The effect of voluntary business rescue

11 June 2020 657
Placing a company under business rescue has numerous legal consequences. It affects the company as well as all affected persons such as the shareholders, creditors, employees and in some instances third parties.

Within five business days after the board of directors of a company has passed a resolution to voluntarily commence with business rescue proceedings, a notice must filed with the Companies and Intellectual Property Commission (“CIPC”) recording the decision. Within two business days after the filing of the commencement notice, the company must appoint a business rescue practitioner. 
Compliance with the prescribed commencement regulations contained in the Companies Act 71 of 2008 (the “Act”), will ensure that a company is placed under business rescue. Accordingly, any attempts to challenge the start of business rescue on a procedural basis will fail. A successful application for business rescue will have the following primary legal consequences for the company and the affected persons:

  1. The business rescue practitioner temporarily takes full management control of the company and is responsible for the management of the affairs, business and property of the company. Whilst the company is under the supervision of the business rescue practitioner, the company may not conduct any activities without the written consent of the business rescue practitioner.
  2. In terms of the Act, an automatic moratorium is placed on any legal proceedings or executions against the company and its assets as well as on the exercise of rights by creditors of the company. The effect hereof is that no new legal proceedings may be instituted against the company nor may existing legal proceedings against the company proceed. There are, however, a few exceptions to this provision. For example, the business rescue practitioner may give his written consent that a party may continue with or institute proceedings against the company or the proceedings are of a criminal nature against the company or its board of directors.
  3. Sureties or guarantees that the company has signed in favour of another party may not be enforced during this time. It is, however, important to take note that legal proceedings against directors in their personal capacity (for example, where the directors have signed surety) can still proceed even though the company has been placed under business rescue.
  4. The business rescue practitioner may suspend contractual obligations of the company, whether in whole or partially, for the duration of the business rescue proceedings. The right of the business rescue practitioner to suspend the contractual obligations of the company applies to any agreement to which the company was a party at the commencement of the business rescue proceedings and to any contractual obligations of the company that may become due during the business rescue proceedings. The only exception to this provision is employment contracts in terms of which the company is the employer.
  5. The interests of the company with regards to any property that it lawfully possesses is generally protected and no person may exercise any right in relation to such property, irrespective of any agreement to the contrary or the actual ownership of such property, without the written consent of the business rescue practitioner.
The legal consequences as contemplated above will remain in effect for the duration of the business rescue proceedings. If executed correctly, the business rescue proceedings should ordinarily not exceed a period of three months, where after the company will either continue with its ordinary course of business or the business rescue proceedings will be converted into liquidation proceedings.

Stay tuned for our next blog – getting to know the business rescue practitioner.

*By Candice Reynders and Linki Scholtz

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