In light of these unprecedented times and unknown future, many businesses are going to be unable to survive the lockdown caused by the CORONAVIRUS (COVID-19) pandemic. Business rescue could save you from dying. In this article, we help provide some clarity on the matter.
Desperate times call for desperate yet calculated actions. Business Rescue is one of those actions that could save businesses in distress and rehabilitate them financially.
The inability to continue doing business and paying accounts will inevitably end in disaster for those that take no action or wake up when it’s too late.
A proactive and decisive approach is needed in times like these, and a voluntary business rescue is an option, once the test for “financially distressed” (as per section 128(1)(f) of companies act) business indicates the following:
What is the test for business rescue?
a) it appears to be reasonably unlikely that the company will be able to pay all its debts as they become due and payable within the immediately ensuing 6 months, or;
b) it appears reasonably likely that that company will become insolvent within the ensuing six months
Read the Liquidity section on The Balance Sheet Part 2 blog to determine your status of solvency.
Should this be the case, the directors are advised to apply for voluntary business rescue, failing which they may be held personally liable for trading recklessly.
How can a company be placed in business rescue?
There are 2 ways a company can be placed in business rescue, namely:
a) resolution by the board of directors to voluntarily start rescue proceedings and place the company under the supervision of a business rescue practitioner (section 129), and;
b) a formal application to the court by an affected person to place the company under supervision and commence business rescue (section 131)
Voluntary business rescue
The process to commence a voluntary business rescue starts with the filing of Form 123.1 with the CIPC, accompanied with the board resolution, and the statement illustrating the facts which support such resolution.
Within 5 days of filing the application with the CIPC, the company must
a) publish the resolution with a sworn affidavit explaining the reasons behind such action and detailing the rescuing prospects to the affected persons (shareholders, creditors, employees, trade union)
b) appoint a business rescue practitioner, and
c) file a notice of appointment with CIPC
d) publish the notice of appointment within the next 5 days to the affected persons
In terms of section 129 (5) (a), if the company fails to comply with the timeline of 5 days from filing for business rescue to appointing the rescuer and issuing the notice and the rescue plan, the process is nullified and may not be refilled for 3 months and this then allows for an affected person to make an application to set aside the resolution.
According to section 132 of the Act, the business rescue process begins on the day the company files for supervision in terms of section 129; or an affected person applies to the court for an order to place a company under supervision as per section 131 of the Act.
The business rescue practitioner must investigate the affairs of the company and convene a meeting of creditors and employees within 10 days of appointment to advise on rescuing prospects.
The business rescue plan must be published within the next 25 days as per section 150 of the Act
After 10 days of publishing the rescue plan, a meeting to vote on the plan must be convened by the rescuer.
When does the rescue process end?
In terms of section 132 of the Act, the rescue ends when;
a) the court sets aside the resolution
b) the business rescuer files a notice of termination (Form 125.2) with CIPC or;
c) the proposed plan has been rejected and no affected person has acted to extend the proceedings
The rescue proceedings should last 3 months as per section 132 of the Act unless the burdensome reporting requirements are complied with.
The business rescue process is not always successful due mainly to lack of support from affected parties on the continuous operations of the distressed company, however, in most cases, with stakeholder support and an objective, restructured and innovative approach many companies survive the tough time and are rescued and turned around successfully.
How can you avoid business rescue?
In the “How to prepare for a recession” blog, we provide 12 steps on avoiding this precarious position.
Most SME’s do not take the time and effort to periodically assess their business and plan the growth path that will ensure viability and sustainability. This is the best time to attend to the challenges that are stumping the success of the business.