The Legal
Process Explained

A brief overview of the Legal Process

What does business rescue mean in the eyes of the law?

Quite simply, it is as the name suggests, a rescue tool provided by the law for your struggling business which could survive should it be given some breathing space from its creditors. The procedures, if followed correctly, can bar the creditors from executing their claims and closing your business. With the help of BRP, enabled by the new legislation, your business could be restored to a successful concern.

What entities can utilise the business rescue procedure?

With the exception of external companies, any company or close corporation that is in financial distress may make use of the business rescue procedures.

There are three options available whereby business rescue can be implemented:

Section 129

The first option, also known as voluntary business rescue, is by way of a resolution adopted by the board of directors of a company in terms of Section 129. The board of directors must believe that the company is financially distressed and that there appears to be a reasonable prospect of rescuing the company.

A company is financially distressed if –

  • it is reasonably unlikely to be able to pay all of its debts as they fall due and payable within the immediately ensuing six months, or
  • it is reasonably likely that the company will become insolvent within the immediately ensuing six months.

This option cannot be followed if liquidation proceedings have been instituted by or against the company.

There are strict procedural requirements and time restraints that have to be followed such as:

  • The Resolution is not effective until it is filed with CIPC.
  • Within 5 days of being adopted and having filed a resolution company must publish notice to every affected person including sworn statement of relevant facts, and appoint a consenting Business Rescue Practitioner. The company is to file a notice of appointment within 2 days and  publish the decision to Affected Persons within 5 days.

Failure to comply with the procedure nullifies all the business rescue proceedings and another such resolution can only be filed after three months unless, on application, it is court ordered.

A company that has applied for business rescue cannot resolve or begin liquidation proceedings unless the resolution to commence business rescue proceedings has lapsed or the Business Rescue Proceedings have ended.

If the Board of directors reasonably believes a company is distressed but has not resolved to embark on business Rescue, it is obliged to advise the Affected Persons of the applicable criteria and reasons for not adopting a business rescue resolution.

Section 130 – Objections to company resolution

Between the adoption of a resolution to commence business rescue and the Business Rescue Plan being adopted, an Affected Person may apply to court for an order setting aside:

A.  The resolution on the following grounds:

  1. There was no reasonable basis for the belief that the company was financially distressed.
  2. Business Rescue holds no reasonable success prospects.
  3. The procedures such as filing and time periods were not complied with.

B. The appointment of the Business Rescue Practitioner on the following grounds:

  1. He does not satisfy eligibility criteria.
  2. He does not satisfy independence criteria.
  3. He does not satisfy skill requirements relative to the company’s circumstances.

The Court can also be requested to order the Business Rescue Practitioner to provide security in the amount and on the terms at the courts discretion.

An Affected Person who, as a director, voted in favour of a resolution, cannot apply for A or B above without proving that his initial support was in good faith.

Any such applications to court are to be on notice to the company, CIPC and all Affected Persons and each Affected Person is entitled to participate in the hearing of these applications.

The Court has a wide discretion in these matters and may order the liquidation of the company.

If the court sets aside the appointment of the Business Rescue Practitioner, it must appoint an alternative practitioner recommended by the majority of the independent creditors and must allow the new appointee sufficient time to consider the prospect of the rescue.

Section 131

The second option, also known as compulsory or court ordered business rescue, is when an affected person applies to court to have the company placed under supervision and commence business rescue proceedings.

An “affected person” is:

  • a shareholder of the company,
  • a creditor of the company,
  • any registered trade union representing the employees of the company, or
  • the employees themselves.

The Applicant must notify the company, CIPC and all the Affected Persons and each Affected Person is entitled to participate in the hearing of the Application.  The Court has a wide power and discretion in hearing such an Application.

Any liquidation application pending at the time of the Application is stayed until the Business Rescue Application is dispensed with or the Business Rescue Proceedings have been concluded.

The Court Order envisaged in Section 131 can also be made at any time during liquidation proceedings.

A Company which has so been placed under Business Rescue by Court Order may not apply for liquidation until the Business Rescue is concluded.

Each Affected Person must be notified within 5 days of such and Order being granted.

Section 132 – Duration of Business Rescue

Business Rescue commences upon the filing of a resolution in terms of Section 129 or upon the granting of a Court Order in terms of Section 131.

Business Rescue comes to an end if:

  • it is set aside by the Court.
  • it is converted to liquidation by the Court.
  • the Business Rescue practitioner files a Notice of Termination of Business Rescue Proceedings
  • the Business Rescue Plan has been rejected and no Affected Party has acted to extend in terms of Section153.
  • the Business Rescue Plan has been adopted and the Business Rescue Practitioner has filed notice of Substantial Implementation

If Business Rescue Proceedings have not ended within three months, or as extended by the Court on application by the Business rescue Practitioner, he must prepare a report at end of each subsequent month and delivered it to each Affected Person and CIPC.

