is not in a relationship with the company that will have an impact
on his integrity, impartiality or objectivity
V. Is not related to a person who is in a close relationship with the
company
Termination of Business Rescue Proceedings
Business rescue proceedings may be terminated in the following:
I. A court order setting it aside
II. A court order converting rescue into liquidation proceedings
III. A notice of termination filed with the CIPC
Compromise
By definition:
• A compromise is a proposal regarding a restructuring of the financial
obligations of a company, submitted to and accepted by the creditors
of the company in a meeting convened of that purpose.
OR
• A compromise is an agreement between a company and its creditors
in terms of which the creditors agree to accept less than their full
claims against the company.
Continued….
Content of a compromise
• The proposal of a compromise must contain sufficient information to reasonably
allow the creditors to decide whether to accept or reject the proposal
• The content is divided into 3 parts, namely:
i. Part A which is the background
ii. Part B states the proposal
iii. Part C states the assumptions and conditions.
• It must also contain, a certificate of authorized directors or prescribed officer
confirming :
i. The factual information provided appearing to be complete and accurate
ii. The projections are made in good faith based on factual information and the
stated assumptions.
Continued….
Service and filing
• The proposal must be delivered to all creditors of a company and the
CIPC
• If the proposal was confirmed by the court, a copy of the court order
must be filed with the CIPC within 5 days after the order was made.
Adoption of compromise
• The proposal must get the support of the majority of at least 75 % in
value of the creditors
Continued….
Approval by court
• The company is not compelled to but may apply to the court to have
an approved proposal made an order of the court.
Effect of court order
• The court order is binding on all creditors or members of a class of
creditor