Did you know that business rescue proceedings can be used as a strategic tool to assist your business in negotiating with creditors?

The economic effects of the COVID-19 pandemic, the national lockdown and the global recession are being experienced by most businesses across all sectors in South Africa. As a result, many otherwise successful and profitable businesses are experiencing varying degrees of financial pressure and distress.

Business rescue proceedings in terms of the Companies Act 71 of 2008 is an effective tool that could be said to have been designed specifically to assist businesses during these troubling times to facilitate their rehabilitation, solvency and profitability in future.

When a company formally engages in business rescue, several mechanisms become available to assist the business in planning for its survival. One such mechanism is the automatic suspension of all legal proceedings or executions against the company, its property and its assets, as well as a suspension of the rights of the creditors of the company.

This suspension of legal proceedings against the company is generally applicable to all the company’s creditors (including secured and unsecured creditors). Such a ‘freeze’ on their rights against the company remains in place until a business rescue plan has been adopted by the creditors and the creditors have been settled in terms of the plan, or, until the business rescue process ends, whichever occurs first.

It is important to bear in mind that the rights of creditors are not significantly altered by the business rescue proceedings, but are temporarily suspended to the extent that the creditors may not enforce their rights while this business rescue process is ongoing.

This suspension of creditors’ rights is essential for the business rescue process, as it allows companies the necessary breathing room to reorganise and reschedule their debts and liabilities. Such a respite provides the business rescue practitioner the opportunity to formulate a business rescue plan to rehabilitate the company and the company to continue with its business and operational activities.

It should be kept in mind that written contracts with creditors may make provision for and stipulate specific arrangements in the event that business rescue is engaged or insolvency proceedings arise. These arrangements (if applicable) should be independently considered and dealt with by the business rescue practitioner.

Practically, when business rescue proceedings commence, creditors will not automatically be in a position to stop supplying goods and services to the company, and contractual arrangements and performances will remain in place unless the creditors elect to terminate their agreement with the company, although they will not be in a position to institute legal action against the company to enforce their rights while business rescue is ongoing.

While the rights of both secured and unsecured creditors are suspended during the business rescue process, it is likely that unsecured creditors will be hesitant to continue to supply goods or services to the company on the same basis as was done before the business rescue proceedings commenced, given that their claims will be satisfied last in accordance with the order of preference for the payment of claims as set out by the Companies Act.

Business rescue therefore serves as a strategic tool to convince creditors and especially unsecured creditors to come to the table and negotiate with the business rescue practitioner regarding concessions for the satisfaction of their claims and arrangements for them to continue delivering on their obligations. Once the business rescue practitioner has formulated a business rescue plan, all the creditors of the company will be entitled to vote on the approval and implementation of this plan. If approved (a vote of more than 75% of the creditors, with 50% of such voting rights being exercised by independent creditors is required for approval) the business rescue plan is binding on all of the creditors of the company.

In general, creditors would be open to supporting a business rescue plan in light of the fact that, in most instances, such a plan would make provision for the distribution of a business rescue dividend that would be more than the creditors would receive if the company was to close its doors and undergo liquidation.

As soon as a business rescue plan has been approved by the creditors and implemented, none of the creditors will be entitled to enforce any debt owed to them by the company, which existed immediately before the business rescue process commenced unless the business rescue plan stipulates otherwise.

Business rescue can therefore serve as a valuable tool in difficult economic times to assist businesses in bringing their creditors to the table to feasibly plan a way forward for ensuring the rehabilitation of the company and its future success.

Although we have used our best efforts to ensure that all information contained in this communication is accurate as at the date hereof, we cannot guarantee the accuracy thereof and recommend verification thereof before use.