Article: Is business rescue a COVID-19 remedy?
The COVID-19 pandemic has started to have a devastating impact on the economy and it seems clear that most businesses will be affected. Governments around the world has had to take drastic action to “flatten the curve” and stem the tide of infections. This will continue to have an adverse impact on business operations and one can expect challenging business operations for some time to come.
Directors of companies are encouraged to take positive, practical and hands-on steps to carry businesses through these challenging times. Some options that businesses may wish to consider include salary cuts, restructuring of loans, retrenchment of staff and applications for funding.
When a company is in financial distress, one of the options that should be considered is business rescue. Business rescue was introduced by Chapter 6 of the Companies Act 71 of 2008 as a means of facilitating the rehabilitation of a financially distressed company in a manner that balances the rights and interests of creditors, employees and shareholders.
Business rescue involves three important aspects.
- A business rescue practitioner is appointed to temporarily supervise the company and manage its affairs.
- The rights of creditors (including taking legal action) are temporarily suspended during the business rescue
- A business rescue plan is developed and implemented.
There are fees payable to a business rescue practitioner, which is one of the aspects which should be negotiated and considered before implementing business rescue. One has to avoid business rescue turning out to be an “expensive liquidation” when there are low prospects of a business actually being salvaged. Globally, business rescue has a 5% success rate, whilst the success rate in South Africa is currently estimated at approximately 10 – 12%.
Directors of companies should also consider “compromise” as an alternative to Business Rescue. It is a less expensive tool provided by the Companies Act. According to Section 155 of the Act, a business may be permitted to enter into a compromise or arrangement (otherwise known as a “restructuring agreement”) with its creditors. Business Rescue is not generally advisable (as the first step) for smaller companies, because it is far more costly than compromise. The company would have to invest in the
Business Rescue Practitioner’s fees and administration costs. These could be wasteful in circumstances where a compromise could have been reached.
Pieter J van Zyl
Bate Chubb and Dickson Inc.
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