Business Rescue: What Directors, Creditors and Employees Should Know
What is Business Rescue?
Business rescue is a legal process under Chapter 6 of the Companies Act 71 of 2008. It gives a struggling company breathing room to restructure instead of being liquidated. The Act defines it as proceedings to rehabilitate a financially distressed company through three things (CIPC):
- Temporary supervision of the company by a business rescue practitioner
- A temporary moratorium (a legal pause) on creditors’ claims against the company
- A business rescue plan to restructure the company’s debts and operations
The plan aims to keep the company trading on a solvent basis. If that isn’t possible, it must give creditors or shareholders a better return than an immediate liquidation would.
When Does a Company Qualify for Business Rescue?
A company qualifies when it is “financially distressed,” and there is a reasonable prospect of rescuing it. Under section 128(1)(f) of the Act, a company is financially distressed if either of these is true (CIPC):
- It appears reasonably unlikely to pay all its debts as they fall due over the next six months, or
- It appears reasonably likely to become insolvent within the next six months.
Courts have refused business rescue for companies that were already hopelessly insolvent, because there was no reasonable prospect of success. Directors who act early have far more options. Our guide on what directors need to know about the financial distress test provides an overview of the board’s duties.
How Business Rescue Starts
There are two routes:
- Via a board resolution (voluntary). The directors resolve to begin business rescue and file Form CoR123.1 with the CIPC. Within five business days of filing, the company must appoint a licensed business rescue practitioner.
- Via a Court order. An affected person, such as a creditor, shareholder, registered trade union or employee, can apply to court to place the company in business rescue.
The Business Rescue Process
- Moratorium on legal action. Once business rescue begins, legal proceedings against the company are paused. They can only continue with the practitioner’s written consent or the court’s permission.
- The practitioner takes control. The business rescue practitioner investigates the company’s affairs and assesses whether it can realistically be saved.
- Contracts may be suspended. The practitioner can suspend agreements the company is party to, wholly or partly, with the exception of employment contracts.
- A business rescue plan is published and voted on. The plan sets out how the company will be restructured. Creditors and other affected persons then consider it, as laid out in sections 150 to 152 of the Companies Act.
- Implementation or liquidation. If the plan is adopted and implemented, the company continues trading. If the rescue fails, the practitioner can apply to have the company liquidated.
What Does Business Rescue Mean for Creditors and Employees?
Creditors can’t sue or enforce claims against the company during the moratorium without the practitioner’s consent or the court’s permission. In return, business rescue aims to give them a better outcome than they would get in an immediate liquidation. Creditors get a say through the vote on the business rescue plan.
Employees keep working on the same terms and conditions under section 136 of the Act. The exceptions are normal attrition or different terms agreed with the company in line with labour law. Any retrenchments under a business rescue plan must follow sections 189 and 189A of the Labour Relations Act. Employees and their unions also count as affected persons in the process. Read more about what happens to employees during liquidation.
Business Rescue vs Liquidation
Business rescue tries to save the business. Liquidation winds it up and sells what’s left to pay creditors.
| Business rescue | Liquidation | |
|---|---|---|
| Goal | Restructure and keep trading | Wind up and sell assets to pay creditors |
| Who is in control | Licensed business rescue practitioner | Liquidator |
| Claims against the company | Paused by a moratorium | Settled from the sale of assets |
| Employees | Stay employed on the same terms; retrenchments only under labour law | Jobs are usually lost |
| Outcome | Company continues, or a better return than immediate liquidation | Company is dissolved |
Talk to Cawood Attorneys About Business Rescue
The earlier a financially distressed company gets advice, the more options it has. Cawood Attorneys advises parties on business rescue, from the initial board resolution through to plan negotiation. Contact us for a confidential consultation with qualified attorneys.