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Rescue Notes (Chapter 12) Final
Rescue Notes (Chapter 12) Final
Business rescue
Chapter 12
What is business rescue?
If companies cannot be competitive in the marketplace, then it is a satisfactory result that those companies are either taken over by
other, stronger companies, or wound up (liquidated).
Winding up a company means that the revenue previously generated by that company will be lost to the economy, and job losses will
have an extremely negative impact on the communities in which the business operated.
‘business rescue’ which is recognized in terms of Companies Act, 2008 is not meant to imply that the company or the business will
necessarily be saved by the prescribed procedure, however procedure obviously does strive to save failing businesses. Example, the
business of the company may ultimately be sold as a going concern in cases where the company cannot be saved; but if the sale of a
business as a going concern means that employees’ jobs can be saved and a better return be obtained for the creditors of the company,
then this would fall within the parameters of a corporate rescue
Business rescue proceedings are proceedings aimed to facilitate the rehabilitation of a company that is financially distressed by
providing for:
1. the temporary supervision of the company, and the management of its affairs, business and property, by a business rescue practitioner;
2. a temporary moratorium (stay) on the rights of claimants against the company or in respect of property in its possession; and
3. the development and implementation, if approved, of a business rescue plan to rescue the company by restructuring its business,
property, debt, affairs, other liabilities and equity (section 128(1)(b)).
Business rescue in South Africa saw its introduction as a part of Chapter 6 of the 2008 Companies Act.
Section 128(1)(b) of 2008 Act defines business rescue.
The aim of business rescue and affected persons.
What is the aim of business rescue?
The aim of business rescue is to restructure the affairs of a company in such a way that either maximises the likelihood
of the company continuing in existence on a solvent basis or results in a better return for the creditors of the company
than would ordinarily result from the liquidation of the company (section 128(1)(b)(iii)).
What is an affected person? Section 128(1)(a) lists the so-called ‘affected persons
Affected persons are important role players in the business rescue process. An affected person is a shareholder,
creditor, employee (or their representative) or a registered trade union representing employees of the company.
Affected persons have various rights throughout the business rescue process (section 128(1)(a)).
What is the test for business rescue?
Business rescue aims to provide help and recovery to companies in financial distress.
The test for whether or not a company should be placed in business rescue is whether or not the company is
financially distressed.
According to Section 128(1)(f) of 2008 Act a company will be financially distressed if:
1. 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. (commercial insolvency);
2. it appears to be reasonably likely that the company will become insolvent within the immediately ensuing 6 months.
(factual insolvency).
In Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd, the Supreme Court of Appeal
made it clear that any one of the two goals referred to in the definition of ‘business rescue’ would constitute valid
grounds for the commencement of business rescue proceedings and rank equally. Any of the two objectives may thus
be pursued from the start in business rescue proceedings, and it will not be necessary in every case to first attempt to
restore the company to solvency despite the wording of the Act that appears to imply such an interpretation.
How is a company placed in business rescue?
There are two main ways in which a company can be placed in business rescue, namely :
1. through a resolution by the board of directors of the company
when the board of directors of a company resolves that the company voluntarily commence business rescue proceedings
and be placed under the supervision of a business rescue practitioner (section 129 of the Act); and
The board of directors of a company may take a voluntary and formal decision to begin business rescue proceedings in
respect of the company under certain specified circumstances.
The business rescue resolution taken by the directors will become effective only when it is filed with (i.e, delivered to the
Commission). The rescue proceedings officially commence on the date of filing. However, a business rescue resolution
taken by the directors may not be adopted if liquidation proceedings by or against the company have already been initiated
2. By court order
when an affected person makes a formal application to court for an order placing the company under supervision and
commencing business rescue proceedings (section 131 of the Act), provided the company has not already been placed
under business rescue in terms of section 129, on the basis that –
the company is financially distressed;
the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or
contract, with respect to employment related matters; or
it is otherwise just an equitable to do so for financial reasons, and there is a reasonable prospect of rescuing the company.
1. Resolution by board of directors to begin business rescue. (The
procedure)
Procedure to commence business rescue by resolution
The company must file Form CoR123.1(Notice of decision to begin business rescue) with the CIPC
Accompanied by the resolution of the board of directors of the company (in which it resolves to commence business
rescue proceedings)
the company must then notify affected parties and appoint business rescue practitioner:
within five business days of filing the Form CoR123.1, resolution and statement, with CIPC,
publish notice of the resolution, together with a sworn statement as to the reasons why the company is financially
distressed, detailing the prospects of rescuing the company, to all affected persons; and
appoint a business rescue practitioner
after appointing a business rescue practitioner,
file a notice of the appointment of the business rescue practitioner within two business days with CIPC; and
publish a notice of the appointment of the business rescue practitioner within five business days after the notice is
filed.
Consequences of non-compliance with prescribed procedures
What happens if the time periods in respect of business rescues are not adhered to?
if a company fails to comply with the provisions of sections 129(3) and (4), the resolution lapses and is a nullity and the
company may not file a further resolution for a period of three months after the date on which the resolution was
adopted, unless a court, on good cause shown, approves of the company filing a further resolution (section 129(5)(b).
an affected person can make application to court in terms of section 130(1)(a)(iii) to set aside the resolution on the
grounds that the company has failed to satisfy the procedural requirements set out in section 129.