Section 133 – Moratorium on Legal Proceedings against Company

No legal proceedings, including enforcement action, may be instituted against the Company, except:

  • with written consent of the Business Rescue Practitioner
  • with Leave of the Court (possibly conditionally granted)
  • as a set off against claims by the Company
  • criminal proceedings against the Company, directors or prescribed officers
  • proceedings against over a property right over which the Company is a trustee.

During Business Rescue, any guarantee or surety in favour of any person is unenforceable unless Court ordered and any prescription period is extended by any such interruption.

Section 134 – Protection of property interests

During the Business Rescue the Company’s property may only to be disposed of:

  • if it is in the ordinary course of business
  • as a bona fide transaction at arms length and at fair value approved in advance by the Business Rescue Practitioner.
  • in a transaction sanctioned under an approved Business Rescue Plan.

Any transaction that commenced prior to Business Rescue is not included for this purpose.

No rights may be asserted on property in the Company’s possession save with the Business Rescue Practitioner’s consent, not unreasonably withheld, in the context of the Business Rescue’s purpose and the Company’s circumstances, the nature of the property and pertinent rights.

If during Business Rescue, a Company wishes to dispose of property over which another holds security:

  • prior consent is to be obtained unless proceeds will fully discharge any indebtedness
  • company must promptly pay any liability and discharge the debt
  • company must provide security for proceeds of the sale.

Section 135 – Post Commencement Finance

Any amount owing to an employee becoming due during Business Rescue is deemed to constitute post commencement finance with preference over all claims bar the Business Rescue Practitioner’s remuneration and costs of Business Rescue.

Any other Post commencement finance may be secured by unencumbered assets of the company and ranks preferent to unsecured claims.

Ranking of Post commencement finance:

  • Business Rescue Practitioner fees and costs even over secured post commencement finance.
  • Employees, who are treated equally.
  • All other post commencement finance.
  • All unsecured claims.

If the Business Rescue process is superseded by a liquidation order, the above preferences remain save for the costs of liquidation.

Section 136 & 137 – Effect of Business Rescue on employees, contracts, shareholders and directors

Despite any provisions in an agreement to the contrary:

  • During Business Rescue employees immediately prior to Business Rescue continue their employment on the same terms and conditions except those who leave due to ordinary attrition or in accordance with normal labour law save if employees and company legally agree to different terms and conditions.
  • Any retrenchment contemplated in terms of Business Rescue is subject to the Labour Relations Act and other related legislation.

Subject to the relevant provisions of the Insolvency Act, the Business Rescue Practitioner may cancel or suspend in whole, part or conditionally any provision of an agreement with the Company at the start of Business Rescue other than an agreement of employment. The other party will only have a damages claim against the company.

If liquidation proceedings are converted to business Rescue, the liquidator is a creditor for the fees for work performed and expenses incurred.

During Business Rescue, any alteration in issued securities or classification or transfer, other than ordinary course of business, are invalid. The exceptions to this are:

  • If it is Court ordered
  • If it is contemplated in an approved Business Rescue Plan

During Business Rescue, directors:

  • Continue to act but are subject to the Business Rescue Practitioner’s authority.
  • Exercise management functions under the instructions/directions of the Business Rescue Practitioner.
  • Are still bound by Section 75 in terms of personal financial interest of themselves or related parties.
  • To the extent of acting with the practitioners direction, they are relieved from S76 (Standards of conduct) and S77 (Liability) except for S77 (3) (a), (b) and (c).
  • Must attend to the Business Rescue Practitioner’s requests at all times and provide any reasonable requested information.

Any action by a director which would require the Business Rescue Practitioner’s approval and has not been obtained is void.

The Business Rescue Practitioner may apply to Court for an order removing a director on grounds that:

  • He failed to comply with Chapter 6 requirements.
  • By acting or failure to act, he has impeded or is impeding the Business Rescue Practitioner in the fulfilment of his powers and functions or his management of the company or the development or the implementation of the Business Rescue Plan.

The above is in addition to Section 162 rights to have a director declared delinquent.

Section 139 – Removal and Replacement of a Business Rescue Practitioner

A Affected Person may apply to court for an order in terms of Section 130 to remove a Business Rescue Practitioner on the following grounds:

  • Incompetence or failure to perform.
  • Failure to exercise proper degree of care
  • Engaging in illegal acts.
  • Failure to satisfy qualification requirements.
  • Conflict or lack of independence.
  • Incapacity with unlikelihood of resolution in reasonable time.
  • Company or creditor who nominated the Business Rescue Practitioner to appointment, is to nominate a new practitioner in the event of death, resignation or removal subject to the right of Affected Person to apply to have such an appointment set aside.

