Business rescue has become a popular topic in corporate and legal circles alike. Many high profile cases such as those of Top-TV and 1Time Airline have been publicly broadcasted on various media platforms. Most cases which have been brought before a court to obtain an order to commence business rescue proceedings have been rejected as companies must prove that a reasonable prospect of achieving a rescue exists. In order to achieve this, it has been advised that accompanying their application to the court, the distressed company should submit a plan setting out the reasonable prospect of rescuing the company.

It must be kept in mind that although the age of creditor supremacy has come to an end, one must still take into consideration the interest of creditors during business rescue proceedings. In the case of Southern Palace Investments 265 Pty Ltd vs Midnight Storm  Investments  386 Pty Ltd 2012 2 SA  423 the court emphasised the importance of seriously considering the interests of creditors as well as other stakeholders stating that business recue proceedings must be conducted in such a manner that balances the rights of all relevant stakeholders.  The court further decided that a complete recovery of the company is neither a necessity, nor the aim, merely that better returns be gained by adopting the rescue procedure.

DEFINITIONS

Chapter 6 of the Companies Act 71 of 2008 (“the Act”) begins with section 128 which contains definitions which are specifically relevant to this Chapter. Amongst these definitions, the following may be found, which are particularly important in the understanding of this article:

2.1. Business rescue: proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:

2.1.1. temporary supervision of the company and its management,

2.1.2. temporary moratorium on the rights of claimants against the company,

2.1.3. development and implementation of a business rescue plan.

2.2. Affected person: these include the shareholders and creditors of the company, any registered trade unions representing

……the company’s employees as well as the employees themselves.

2.3. Financially distressed: this will mean that a company is reasonably unlikely to pay all of its debts as they become due

……and payable in the next 6 months or that it is reasonably likely that the company will be insolvent within the next 6 months.

METHODS OF INITIATING PROCEEDINGS

Business rescue proceedings may be commenced in two way namely; by a resolution of the board of directors or by a court order. This position places a higher burden on the directors as will be discussed below.

3.1. Resolution by the board of directors (section 129 of the Act)

If the directors of a company find that a company is experiencing financial distress and the directors are of an opinion that there exists a reasonable prospect of rescue, they may pass a resolution of the board to begin business rescue proceedings.

The King Code of Governance for South Africa 2009 (III) provides in Principle 2.15 that a board of directors must consider business rescue proceedings if a company is experiencing financial distress. If the directors do not comply with this, it could constitute a breach of a director’s duty of care and the directors could result in the directors being held personally liable. The case of Philotex Pty Ltd  v Snyman; Braitex Pty Ltd vs Snyman 1998 (2) SA 138 (SCA), it was decided that this could be seen as reckless trading or trading with the intent to defraud.

3.2. Court order (section 131)

In the event that the company has not taken a resolution as per S 129 an affected person may apply to court for an order placing the company under supervision and commencing business rescue proceedings.  The court may grant such an order of it is satisfied that:

a)      The company is financially distressed; or

b)      The company has failed to pay an amount due to a government authority in terms of a statutory obligation in respect of its

……..employees, such as unemployment insurance or money due in terms of a contractual obligation; or

c)       It is otherwise just and equitable to do so for financial reasons; and

d)      There is a reasonable prospect of rescuing the company

The case of WG Koen vs Wedgwood Village Gold & Country Estate (Pty) Ltd (Western Cape High Court, 24850/2011) confirmed that affected persons must place solid evidence before the court to prove that the business rescue practitioner would be able to draft a viable business rescue plan and that vague and speculative arguments would not suffice.

One problem that must be addressed by legislation is the scenario where a minority of directors vote for a business rescue plan and this is rejected by the majority vote. In this situation, a director cannot apply to a court to commence proceedings as the director in his capacity as a director is not considered an affected person. Should at a later point the directors be held liable for not implementing a business rescue plan as considered above, the minority directors who voted in favour thereof are pooled in the same category and are equally liable.

MORATORIUM

Section 133 of the Act provides that no legal proceeding may be continued or commenced against a company for the duration for the duration of the business rescue proceedings. This moratorium is subject to certain exceptions such as where the practitioner gives written consent or the court gives permission to do so. Similarly a guarantee or surety given by a company in favour of another person may not be enforced during business rescue without leave of the court and prescription shall not run in this period.

It is therefore important to distinguish when the proceedings commence as the moratorium will commence automatically at this point and creditors can no longer enforce their claims. Where the directors resolve to place the company under business rescue, the process begins on the date of the filing of the resolution and where a court order is applied for the process is said to begin upon application by the affected person.

The purpose of this moratorium is to give the company some breathing space while the practitioner attempts to restore the finances of the company. Judge Tolmay, in the case of Madodza (Pty) Ltd vs ABSA Bank Limited 38906/2012, after having considered international law, ruled that the end result sought to be achieved by business rescue is to have a business continue as a going concern.

Having considered the above, it begs the question; can companies or individuals who have stood surety for a company undergoing business rescue be held to the surety and expected to fulfil the obligations thereof? Section 133(2) of the Act reads thus: “During business rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except with leave of the court and in accordance with any terms the court considers just and equitable in the circumstances.”.

There has been some confusion regarding the interpretation of this clause In the case of Investec Bank Ltd v Bruyns (19449/11) [2011] ZAWCHC 423; 2012 (5) SA 430 (WCC) the court held that this section was not tautologist and that it applied to sureties granted in favour of companies undergoing business rescue. The court further held that this question relates to section 133(1) and is better answered by considering whether the defence is on in personam  or in rem. The defence arises from a personal liability and therefore the former applies. As such, there is a valid and existing obligation which can be upheld by the consent of the business rescue practitioner or order of court.