In Advanced Technologies and Engineering Company (Pty) Ltd, where the business rescue practitioner had been
appointed after the prescribed period of five days after filing of the board resolution had elapsed, the court held that s
129(5) required full compliance with the prescribed procedural requirements in sub-ss (3) and (4) and did not provide
for the possibility of mere substantial compliance being sufficient or for condonation of non-compliance.
If the procedural requirements of s 129(3) and (4) were not fully complied with, the resolution automatically lapsed and
became a nullity
How does the business rescue process unfold
Once a company commences business rescue proceedings either voluntarily or by an order of court the following
actions are prescribed by the Act:
the practitioner must investigate the affairs of the company as soon as possible after the commencement of
business rescue (section 141);
within ten business days after being appointed, the practitioner must convene a meeting of the creditors and a
meeting of the employees and advise the meeting, among other things, of the prospects of rescuing the company
(section 147 and 148);
the business rescue plan must be published by the company within twenty five days after the date on which the
business rescue practitioner was appointed (section 150); and
the business rescue practitioner must convene a meeting of the creditors and any other holders of a voting interest,
for the purpose of considering the proposed plan, within ten business days of the publication of the business
rescue plan (section 151)
Business rescue practitioner
A business rescue practitioner is a person appointed, or two or more persons jointly appointed, to oversee a company during business rescue.
The Companies Act, 2008 regulates the appointment and activities of a business rescue practitioner in a number of areas such as the qualifications
a person should have to be appointed as a practitioner, how they may be removed and replaced, their powers and duties and the remuneration
that a practitioner may receive.
Once appointed and licensed by CIPC (The Commercial and Intellectual Property Commission), the Business Rescue Practitioner has, during the
Company’s Business Rescue Proceedings, certain powers and duties.
The business rescue practitioner may not be appointed as the liquidator of the company if the company is liquidated when the business rescue ends.
POSITION OF THE BUSINESS RESCUE PRACTITIONER:
During a Company’s Business Rescue Proceedings, the Practitioner is an officer of the Court, and must report to the Court in accordance with any
applicable rules of, or orders made by the Court.
The Practitioner also has the responsibilities, duties and liabilities of a director of the Company.
LIABILITY OF THE PRACTITIONER:
During the Business Rescue Process of the Company, the Practitioner is not liable for any act or omission in good faith in the course of the exercise of
the powers and performance of the functions of Practitioner; but may be held liable for any act or omission amounting to gross negligence in the
exercise of the powers and performance of the functions of Practitioner.
The Practitioner may not be appointed as the liquidator of the Company if the Business Rescue Process fails and the Company is liquidated.
How is a business rescue practitioner remunerated?
In terms of section 143 the business rescue practitioner is entitled to charge the company for the remuneration and expenses incurred by the
practitioner in accordance with the tariff prescribed by the Act.
In addition to its remuneration as determined by the tariff, the business rescue practitioner may also conclude a contingency agreement with the
company for further remuneration
Qualifications of business rescue practitioner:
There are now six qualifications for appointment as a business rescue practitioner. The person must:
1. be a member in good standing of a legal, accounting or business management profession accredited by the
Commission
2. be licensed by the Commission to practice as a business rescue practitioner- section 138(2).
not be subject to an order of probation in terms of s 162(7)
4. not be disqualified from acting as a director of the company in terms of s 69(8)
5. not have any other relationship with the company that would lead a reasonable and informed third party to conclude
that their integrity, impartiality or objectivity is compromised by that relationship
6. not be related171 to a person who has such a relationship.
Powers, duties and liability of business rescue practitioner
1. Taking full responsibility for the management of the company:
“The Practitioner” (a) has full management control of the Company in substitution for its Board and pre-existing
management;
(b) may delegate any power or function of the Practitioner to a person who was part of the Board or pre-existing management
of the Company;
(c) may remove from office any person who forms part of the pre-existing management of the Company; or
(d) may appoint a person as part of the management of the Company, whether to fill a vacancy or not. (there are requirements
however as to who may be appointed by the Practitioner).
2. The practitioner must investigate the affairs of the company as soon as possible after the commencement of business rescue
(section 141).
3. Development of business rescue plan: business rescue practitioner has to develop a rescue plan for the company and, if the
plan is adopted, to see to its implementation. sec 140
4. The business rescue practitioner must convene a meeting of the creditors and any other holders of a voting interest, for the
purpose of considering the proposed plan, within ten business days of the publication of the business rescue plan (section 151)
Duties and liability of business rescue practitioner: The business rescue practitioner has all the duties and responsibilities of a
director and is liable for a breach of these duties in the same way as a director. The practitioner is an officer of the court and must
therefore report to the court as required by any court order.
Remuneration of business rescue practitioner
The business rescue practitioner is entitled to payment of a basic remuneration by the company in accordance
with a tariff prescribed by the Minister.
