Co-Author by Tiffany Agulhas

The Covid-19 pandemic has had a devastating impact on the South African economy with several enterprises struggling to remain profitable. Their continued operation remains threatened by the imposition of trade restrictions pursuant to the national lockdown and South Africa's subsequent economic downgrade to junk status.

... it is imperative that companies in financial distress prioritise their continued existence and consider business rescue as an alternative to liquidation.

With South Africa's formal sector creating employment for approximately 10 213 000 employees 1 as at December 2019 and contributing approximately R690 billion in profit to the South African economy in 2017 2 , it is imperative that companies in financial distress prioritise their continued existence and consider business rescue as an alternative to liquidation.

The South African legislature provides for Business Rescue in Chapter 6 of the Companies Act 17 of 2008 ("the Act"), the objective of which is to assist companies and close corporations in financial distress. In terms of section 128(1)(f) the Act, a company is regarded as being 'financially distressed' if:

  • it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months (commercially insolvent); or
  • it appears to be reasonably likely that the company will become insolvent within the immediately succeeding 6 months (factually insolvent).

Although the directors of a company in financial distress are not obliged to place a company into business rescue, if they have reasonable grounds to believe that the company is financially distressed and elect not to do so, they are obliged to deliver a notice to each affected person setting out the fact that the company will be unlikely to honour its debts within the next six months and furnishing its reasons for omitting to the place the company into business rescue.

The concern is that given that affected persons include the company's creditors, this notice may inevitably give rise to scrutiny by suppliers and others regarding the company's ability to meet its debts under existing payment terms.

Alternatively, the notice may also give rise to CIPC putting the company on notice to satisfy the Commission, within 20 days, as to why it should be permitted to continue trading and that it will be able to pay its debts as and when they fall due, failing which the Commission may issue a notice requiring the company to cease trading.

Whilst the Commission has committed to not exercising its powers to stop companies from trading if the impending insolvency is related to Covid-19, failure to send out this notice may lead to personal liability for the directors for contravening the provisions of the Act and causing loss to creditors who continue to trade with the company.

A company may also be placed under business rescue by virtue of a court order.

In terms of section 131 of the Act, any affected person (shareholders or creditors of the company, registered trade unions representing the company's employees or individual employees or their representatives if they are not represented by a registered trade union) may apply to Court for an order placing a company into business rescue.

After a company has been placed under business rescue, a business rescue practitioner ("BRP") is appointed to temporarily supervise the company, the management of its affairs, its business and property. The BRP is tasked with the development, and once approved, implementation of a business rescue plan that delineates how the affairs of the business, its property, equity, debts and other liabilities will be restructured to enable the company to trade out of its impending insolvency or to secure a better return for the company's creditors or shareholders than would result from the immediate liquidation of the company.

Furthermore, a temporary moratorium is placed on the rights of claimants against the company or in respect of property in its possession. This means that creditors will be precluded from instituting or proceeding with any civil proceedings or enforcement action against the company or in relation to any property lawfully in its possession at the date of the company being placed under business rescue.

Business rescue is a robust procedure that could effectively save companies in financial distress. It is endorsed by the Act and our Courts and is in accord with the legislator's intention contained in section 7(k) of the Act which provides "that the purpose of the Act is to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders". Therefore, increased reliance thereupon should be encouraged.

Footnotes

1 http://www.statssa.gov.za/publications/P0277/P0277December2019.pdf.

2 http://www.statssa.gov.za/?p=11828.

Originally published May 19 2020

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.