Financially distressed companies in South Africa now have an opportunity can opt to reorganise and restructure through Chapter 6 of the amended Companies Act, No 71 of 2008. This has far-reaching effects on creditors, financial institutions, shareholders, employees and restructuring specialists.
Kindly note that Section 66 (1A) of the Close Corporations Act 69 of 1984 provides that the business rescue provisions of the Act apply equally to close corporations as they do to companies.
To fully determine what causes firms to enter into business rescue and how business rescue is initiated, it’s of fundamental importance to comprehend the terms and provision including key definition, as contained in chapter 6 of the Companies Act, No. 71 of 2008, amended.
The key TEST to determine whether an entity should enter is that of financial distress which the Act has defined under section 128(1)(f), subject to two (2) conditions below, as: “financially distressed, in reference to a particular company at any particular time, means that; (i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or (ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months”.
It would then be safe to say for an entity to consider entering into Business Rescue (“BR”) the company must be "financially distressed". This means that it is reasonably unlikely that the company will be able to pay its debts as they become due in the next 6 months, or, it is reasonably likely that the company will become insolvent in the next 6 months. If a company is financially distressed and the directors/members do not file for BR, they can attract personal liability, according Pat Pattinson.
The ultimate goal of business rescue is to reach a commercial and viable solution, culminating in the rescue of the company as well as maximising the likelihood of its continued existence on a solvent basis.
However the following conditions are also deemed to hold:
(i) Reasonable prospect: In a decision of the South Gauteng High Court, in the case of Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd 2012 JPR 0239 (GSJ), the court considered the plausibility of business rescue in an instance where liquidation was preferable. In this instance, the court dismissed the application for business rescue and held that a liquidation of the company would achieve a similar result to that of a business rescue. This judgment makes it clear that prior to a company, or an affected person being placed in business rescue, consideration should be given to the nature of the company, the extent to which business rescue is the appropriate procedure for that company and the extent to which business rescue would be more beneficial for the company than liquidation. If the answer to the latter questions is in the affirmative, business rescue proceedings are likely to be successful. If not, liquidation may be the preferred alternative. The term reasonable prospect is further defined under key terms and phrases as well as introduction of the concept of;
(ii) The company must not be insolvent in terms of the definition of insolvency under the Act and if its insolvent and proceedings have commenced or imminent for windup, BR should may only be considered if it results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company in line with Section 128(1b)iii = Better Return than in Liquidation (“BRiL”)
It is important to note that when referring to insolvency, the Act has two considerations for insolvency;
(i) Technical (factual) insolvency whereby the total liabilities of the entity exceeds the total assets and thereby reflecting negative equity;
(ii) Commercial insolvency; whereby it appears reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months, regardless of whether assets exceed assets.
The measure of solvency according to the Act refers to the second definition.
The test of reasonable prospect above entails that business rescue is meant for economically viable companies only, and that economically unviable companies entering the process, when allowed, is the cause of its high failure rate overseas, as well as locally.
Note that depending on circumstances surrounding the business rescue, in terms of how the BR proceeding are instituted, whether voluntary or by the courts (in favour of affected person), the Business Rescue Practitioner (“BRP”) will be appointed by either the company or by the court. However, further note that any BRP appointment has to be ratified by the court.”
Section 138 of the Act regulates the qualifications required for a business rescue practitioner. In order to qualify as a business rescue practitioner a person must be –
• a member in good standing of a legal, accounting or business management profession accredited by the CIPC (section 138(1)(a)); and
• be licensed as such by the CIPC (section 138(1)(b)).
From this it appears that a person must satisfy both the above requirements for appointment. But Regulation 126 of the Act states that a person who is part of an accredited profession need not be licensed by the CIPC (Regulation 126(2)). The CIPC has further indicated that it is, at least for the meantime, accrediting certain professions for the purposes of business rescue appointments and instead is appointing and licensing business rescue practitioners on an ad hoc basis in accordance with section 138 (1)(b).
There is now a drive by the CIPC to transfer the responsibility and regulation of BRPs including licensing/ accreditation to Recognised Professional Bodies (“RPBs”). This means CIPC will accredit RPBs for purposes of issuing accreditation to their members as well as monitoring and ensuring compliance as well as adherence to approved codes of conduct. IBASA as a professional body intends to proceed with an application for the RPB accreditation by the CIPC and once accredited will provide IBASA members with the business opportunity of acquiring accreditation/ licence to operate in the Business Rescue space. I would personally encourage all our existing and potential members to consider this field and exploit the opportunities it presents.