The South African economy has been significantly impacted by the Covid-19 pandemic. It is estimated that during the 2021 financial year alone, approximately four hundred companies were placed in business rescue. But what is business rescue, and why is it relevant to small business owners and entrepreneurs in South Africa?

This guide aims to provide small business owners and entrepreneurs with a broad overview of the legal regime governing business rescue in South Africa. It will begin with a brief explanation of the term business rescue and explain how business rescue typically commences. It will also touch briefly on the rights of a company’s creditors in the process and consider the nature and effect of a business rescue plan. It will conclude with an overview of the key steps in business rescue proceedings.

Broadly speaking, business rescue is a legal process aimed at facilitating the rehabilitation of a financially distressed company. The term “financially distressed” is defined in section 128 of the Companies Act, No. 71 of 2008 (the “Companies Act”). A financially distressed company is one which (i) appears to be reasonably unlikely to be able to pay all of its debts as they become due and payable within the immediately ensuing six months or (ii) a company which appears to be reasonably likely to become insolvent within the immediately ensuing six months.

The rehabilitation of a financially distressed company is facilitated in three steps. First, the company, its business and property together with the management of its affairs are placed under the temporary supervision of a business rescue practitioner (the “BRP”). Secondly, a temporary moratorium (or stay) on the rights of claimants (for instance creditors) is imposed. Finally, the rehabilitation process is facilitated through the development and implementation of a business rescue plan. If approved, this plan serves to restructure a company’s business, property, debt, affairs, other liabilities and/or equity. The statutory regime which governs business rescue and the steps described above can be found in chapter 6 of the Companies Act.

In broad terms, the primary aim of business rescue is to maximise the likelihood of the company continuing to exist on a solvent basis in an manner that balances the rights and interests of all relevant stakeholders. If this is not possible, the secondary aim is to restructure the business in a manner that results in a better return for the company’s creditors or shareholders as opposed to the immediate liquidation of the company. It is important to bear in mind that the liquidation of a company and placing the company into business rescue are two distinct processes. Business rescue is concerned with the preservation of the existence of a company for the benefit of its stakeholders, while liquidation is the winding up of an insolvent company, in terms of which the rights and interests of creditors are paramount. In order for any company to be a candidate for business rescue, it must be financially distressed and there must be a reasonable prospect of rescuing the company.

However, it should be borne in mind that it is not always possible to reorganise and rescue a company such that it can be brought back to trading on a solvent basis. While this may be an ideal situation in most cases, it is not always attainable. As such the business rescue proceedings may involve a takeover or sale of business, or the sale of certain non-core assets or departments.

Finally, despite its name, business rescue is only available to companies as defined in the Companies Act and close corporations. It is not available to unincorporated associations or entities such as sole traders, partnerships, business trusts or co-operatives.

The impact of business rescue on directors can vary depending on the specific circumstances of the case. Generally, the directors of a company in business rescue proceedings may experience some limitations on their powers and responsibilities. However, they may also be given the opportunity to participate in the development of a business rescue plan and to continue to manage the company during the process.

During the business rescue proceedings, the directors may experience limitations on their powers and responsibilities. They are not allowed to make any changes to the company's property or assets, without the consent of the business rescue practitioner. Additionally, any legal actions that the company was planning to undertake have to be put on hold, and any legal actions that have been instituted must be given to the business rescue practitioner to deal with.

Additionally, the directors may not enter into any new contracts or agreements without the consent of the business rescue practitioner, as these contracts may impact the company's ability to develop and implement a successful business rescue plan. The directors may also be required to provide regular financial and operational reports to the business rescue practitioner and to attend meetings of the company's creditors and shareholders.

However, directors may also be given the opportunity to participate in the development of the business rescue plan. They are expected to be part of the process of identifying the causes of the company's financial distress and to provide input on how to address these issues. The directors may also be able to continue to manage the company during the business rescue proceedings, as long as they do not take any actions that are detrimental to the company's ability to develop and implement a successful business rescue plan.

