Legal mechanisms to assist your business during commercial hardship

The COVID-19 pandemic has severely strained the South African economy and the ability of various businesses within the country to generate income. The aforesaid position has consequently affected the cashflow of businesses negatively and in many instances the business’s ability to pay salaries.

Management of businesses are being called upon to assess the current financial state of the business and to determine whether the business will be able to function and have a future after the upliftment of the current COVID-19 Regulations and taking into consideration the undoubtedly transformed landscape of the business environment within which the business would need to operate.

In South Africa there are two legal mechanisms that can assist management and business owners in making crucial commercial decisions. These processes include Business Rescue and Liquidation.

Business Rescue

Business Rescue is regulated by the Companies Act, 71 of 2008 (hereinafter referred to as “the Act”) and specifically Chapter 6 thereof. A pre-qualification for a company to commence with Business Rescue Proceedings is that the company should be financially distressed as defined in Section 128(1)(f) of the Act.

A company is defined to be financially distressed where it appears that:

1. It is reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing 6 (six) months; or

2. It appears to be reasonably likely that the company will become insolvent within the immediately ensuing 6 (six) months. Business Rescue Proceedings can be commenced by way of the adoption of a resolution as contemplated in Section 129 of the Act or alternatively by way of a court order in compliance with Section 131 of the Act.

The Business Rescue Proceedings are administered by a qualified Business Rescue Practitioner who meets the qualifications as provided for in Section 138 of the Act.

Amongst various of the other obligations that the Business Rescue Practitioner has towards the company, the most crucial obligation would be to draft a Business Rescue Plan, which details the manner in which the company would be restructured during the Business Rescue Proceedings in order to manage all of its debts and ultimately to generate an income, with the view of producing a greater return to the company’s creditors than would have been the case had the company been liquidated.

During the Business Rescue Proceedings the directors of the company will continue to exercise many of their duties, but it would take place under the supervision of the appointed Business Rescue Practitioner.

Should a company be found to be financially distressed and commence with Business Rescue Proceedings, there are various Sections within the Act which aim to provide the company with relief. These relief measures include the following:

1. A temporary suspension of all of the creditors’ claims against the company;

2. A temporary suspension of legal proceedings against the company;

3. Protection of some, if not all, of the employees’ jobs as the company will continue to trade;

4. The suspension of contracts, entered into by the company either entirely, partially or conditionally, by the Business Rescue Practitioner for the duration of the Business Rescue proceedings.

Liquidation

Liquidation proceedings in South Africa are regulated by the provisions of Chapter 14 of the Companies Act, 61 of 1973 (hereinafter referred to as “the Old Act”) although certain sections of the Companies Act, 71 of 2008 (hereinafter referred to as “the Act”) are also applicable to the process.

The test applicable as to whether a company is insolvent and would need to utilise the liquidation process is where either a company’s liabilities exceeds its assets (factual insolvency) or where a company is unable to pay its debts when those debts become due and payable (commercial insolvency).

The aim of Liquidation proceedings is to sell the assets of the company in order to pay the costs, charges and expenses incurred during the Liquidation process, as well as to offer a dividend to creditors of the company.

In the event that there is any residue left after the aforesaid process, the dividend would be divided between the former shareholders of the company in accordance with their rights and interests.

The Liquidation of insolvent companies is largely regulated by the provisions of the Old Act whilst the Liquidation of solvent companies is regulated by the Act.

Insolvent companies may be liquidated voluntarily by the passing of a resolution by its Board of Directors and handing this together with certain substantiating documentation to the CIPC. In the alternative the company may be liquated by way of a court order that is obtained by a creditor, the company itself, or one or more of its shareholders.

Once a company is in Liquidation, a liquidator is appointed to administer the estate and the winding-up thereof.

All of the assets of the company are realised during the liquidation proceedings. Trading and legal proceedings against the company would be suspended until the appointment of a liquidator.

Both Business Rescue and Liquidation proceedings are available to companies that are in precarious financial positions.

In the event that it becomes apparent during Business Rescue proceedings that the company cannot be rescued, the company will be placed in Liquidation.

Taking into consideration the effect of the proceedings mentioned herein as well as the potential complexity thereof, we would encourage interested parties to contact our offices for further advice regarding the possible application of these mechanisms to the business.

The following attorneys can be contacted in this regard:

Pieter Walters                                                                       Nel de Jager
Cell: 0828583817                                                                    Cell: 0826856212
E-mail: pieter@nvsinc.co.za                                                 E-mail: dejager@nvsinc.co.za

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)