Article by listed Attorney: Nanika Prinsloo
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The Business Rescue process created by the Companies Act, Act 71 of 2008, is meant to rescue a Company that is in financial distress, so as to avoid the liquidation of the Company and managing it back into a healthy Company.
The Business Rescue process will be successful is the right steps, as proposed by the Companies Act, are followed and if it is clear beforehand that all the Company needs is a period of help where no legal action is taken against it and where no creditors put pressure on the Company with legal actions.0
The question arises that, if the Company is in financial distress, and it already cannot pay its creditors, what happens during the period of the Business Rescue process to for example salaries of staff (who can’t wait to be paid) and electricity bills and so forth?
If any monies are owed to employees and are not being paid to employees during the period of Business Rescue, then the money is deemed to be “post-commencement financing” and then must be paid in the order of preference as set out in Section 135(3)(a) of the Companies Act.
The order of preference as set out in Section 135(3)(a) of the Companies Act, means that payment will be made in the following order:
(a) The Business Rescue Practitioner’s salary and expenses as well as other professional persons whose services were used during the process (like a lawyer or auditor), will be paid first;
(b) Employees’ salaries or other monies that became due after the Business Rescue Process began will be paid second;
(c) Thereafter secured creditors will be paid for any loan that the Company made after the Business Rescue process began (This is the “post-commencement finance” referred to above);
(d) Next unsecured creditors of the Company are paid for any loan or supply that the Company made after the Business Rescue proceedings began;
(e) Then secured creditors will be paid for any loan or supply that the Company made before the Business Rescue proceedings began;
(f) Then the employees will be paid any monies that became due to them before the Business Rescue proceedings began;
(g) Lastly, unsecured creditors of the Company for any loan or supply that the Company made before the Business Rescue proceedings began.
If creditors are willing to lend monies or sell goods on account to the Company after the Business Rescue proceedings began, that is referred to as “post-commencement finance” and is possible.
Companies who are willing to lend monies to the Company after the Business Rescue proceedings have started, will be paid over all unsecured claims against the Company. It won’t matter whether these loans were secured or not. The purpose of this is to make it desirable for banks to lend money to Companies who are under Business Rescue, otherwise nobody will lend money to the Company.
It is important that the Company may be able to get finance from banks or other institutions during or after the Business Rescue proceedings, because it may be just what the Company needs to get out of financial distress. Hopefully the banks and institutions will be co-operative in the Business Rescue process of Companies so that the Companies could survive, otherwise the Business Rescue process could defeat the purpose if cash flow or monies for other reasons are required and the Company cannot obtain it.