This remuneration must be determined at the time of appointment of the practitioner and may not exceed the
prescribed tariff for that size of company.
The practitioner may also enter into an agreement with the company to be paid an additional contingency fee if a
rescue plan is adopted or any specified result is achieved in the business rescue proceedings- Section 143(1)–(2).
The practitioner is also entitled to be reimbursed for actual costs or expenses reasonably incurred in carrying out
their functions.
In Murgatroyd v Van den Heever NNO, the court held that the Act did not require a practitioner to carry out all
their functions personally. A practitioner could therefore appoint advisors, valuators, auctioneers, forensic
accountants, lawyers, and other experts or persons to assist. The test whether the practitioner should be
reimbursed for expenses is whether they were reasonably necessary to carry out their functions and to facilitate
the conduct of the company’s business rescue proceedings, which will depend on the circumstances of each
case.
In a subsequent liquidation of the company, the business rescue practitioner must prove a claim for unpaid
remuneration like any other creditor and this claim must be paid out of the free residue.
Removal and replacement of business rescue practitioner
• The only way in which a business rescue practitioner can be removed from office is by an order of court – either in
terms of s 130 or in terms of s 139.
• The order in terms of s 139 may be made on application by an affected person or on the court’s own initiative, based
on any of the grounds stipulated in s 139(2). These grounds are:
• 1. incompetence or failure of the person to perform their duties as practitioner of the particular company,
• 2. failure to exercise the proper degree of care in the performance of the practitioner’s functions,• engaging in illegal
acts or conduct,
• 3. no longer meeting the requirements for appointment as a business rescue practitioner as set out in s 138,
• 4. having a conflict of interests or lack of independence, or
• 5. becoming incapacitated and unable to perform the functions of a practitioner and being unlikely to regain that
capacity within a reasonable time.
If a business rescue practitioner dies, resigns or is removed from office, a new business rescue practitioner must be
appointed by the company or, if applicable, by the creditor who nominated the previous one-sec139(3)
For example if Sam and Jane were affected persons in company XYZ (Pty) Ltd and they want to remove
Lerato as the business rescue practitioner because of her incompetence and failure to do her duties they will be
able to successfully remove and replace her if they prove the grounds in section 139.
Setting aside an appointment of business rescue practitioner
An affected person may also apply to court to set aside the appointment of the business rescue practitioner on the grounds that :
1. the business rescue practitioner does not meet the requirements set for a business rescue practitioner in s 138, or
2, Practitioner is not independent of the company or its management, or
3. Practitioner lacks the skills that are necessary to supervise the rescue of the particular company. NB: Since a lack of such skills can be
used as grounds for a practitioner’s removal, the question that arises is why s 138(1) does not include in the requirements for appointment
as a business rescue practitioner that the person must have the necessary skills required by the particular company’s circumstances.
If the court sets aside the appointment of the business rescue practitioner, it must appoint another business rescue practitioner who meets
the requirements of s 138 and is recommended by or is acceptable to the majority (in value) of recognised independent creditors of the
company who were represented in court.
Although the original business rescue practitioner was appointed by the board, the directors do not have the power to nominate the new
practitioner.
Instead Independent creditors nominate him (theses are the creditors, including employees, who are not related to the company, to a
director of the company or to the business rescue practitioner
An affected person may also apply to court for an order that the business rescue practitioner must provide security to protect the interests
of the company and any affected persons. Section 130(1)(c) of Act,
A director of the company who voted in favour of the resolution to start business rescue proceedings may not bring an application in their
capacity as an affected person for either the resolution or the appointment of the business rescue practitioner to be set aside, unless the
director can satisfy the court that they supported the resolution in good faith based on information that they later found to be false or
misleading
Setting aside business rescue resolution or appointment of business rescue practitioner
If, at any time during Business Rescue proceedings, the Practitioner concludes that there is no reasonable prospect
for the Company to be rescued, then the Practitioner must inform the Court, as well as the Company, and all
affected persons of this fact.
The Practitioner must then apply to the Court for an order to discontinue the Business Rescue proceedings and the
Company must be placed into liquidation.
If there no longer are reasonable grounds to believe that the Company is financially distressed, the Practitioner
must inform the Court, the Company, and all affected person.
If the Business Rescue process was confirmed by a court order, or initiated by an application to the Court, as
opposed to a resolution by the Board, then the Practitioner must make application to the Court for an order to
terminate the Business Rescue proceedings. If not, then the Practitioner must file a notice of termination of the
Business Rescue proceedings with CIPC.
The Effect of Business Rescue
When the business rescue process is underway, there will be considerable changes. The practitioner assigns roles
and responsibilities largely as he sees fit.
The directors will remain directors, albeit with restricted powers over the business. This continues until the
rescue process concludes, and no longer affects the company.
Shareholders’ interests will remain the same as agreed upon before the process began. But, this must also be in
line with the terms and conditions set out before the process started.
This may change as the company in financial distress takes its course over time. Though the company must still
meet its agreements between the affected parties.
The Effect of Business Rescue on directors of the company