The Business Rescue Process in South Africa, Everything You Need to Know
In South Africa, businesses facing financial distress have the option of entering into business rescue, a process introduced by the Companies Act 71 of 2008. Business rescue is a vital mechanism designed to provide a company with an opportunity to restructure its affairs, operations, assets, and liabilities in a way that maximises the likelihood of recovery. Alternatively, it ensures that creditors receive a better return than they would through liquidation. Here is everything you need to know about business rescue in South Africa.
What Is Business Rescue?
Business rescue is a legal process aimed at helping financially distressed companies rehabilitate. It involves placing the company under the supervision of a business rescue practitioner (BRP) who works to reorganise the company's affairs. The process seeks to avoid liquidation, where the company would be wound up and its assets sold off. Instead, the company remains operational while it works on a recovery plan.
When Should a Company Enter Business Rescue?
A company can enter business rescue when:
It is financially distressed, meaning it cannot pay its debts as they fall due, or
There is a reasonable prospect of rescuing the company.
The board of directors must pass a resolution to begin the business rescue process, or an affected party (such as a creditor) can apply to the court to place the company under business rescue.
Who Oversees the Process?
The business rescue process is managed by a Business Rescue Practitioner (BRP), who is an independent expert appointed to assess the company’s situation, work with creditors, and develop a business rescue plan. The BRP has extensive powers and responsibilities, including taking over the company’s management during the rescue process.
The practitioner must be a qualified individual registered with the Companies and Intellectual Property Commission (CIPC), and their appointment needs to be approved by creditors and other stakeholders.
Steps in the Business Rescue Process
Commencement of Business Rescue
The business rescue process starts when the board passes a resolution to place the company under business rescue, or an affected party approaches the court to do so. Once the process is initiated, all legal proceedings against the company are suspended, and the BRP takes over management.
Appointment of the Business Rescue Practitioner
The company must appoint a BRP within five days of passing the resolution. The practitioner is responsible for evaluating the company's financial position and developing a recovery plan.
Development of the Business Rescue Plan
The business rescue practitioner must create a business rescue plan outlining how the company’s financial health will be restored. This plan may involve reorganising the company's operations, selling assets, restructuring debts, or negotiating with creditors. The plan should be shared with affected parties, including creditors and shareholders, within 25 days of the BRP’s appointment.
Approval of the Plan
Once the rescue plan is drafted, it must be presented to creditors and other stakeholders for approval. For the plan to be accepted, it must be approved by 75% of the creditors voting in favor, with 50% of the independent creditors also supporting it.
Implementation of the Plan
After the business rescue plan is approved, the BRP works with the company's management team to implement the recovery steps outlined in the plan. The company remains operational during this time, though certain operational and financial changes may occur to meet the goals of the plan.
Role of Creditors
Creditors play a crucial role in the business rescue process. They are directly affected by the company’s financial distress and are involved in the decision-making process when it comes to approving the business rescue plan. Creditors' claims are temporarily frozen during business rescue, meaning they cannot take legal action or enforce any debts owed by the company.
Creditors may be required to compromise on debt repayment terms, such as accepting reduced payments or restructuring debt agreements, to give the company room to recover.
Business Rescue vs. Liquidation
While both business rescue and liquidation deal with financially distressed companies, the key difference is that business rescue aims to rehabilitate and save the company, while liquidation leads to the complete dissolution of the company.
In liquidation, the company’s assets are sold off to pay creditors, and the company ceases to exist. On the other hand, business rescue keeps the company running, allowing it to reorganise and, ideally, avoid liquidation.
Key Benefits of Business Rescue
Continuation of Operations: Unlike liquidation, business rescue allows the company to continue trading during the process, preserving jobs and maintaining relationships with suppliers and customers.
Better Return for Creditors: Creditors are likely to receive a better return through business rescue than liquidation, where the sale of assets may not cover the full extent of the company’s liabilities.
Protection from Legal Action: Once the business rescue process begins, creditors cannot take legal action against the company, providing it with breathing room to reorganise.
Challenges and Risks of Business Rescue
High Costs: Business rescue can be expensive due to fees charged by the BRP and the costs associated with restructuring the company.
Uncertain Outcomes: Not all companies that enter business rescue succeed. If the business rescue plan fails, the company may still be forced into liquidation.
Loss of Control: Management loses control of the company’s operations once a BRP is appointed, which may be difficult for business owners or directors.
Exiting Business Rescue
A company can exit business rescue in one of three ways:
Successful Implementation: If the business rescue plan is successfully implemented, the company exits the process and continues trading.
Failure of Business Rescue Plan: If the plan fails, the company may be placed in liquidation.
Termination by Court Order: A court can terminate the business rescue proceedings if it becomes evident that the company cannot be rescued.
Conclusion
The business rescue process offers financially distressed companies in South Africa a second chance to recover and avoid liquidation. By temporarily suspending creditors’ claims and allowing the company to restructure, business rescue can save jobs, protect assets, and provide a better return for creditors. However, it is essential for business owners and stakeholders to understand the complexity, cost, and potential risks involved in the process. When done correctly, business rescue can give a company the opportunity to survive, but it requires careful planning, collaboration with creditors, and strong leadership from the appointed business rescue practitioner.
If your company is facing financial distress, seeking early advice from a qualified business rescue practitioner is crucial to increase the chances of success.
Access the CIBA Academy Business Rescue 2024 CPD here.
Unlocking Business Recovery: Join Our Business Rescue 2024 Webinar!
📅 Date: Recording
🕑 CPD Points: 4
💻 Level: Moderate
💼 Price: R375 (VAT Incl.)
Is your business struggling or showing signs of financial distress? Don't wait until it’s too late! Our Business Rescue 2024 webinar, led by the experienced Business Rescue Practitioner Tania Lopes, will empower you with the tools and knowledge to navigate the business rescue process and help save businesses in financial trouble.
💡 What You'll Learn:
A step-by-step guide to the business rescue process under Chapter 6 of the Companies Act.
How to recognize financial distress in a business before it’s too late.
Discover when business rescue is the best option and how to advise company directors.
Practical tips on how to become an accredited Business Rescue Practitioner.
✨ Why Attend?
Gain hands-on experience with real-life examples.
Equip yourself with the knowledge to assist your clients and companies in avoiding insolvency.
Learn from Tania Lopes, a licensed practitioner with over 13 years in the industry.
This event is packed with essential information for anyone interested in business rescue, from company directors to financial consultants. Don’t miss out—your next big career step or business success could start here!
📢 Register Now and gain 4 CPD points!
For more details and registration, click here.