South Africa: Can A Business Rescue Practitioner Issue Shares?

In most instances a company in business rescue will require post commencement financing. A potential investor or post commencement financier may come along with an offer to invest in the company and in return, subscribing for all the authorised but unissued ordinary shares in the company. The question arises as to whether the business rescue practitioner:

• Has the power to issue the authorised but unissuedshares to the investor.
• Needs to obtain the consent or cooperation of the board of directors or the company's shareholders in order to do so.

In terms of section 137(a) of the Companies Act, any alteration in the classification or status of any issued securities of a company during business rescue, except by way of transfer of securities in the ordinary course of business, is invalid, unless authorised by the court or contained in an approved business rescue plan.

Section 1 of the Companies Act defines "securities" as any shares, debentures or other instruments irrespective of their form or title, issued or authorised to be issued by a profit company.

It must be remembered that in terms of the Companies Act, shareholders are included in the definition of an "affected person" and therefore have the right to be notified of important and relevant events and to participate in court proceedings and business rescue proceedings as allowed by section 146.

Shareholders and any holders of the company's securities, however, do not have the right to attend meetings or vote in respect of the business rescue plan, except for in the case where a shareholder's rights or the rights of a holder of the company's securities would be affected by the plan as envisaged in terms of section 146(d) of the Act.

The duty of the business rescue practitioner is to prepare a business rescue plan for consideration by affected persons and possible adoption at a meeting convened in terms of section 150(1) of the Act. At such meeting the business rescue practitioner must introduce the plan for consideration by creditors and, if applicable, by the shareholders. The practitioner must invite discussion on the plan and conduct a vote on the plan. If voting on the plan takes place and the plan is supported by more than 75% in value of all creditors who voted, and at least 50% in value of independent creditors who voted, and no rights of shareholders of any class were altered, than the plan is regarded as finally adopted.

If, however, the rights of any shareholders are altered by the plan, the above approval by creditors is only a preliminary approval, and the plan must also be approved by a majority vote of the relevant shareholders at a meeting convened for this purpose in terms of section 152(3)(c) of the Act.

If the plan provides for the issue of any authorised shares of the company, the practitioner may determine the consideration for these shares and in accordance with the plan, issue any authorised securities of the company, in terms of section 152(6)(a) of the Act.

It must be remembered that section 140(1)(a) confers upon the business rescue practitioner full management control of the company in substitution for the board and pre-existing management during the company's business rescue proceedings. In terms of section 140(3)(b), the business rescue practitioner also has the responsibilities, duties and liabilities of a director of the company, as set out in section 75 to 77 of the Act.

Accordingly the business rescue practitioner assumes full management control and the total control of the board of directors. This will in itself allow him to issue the relevant authorised but unissuedshares to the investor and he would not need the consent or cooperation of the board of directors to do so.

He further does not need the consent or cooperation of the company's shareholders, as the status of the issued securities will not be altered or changed in any way owing to the fact that he will be issuing authorised but unissuedshares to the investor.

The business rescue plan will still nonetheless have to be passed on a majority of more than 75% of the voting interest, of which 50% will have to be independent creditors as envisaged in terms of section 152(2) of the Act. Accordingly it is only the creditors who will, in terms of section 145 of the Act, be entitled to vote in respect of the issuing of the shares, which issuing of shares will have to be canvassed in the business rescue plan.

In the next newsletter we will look at a situation where an investor or post commencement financier to a company in business rescue, wants to invest in a new class of debentures, which will be specifically issued to him for that purpose, and whether the business rescue practitioner:

• Has the power to issue the new type of debentures to the investor.
• Needs to obtain the consent or cooperation of the board of directors or the company's shareholders in order to do so.

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.