Is Business Rescue A Viable Option?

Many directors resolve to file for business rescue nowadays, resulting in more and more people being affected by the subject matter on a daily basis. Together with the increase in business rescue cases and the diverse outcomes experienced in practice, some uncertainty can be created amongst directors, shareholders, and employees, resulting in many questioning the viability of business rescue proceedings.

Before attempting to clarify business rescue proceedings, let’s consider what the legislator’s objective was when business rescue, as a legal remedy, was introduced into our law. The Companies Act of 2008, which regulates the business rescue process, states that the objective of a business rescue can be twofold: to rescue the company by (1) restructuring its affairs, business, property, debt, other liabilities, and equity, in a manner that maximizes the likelihood of the company continuing in existence on a solvent basis or (2) if it is not possible for the company to continue on a solvent basis, to take action that would result in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

Furthermore, bearing in mind the two objectives mentioned above, the requirements for a company to commence business rescue are as follows: “If it appears to be reasonably unlikely that a company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or if it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months, the company is deemed to be financially distressed.” A company that is financially distressed, qualifies to commence with business rescue proceedings.

Considering the wide scope in terms of the two possible objectives of business rescue proceedings and the low barrier to entry in terms of requirements to commence, it is understandable that success would be defined on a case-by-case basis. In other words, in one instance the success of a particular business rescue may mean that a company is restructured and continues on a solvent basis, and in another instance, success may mean that the company will not continue in existence, however its creditors will receive a better dividend than what they would have received when the company was liquidated. Although the last-mentioned option may not sound successful to the general public when compared to a liquidation scenario, it is a more successful outcome for all affected parties i.e. creditors, employees, and shareholders.

It could therefore be argued that the term “business rescue” may be misconstrued by many, thinking that the success of the rescue is only linked to a company being successfully restructured and continuing in existence on a solvent basis. However, in most cases, the definition of success is much broader and dependent on the specific circumstances.

Article by Enrico Acker, (M. Com, Dip. Insolvency Law) – Insolvency and Business Rescue Practitioner