Chapter 6 of the Companies Act, No. 71 of 2008 (“Companies Act”) allows for companies to enter into business rescue proceedings with the aim to assist the rehabilitation of a company that is financially distressed.
Such rehabilitation involves the development and implementation of a business rescue plan which provides for the restructuring of the company’s affairs, business, property, debt, other liabilities and equity in such a matter that maximises the likelihood of the company to be able to continue existing on a solvent basis.
If it is determined that it is not possible for the company to continue to exist on a solvent basis, the business rescue plan must be formulated in a way to provide a better return for the company’s creditors and/or shareholders, in order to avoid the immediate liquidation of the company.
Section 145 of the Companies Act allows for creditors, as affected persons, to participate in business rescue proceedings, which is why it is critical for creditors to understand the extent to which they are entitled to be involved in the development and implementation of a business rescue plan including their obligations to the company during such proceedings.
Each creditor is entitled to, amongst other things, participate in a company’s business rescue proceedings by submitting proposals for a business rescue plan to the appointed business rescue practitioner. In exercising this right, each creditor is entitled to cast a vote to amend, approve or reject a proposed business rescue plan.
Each secured or unsecured creditor has a voting interest equal to the value of the amount owed to that creditor. Concurrent creditors, who would be subordinated in a liquidation, have a voting interest equal to the amount that the creditor could reasonably expect to receive in the liquidation of the company.
A business rescue plan is approved if it is supported by more than 75% (seventy-five percent) of the creditors’ voting rights (in relation to the votes casted) and if such votes include at least 50% (fifty percent) of the votes casted by independent creditors. Once the business rescue plan has been approved, it becomes binding on all creditors of the company.
If the proposed business rescue plan is rejected, each creditor has the further right to suggest the development of an alternative plan or, alternatively, present an offer to acquire the interests that any or all of the other creditors may have in the company.
Notwithstanding the fact that creditors are entitled to participate in the business rescue proceedings of the company. All creditors, under the management of the business rescue practitioner, are required to comply with their obligations to supply goods or services to the company as they did before to the commencement of business rescue proceedings if there is no agreement between the company and the creditor regulating instances of insolvency or business rescue.