Business rescue is about the beginning, not the end

22 Jun 2020

At a recent sitting of a COVID-19 joint parliamentary committee, Rory Voller of the Companies and Intellectual Property Commission (CIPC) said there has been an increase in the number of companies applying for business rescue.

The week prior, Comair Ltd [JSE:COM] filed for voluntary business rescue and there has been a natural assumption by many that this is the end of Comair and low-cost airline Kulula. This is not necessarily true as business rescue probably gives the company its very best chance of survival.

Introduced into South African business legislation around 2011, and regulated by Chapter 6 of the Companies Act, Act 71 of 2008, ‘Business Rescue’ is a mechanism that provides financially distressed companies a moratorium on payment of claims by its creditors.

In much the same way that the current ‘Lockdown’ period buys our country’s health structure much-needed time to prepare for the big COVID-19 onslaught, the provision of a business rescue moratorium provides temporary relief to the distressed company.

Once a company has been place into business rescue by a court, the owners and shareholders must appoint business rescue practitioners to deal with the options now available to the board or stakeholders. The business rescue practitioner would have to draft a business rescue plan to be presented to all affected parties, including employees.

The company can now choose to make critical changes to their ownership, management or operations during the moratorium in order to aid the organisation’s rehabilitation. Any company that can successfully implement the business rescue plan will be able to avoid the negative impacts of closure, save some or all of its jobs, and continue to operate beyond an external crisis such as COVID-19.

Companies in financial distress or where turnaround strategies have failed can either be liquidated or file for a business rescue court order. The preferred route for any distressed organisation is to prevent a forced liquidation due to the negative effect that business closures and job losses would have on the community. So many companies that experience financial distress should first consider the feasibility of business rescue as a means for a financial rehabilitation.

Under Business Rescue, the company can begin to restructure its business agreements, property, equity, debt and liabilities to maximise the chances of the company’s solvency. Shareholder and investors would also prefer this legislated mechanism as it improves their chances of returns that would have otherwise been compromised by a liquidation order.

Not all companies that are in financial distress would be able to exploit the business rescue mechanism. Companies that cannot be financially rehabilitated should be liquidated rather than filing for business rescue. This means that all stakeholders should carefully understand the role and purpose of business rescue legislation, and the ideal time for its implementation.

Owners and CFOs should pay close attention to recognising financial distress in the business as early as possible, because the sooner a financially distressed business activates business rescue, the better the chances of that rescue being successful. Had Comair Ltd delayed the decision to apply for business rescue after analysing liquidity issues and financial ratios, the option might not have been available or possible. Business rescue practitioners, armed with legal, business and accounting qualifications, are now able to guide the company through the vital mediation, conflict resolution, restructuring, funding and decision-making processes timeously.

See also:

• The impact of business rescue on employees
• Reckless trading, fraud, contraventions and the onus on business rescue practitioners
• Planning for a resurgent hospitality market after COVID-19

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)