The directors of a company are also liable to face any legal actions and penalties for mismanagement of the company's affairs. Directors may also be held liable for any losses suffered by the company's creditors as a result of the business rescue proceedings.

In conclusion, the impact of business rescue on directors can be significant, as they may experience limitations on their powers and responsibilities and may also be held liable for any losses suffered by the company's creditors. However, they may also be given the opportunity to participate in the development of a business rescue plan and to continue to manage the company during the process. It is therefore essential for directors to be aware of their rights and responsibilities during business rescue proceedings and to seek legal advice to ensure that their interests are protected.

Business rescue can commence in one of two ways; voluntarily or compulsory.

Voluntarily commencement

If commenced voluntarily, this occurs by way of a resolution of the board of directors of the company. To do so the board of the company must have reasonable grounds to believe that the company is financially distressed and that there appears to be a reasonable prospect of rescuing the company.

If the process is commenced on an involuntary basis, this is done by way of a formal court application instituted by any “affected person”. Affected persons include creditors, shareholders, registered trade unions representing employees of the company, or employees not represented by a registered trade union. Each affected person has certain rights throughout the business rescue proceedings and are also entitled to participate in the hearing of an application to place a company in business rescue.

If the process is commenced on a voluntary basis, the company must:

• within five business days of adoption and filing of the relevant resolution with the Companies and Intellectual Property Commission (“CIPC”), publish a notice of the resolution and its effective date to each affected person and appoint a BRP; and

• within two business days of the appointment of a BRP, file a notice of appointment with CIPC. Within five business days of filing, the company must publish a notice of appointment to each affected person.

If the company fails to comply with any of these steps, the resolution adopted by the board lapses and the company may not file a further resolution for three months of adoption unless a court otherwise orders.

Involuntarily commencement

If the process is commenced on an involuntary basis, the applicant must serve a copy of the application on the company and the CIPC. The affected persons must be notified of the application.

A court may, after considering the application, grant the application if it is of the view that;

• the company is financially distressed; the company has failed to pay an amount in terms of an obligation; or

• it is otherwise just and equitable to do so.

In addition to any of the three reasons listed above, the court must also be of the view that there is a reasonable prospect of rescuing the company. If the order is granted, the company must notify each affected person of the court order within five business days after the date of the order.

The Companies Act gives each creditor certain rights in business rescue. Each creditor of the company is entitled to:

• receive notice of each court proceeding, decision, meeting or other relevant event concerning the business rescue;

• participate in any court proceedings arising during the business rescue proceedings; and

• make proposals for a business rescue plan to the BRP.

• Each creditor has the right to vote to amend, approve or reject a proposed business rescue plan. A creditor’s voting interest is determined by the value of the amount owed to that creditor.

• Creditors are entitled to form a creditors’ committee and be consulted, through this committee, by the BRP during the development of the business rescue plan.

It is imperative for creditors to note that a business rescue plan contemplated above, once adopted, is binding on all creditors, whether or not such creditor attended the meeting where the business rescue plan was adopted, voted in favour or against the adoption of the business rescue plan, or proved a claim.

Claims of creditors may be compromised in terms of an adopted business rescue plan, resulting in the discharge of a creditor’s claim and debt. Once the business rescue plan is adopted and implemented, creditors who acceded to the discharge of the whole or part of a debt in the business rescue plan, if so provided, lose the right to enforce the debt and creditors. In addition, once a business rescue plan is adopted and implemented, creditors are not entitled to enforce any debt owed by the company immediately before the commencement of business rescue, except to the extent provided for in the business rescue plan.

The participation of creditors through their voting interest in business rescue proceedings is critical.

First meeting of creditors

The first meeting of creditors must occur within ten business days of the appointment of a BRP. The meeting serves many purposes. At this meeting, (i) the BRP must inform the creditors whether he or she believes there is any reasonable prospect of rescuing the company; and (ii) the BRP may receive proof of creditors’ claims. It is also at this meeting where the creditors decide whether or not to form a creditors’ committee.

Business rescue plan

After consultation with the creditors and other affected persons, the BRP must prepare a business rescue plan which must be published within twenty-five business days of the BRP’s appointment (or such longer time as permitted by the court or the majority of creditors).

