Article by listed Attorney: Nanika Prinsloo
Business rescue is a mechanism that was created by the new Companies Act, Act 71 of 2008. It applies to both Companies as well as Close Corporations. In this article we will only refer to Companies.
Up to the point of the new Companies Act, the only possibility for a Company that experienced financial difficulties had, was to liquidate or go under judicial management. Some Companies just needed a little bit of time to manage itself out of its problems, but since business rescue did not exist before, the Companies were liquidated. Judicial management was a complicated process and involved a court application which was expensive. It was not very popular.
It is first prize for a Company not to be liquidated (insolvent), hence the business rescue process was created where a Company can go through a business rescue procedure to manage itself out of its problems. A business rescue practitioner is appointed and the latter then assists the Company by negotiating with creditors on behalf of the Company, and managing the Company out of its problems. Of course, if the business rescue process does not work, then the Company will still have to liquidate. See also How a Small Business Accountant can Help Struggling Businesses
One has to be very careful to not arbitrarily place all Companies under business rescue. There are times when business rescue is not the answer and the Company should liquidate straight away; there are other times when it is not necessary to formally go through the business rescue procedure, but rather let the financial officer negotiate with creditors (if the Company knows that the problems can be solved.) I have found instances where it was of no use to put the Company under business rescue, because the Company would not have made it in any case.
The business rescue process is not a decision to be taken lightly nor quickly. One should also rather discuss the problem with both a business rescue practitioner as well as an attorney who is an insolvency practitioner before making the decision, so that one does not spend unnecessary money. Unless the Company will most certainly be able to fix the problem and cash flow will resume if there was a respite in paying debt, then absolutely, business rescue is the answer. It is, however, no use for the Company to go under business rescue if the Company is so far gone that the process of business rescue is simply postponing the inevitable.
Therefore, do your homework and analyse the problem carefully: know exactly when the finances are going to come right, if ever. It is really not use to go under business rescue if it is not going to play a role in simply stalling matters with creditors for a while so that the cash flow can come right. Sometimes it is better to close the Company down as soon as possible, sometimes it is not.
Before there can be any business rescue proceedings, the board of a company must make a decision that the Company must be placed under business rescue. The same decision must be made if the Company is going to be liquidated as well. Business rescue is a voluntary process and starts with the board decision. The board will make the decision whether the Company is “financially distressed” and if there is reasonable prospect that the Company can be rescued. This is key: “there must be reasonable prospect that the Company can be rescued”. The board must carefully consider whether the Company shouldn’t rather liquidate. At this point it is advisable that the board consults with an insolvency practitioner as well as a business rescue practitioner.