Business Rescue: A Lifeline for Financially Distressed Companies
For entrepreneurs and business owners, challenges are inevitable. But when these challenges become too many, some companies may find themselves in financial distress, struggling to keep up with debt payments and daily operational costs. In South Africa, there is a legal process called business rescue that aims to help these businesses get back on their feet. Introduced by the Companies Act of 2008, business rescue presents a structured approach to rehabilitating a company.
What is Business Rescue?
Business rescue is essentially a plan that provides a financially distressed company with the opportunity to restructure its affairs, debt and operations in such a way that it could prevent liquidation. Rather than immediately shutting down, a business can then explore options to recover and continue trading. The idea is to create an environment where a company can be restored to solvency or at least negotiate better terms with creditors than if it were simply liquidated. It’s a lifeline for businesses that, despite facing severe financial challenges, have the potential to turn things around.
Who Qualifies for Business Rescue?
Not every company can enter into business rescue. According to the Companies Act, a company qualifies if it meets one of two criteria:
Financially Distressed Companies
This means that the company is unable to pay its debts as they become due, or it is likely that it won’t be able to pay its debts within the next six months. In such cases, the company’s financial health is declining, and immediate intervention is needed to avoid insolvency. Early recognition of financial distress can increase the chances of a successful outcome.
Reasonable Prospect of Rescue
There must be a reasonable prospect of successfully rescuing the company through restructuring or other measures. This is a critical point, as business rescue is not intended for companies that are beyond saving. There must be some chance that the business can recover from its financial situation.
What is the Business Rescue Process?
The process is fairly structured but multifaceted. Here’s a breakdown of the key steps:
- Initiating Business Rescue: A company can either voluntarily file for business rescue, or creditors can apply to a court to place the company under. If the company’s board believes that it is in financial distress but still has a chance of recovery, it can pass a resolution to start the process. This must then be filed with the Companies and Intellectual Property Commission (CIPC) to officially start the proceedings.
- Appointment of a Business Rescue Practitioner: Once proceedings begin, the company appoints a business rescue practitioner (BRP). This person is key to the entire process. The BRP is an independent and experienced professional tasked with taking control of the company during the rescue process. Their job is to assess the financial position of the company, manage the business, and develop a plan to improve the business.
- Suspension of Management Powers: While the company’s directors and management stay on board, their powers are limited once the BRP is in charge. The BRP has full authority to make decisions including those related to day-to-day operations, as long as their decisions are made in the best interest of rescuing the company. This can sometimes be a tough transition for management, but it’s a necessary step to ensure that an objective plan is developed and executed.
Moratorium on Legal Action
One of the advantages of business rescue is the moratorium on legal action. This means that, while the company is undergoing the process, creditors are not able to take any legal action against the company. No one can attach or liquidate the company’s assets during this period, which gives the business breathing room to focus on recovery without the constant threat of creditor pressure. This moratorium is a key reason why many businesses opt for business rescue over immediate liquidation as it provides some time to work on a solution.
Once the plan is developed, it must be presented to creditors and shareholders for approval. Creditors are particularly important here, as they often need to agree to any proposed reduction or restructuring of the company’s debts.
Getting Expert Assistance
Business rescue is a valuable option for companies that face financial distress, but still have the potential for recovery. The process offers a structured, legally protected environment in which businesses can work towards a turnaround. With the right support, many companies are able to avoid liquidation and emerge stronger. So contact us today if your company is experiencing financial difficulty, because it might be worth considering business rescue as a proactive step toward saving your business.