The BRP must thereafter convene a meeting to consider the business rescue plan within ten business days after publication. At least five business days before this meeting, a notice must be sent to all affected persons informing them of the date, time and place of the meeting, its agenda and a summary of the rights of affected persons to participate and vote at the meeting.

Meeting to consider and vote on the published business rescue plan

At this meeting, the BRP must:

• introduce the published business rescue plan;

• inform the meeting whether he or she continues to believe that there is a reasonable prospect of rescuing the company;

• invite a discussion, entertain and conduct a vote on any motions to either amend the published business rescue plan or direct the BRP to adjourn the meeting in order to revise the published business rescue plan; and

• call for a vote for the adoption of the published business rescue plan.

To be approved, the business rescue plan must be supported by creditors holding at least seventy-five percent of the voting interests that were voted and at least fifty-percent of the seventy-five percent must be from independent creditors voting interests (if any). If the plan is not approved on a preliminary basis, it is deemed to be rejected. The creditors holding the majority of voting interests can propose the preparation of a new plan, or the BRP can apply to court to have the vote set aside on the grounds that it is inappropriate.

Once approved, the business rescue plan is binding on the company, each creditor and every holder of security of the company.

ILandlords' rights during a tenant's business rescue proceedings are governed by the Companies Act of 2008 and the National Credit Act of 2005. In these proceedings, the landlord may have a natural hypothec, or a right to claim against the tenant's assets in the event of default on rent payments. The claim ranking of the landlord's natural hypothec depends on the specific circumstances of the case, as well as any relevant case law.

Under the Companies Act, a tenant may apply for business rescue proceedings if they are financially distressed and unable to pay their debts as they fall due. The Act allows for the appointment of a business rescue practitioner, who will manage the business rescue process and assist the company in developing a business rescue plan.

During the business rescue proceedings, the landlord's rights are limited in several ways. First, the tenant's obligations under the lease agreement are suspended until the business rescue plan is implemented. This means that the tenant is not required to pay rent or any other charges under the lease during this time.

However, the landlord is still entitled to receive reasonable compensation for the use and occupation of the property during the business rescue proceedings. This compensation is determined by the business rescue practitioner and is based on the fair market value of the property.

Additionally, the landlord is entitled to claim for damages suffered as a result of the tenant's default on the lease. This includes any losses incurred due to the tenant's failure to pay rent or other charges, as well as any damages to the property caused by the tenant.

The landlord's natural hypothec, or right to claim against the tenant's assets in the event of default, is also impacted by the business rescue proceedings. Under the Companies Act, the natural hypothec is ranked behind the claims of the business rescue practitioner and any secured creditors. This means that the landlord's claim may not be fully satisfied in the event that the tenant's assets are insufficient to cover all outstanding debts.

However, case law has established that the landlord's natural hypothec may be ranked ahead of the claims of unsecured creditors in certain circumstances. In the case of Commercial First National Bank v De Hoop, the court ruled that the landlord's natural hypothec should be ranked ahead of the claims of unsecured creditors if the tenant has failed to pay rent and has caused damage to the property.

Similarly, in the case of FirstRand Bank Ltd v Spatroc Civils (Pty) Ltd, the court ruled that the landlord's natural hypothec should be ranked ahead of the claims of unsecured creditors if the tenant has failed to pay rent for a period of three months or more.

Overall, landlords' rights during a tenant's business rescue proceedings are limited by the Companies Act and the National Credit Act. The landlord is entitled to receive reasonable compensation for the use and occupation of the property, as well as damages suffered as a result of the tenant's default on the lease. However, the landlord's natural hypothec may be ranked behind the claims of the business rescue practitioner and secured creditors, although case law has established that it may be ranked ahead of the claims of unsecured creditors in certain circumstances.

As explained above, the purpose of business rescue is to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. Small businesses which conduct business with companies and close corporations which either commence or are in business rescue, are encouraged to seek legal advice in respect of their rights as creditors in business rescue proceedings.