Articles

Preventing abuse of the new business rescue process

by Steve - Posted 08 February 2012

In 2011, a new business rescue scheme was introduced in SA to help financially distressed companies avoid closing their doors for good. Companies in financial difficulty could gain some breathing room to draft and implement a plan to possibly salvage their business.

Part of the business rescue process is putting a temporary moratorium on the enforcement of any claims by the distressed company’s creditors. If a business rescue practitioner is appointed, they are empowered to unilaterally change the terms of existing contracts with the aim of relieving some pressure.

These new provisions are obviously very onerous on creditors, especially if they are themselves struggling financially. In the recent case of Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 (Pt) Ltd, the Western Cape High Court confirmed that applications for business rescue must be carefully scrutinised by the courts as the process could be open to abuse.

The new Companies Act provides that a court may make an order placing a company under supervision and commencing business rescue proceedings if it is satisfied that:

a)    the company is financially distressed;

b)    the company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment-related matters; or

c)    it is otherwise just and equitable to do so for financial reasons; and

d)    there is a reasonable prospect for rescuing the company.

If the court is not so satisfied, it may dismiss the application and can place the company under liquidation.

What is meant by "reasonable prospect"?

In the Southern Palace case, the court said that when applying for business rescue, the applicant should give full details of the reasons for the company’s demise or failure and provide a concrete remedy for that demise or failure that has a reasonable prospect of being sustainable.

Some concrete and objectively ascertainable details need to be given which goes beyond mere speculation about the following:

a)    the likely costs of running the company’s core business;


b)    the likely availability of the necessary cash resources to enable the company to meet its day-to-day expenses;

c)    details of any loan capital or other facilities being relied on, including the amount and payment terms for such facilities;

d)    the availability of any other necessary resource, such as raw materials and human capital;

e)    the reasons why it is suggested that the proposed business plan will have a reasonable prospect of success.

The court confirmed that a business plan which proposes merely substituting one debt for another without there being any new basis for believing that the company will be in a better position to repay that debt will not suffice.

The court found it significant in the Southern Palace case that the application for business rescue had not been made by the board of directors of the distressed company and that the information placed before it was ‘’vague and undetailed’’.

There was no concrete plan available for it to consider and, in fact, a previous plan that had been implemented had failed. The court held that there was no reason to believe that there was any prospect of the business of the company being restored to a successful one.

Our R0.02:

If one of your debtors is applying for business rescue, make sure you get hold of a copy of the application to check whether sufficient information has been given to show that there is a reasonable prospect of the distressed company being rescued. If not, you should consider opposing the application.

If you want to apply for business rescue, make sure you provide the court with detailed information along the lines set out in the Southern Palace decision.