Opinion Piece

The Rise and Role of the Business Rescue Process

By Adv. A M Matjila on behalf of LexisNexis South Africa

[Durban, xx June 2020] The Covid-19 pandemic and extended lockdown – instituted in an already precarious economic situation in South Africa - will see many companies spiral into distress and be pushed to consider business rescue as a means for financial rehabilitation. Advocate AM Matjila recommends that businesses should file their business rescue notices sooner rather than later if they find themselves in distress.
The Term ‘business rescue’ is defined in section 128 (1) (b) of the Companies Act 71 of 2008 (the ‘ACT’) to mean ‘proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for –
(i) The temporary supervision of a company, and of the management of its affairs, business and property.
(ii) A temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
(iii) The development and implementation, if approved of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis, or if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.’
The business rescue has the effect of placing a general moratorium on legal proceedings against the company and also to protect the property interests of the company.
The business rescue process is intended to create an efficient, regulated and effective mechanism to facilitate the rescue of companies in financial distress as long as they are capable of rescue in a way that balances the rights and interests of the stakeholders.
Business rescue proceedings are much more flexible and friendly towards the financially distressed company than judicial management.
Central to this process is the business rescue practitioner (BRP) who is defined in section 128 (1) (d) to mean ‘a person appointed, two or more persons appointed jointly, in terms of this chapter to oversee a company during business rescue proceedings.’
The BRP is required to draft a business rescue plan that has to be adopted in terms of section 152 of the Act. Once adopted it becomes binding.
The business rescue plan provided for in ss 128 (1) (b) (iii) has two objects in mind. The primary object being to facilitate the continued existence of the company in a state of solvency and secondly and in the alternative, in the event that the primary object cannot be achieved or appears not to be viable, to facilitate a better return for the creditors or shareholders of the company than would result from immediate liquidation.
Statistics available from the Companies and Intellectual Property Commission (CIPC) show that from the inception of the new Companies Act on 1 May 2011 to 30 June 2019, about 366 companies filed for business rescue during each financial year.
By 30 June 2019 there were about 3298 businesses that started business rescue proceedings. For various reasons 2023 business rescue proceedings were terminated and only about 1275 businesses remained actively participating in business rescue proceedings. Only 400 (12%) of the 3298 businesses filed for liquidation.
The majority of companies in business rescue are private companies and close corporations comprising 66% and 31% respectively.
Predominant industries in business rescue as at 30 June 2019 were:
Wholesale and Retail - 365
Construction - 230
Manufacturing - 205
Real Estate activities - 180
Mining - 113
Transportation and storage - 111
The latest figure as to how successful the business rescue was at the end of June 2019 could not be obtained at the time of writing this article, however the last figure provided by CIPC in their 2015 business rescue status quo report was around 9.4%.
Some believe that the success depends on the timing of commencement of the business recue proceedings. The earlier the business finds itself in financial distress the more the need to commence business rescue proceedings. The longer the business waits, the more the debt builds up and the slimmer the chances become of an eventual return to liquidity.
During this period of the COVD-19 pandemic it is a fact that more and more businesses are going to find themselves in financial distress much as SAA and Comair airlines have already felt the distress.
The latest statistics on companies that filed for business rescue for the period 1 July 2019 to June 2020 could not be obtained but it is submitted that they will be higher than the available figures for 2019.
Businesses are therefore advised to file their business rescue notices earlier before lenders start to act, as lockdown regulations are progressively adjusted to avoid liquidation proceedings.
If businesses act sooner rather than later, society will benefit by having economically active businesses, economic improvement and preservation of jobs through businesses returning to continued existence and profitability.



About LexisNexis® Legal & Professional

LexisNexis Legal & Professional is a leading global provider of legal, regulatory and business information and analytics that help customers increase productivity, improve decision-making and outcomes, and advance the rule of law around the world. As a digital pioneer, the company was the first to bring legal and business information online with its Lexis® and Nexis® services. LexisNexis Legal & Professional, which serves customers in more than 150 countries with 10,600 employees worldwide, is part of RELX, a global provider of information-based analytics and decision tools for professional and business customers.
In South Africa LexisNexis® has been assisting companies and professionals to remain abreast of changing legislation and shifts in the regulatory environment for over 80 years, combining the best of local knowledge in Butterworths with leading-edge tools and online solutions that have positioned the company as a pioneer of legal technology. LexisNexis South Africa’s business units include LexisNexis Legal Information and Compliance, LexisNexis Data Services, LexisNexis Business Software Solutions and LexisNexis Academic. South African investment firm, Tsiya Group acquired a minority interest in LexisNexis South Africa in July 2012.


Issued by:
Jozi Meth
Logico Creative Solutions
Tel. +27 (0)31 207 2887
jozi@logicocreative.co.za

On behalf of:
Neliswa Mncube
GM: Corporate Communications & Brand
LexisNexis South Africa
Tel. +27 (0)31 268 3284
Neliswa.Mncube@lexisnexis.co.za