Section 140 – General power and duties of Business Rescue Practitioner

Section 140 is to be read in detail but to summarize, the Business Rescue Practitioner has wide management powers with emphasis on:

  • Development of Business Rescue Plan and implementation thereof

A business Rescue Practitioner has the responsibilities and bears the liabilities of director and may not use parties having conflicts.

If Business Rescue concludes with liquidation, the Business Rescue Practitioner may not be appointed liquidator.

Section 141 – Investigation of Company Affairs.

At the soonest possible time after appointment, the Business Rescue Practitioner must investigate the affairs and determine the rescue prospects.

If he concludes that no reasonable prospects for Business Rescue exist, he is to inform the court, company and Affected Person as prescribed and apply to court for a liquidation order.

If he concludes at any time that company is no longer financially distressed, again he must inform the court, company and Affected Person and if the Business Rescue was court initiated, apply for a court order terminating it and if not, file a Notice of Termination.

If he concludes that before Business Rescue there were:

  • Voidable transactions or failures by directors in material obligations, the Business Rescue Practitioner is to direct management to take steps to rectify.
  • Reckless trading, fraud or other contraventions of law, are to be reported to the appropriate authorization (SAP, SARS etc.) and management must be directed to take steps to rectify including recovery of any misappropriated assets.

The court may make an appropriate order, including liquidation.  The directors are to co-operate with Business Rescue Practitioner (Section 142).

As soon after Business Rescue commencement as possible, each director is to deliver to the Business Rescue Practitioner all records in his possession as well as informing him of any known whereabouts of any other records.

  • Material transactions past 12 months.
  • Court, arbitration or other proceedings against the company.
  • Assets and liabilities of the company, income and disbursements of the past 12 months.
  • Number of employees and any collective or other agreements relating to their rights.
  • Debtors of and obligations to company.
  • Creditors and rights against company.

No liens are enforceable as against Business Rescue Practitioner over company records.

Section 143 – Remuneration of Business Rescue Practitioner

The Business Rescue Practitioner is entitled to charge on a tariff.

He may propose further remuneration, contingently based. This is valid and binding if approved by a majority of creditors voting interests and a majority of security holder rights as they would be entitled to at a winding up distribution.

A creditor or shareholders having voted against the fee structure may apply to court within 10 days for an order setting it aside on grounds of if not being just and equitable, or egregiously unreasonable in the company’s circumstances.

The Business Rescue Practitioner’s fees rank first against secured and unsecured creditors.

Rights of Affected Persons

Section 144 – Employees

During Business Rescue, employees are represented through a union and those that are not are entitled to make representations directly or be represented by proxy.

Any unpaid amounts due prior to Business Rescue are seen as a preferred unsecured creditor.

During Business Rescue every registered trade union and every unrepresented employee is entitled to;

  • Notice of all court proceedings, decisions, meetings, and other relevant events at the workplace and at the head office of the union.
  • Participate in court proceedings during Business rescue.
  • Form a committee of employees’ representatives.
  • Be consulted by the Business Rescue Practitioner during the development of the Business Rescue Plan, and be afforded sufficient opportunity to review and prepare submission thereon.
  • Be present and make submissions to holders of voting interests before any vote on a Business Rescue Plan
  • Vote with creditors on motion to approve a Business Rescue Plan to the extent that an employee is a creditor.

If a proposed Business Rescue Plan is rejected:

  • Propose development of an alternative Business Rescue Plan (Section153).
  • Present an offer to acquire rights of one or more Affected Persons (Section153).

A medical scheme or pension or provident scheme for benefit of past or present employees is an unsecured creditor to the extent that:

  • Amount due to trustees is prior to Business Rescue.
  • In defined benefit pension scheme the present value at commencement of Business Rescue of any unfunded liability under scheme.

All rights in this section are additional to other rights held.

Section 145 – Creditors

Entitled to:

  • Notice of court proceedings, meetings, decisions or other Business Rescue relevant proceedings.
  • Participate in Business Rescue proceedings to the extent provided for.
  • Formally participate in Business Rescue in terms of Chapter 6.
  • Informally participate in Business Rescue by making proposals to Business Rescue Practitioner.

Additionally each creditor has the right to vote to amend, approve or reject the Business Rescue Plan.

If the Business Rescue plan is rejected to:

  • Propose the development of an alternative plan or to present an offer to acquire interest of other creditors.
  • Creditors may form a creditors committee with which business Rescue Practitioner must consult during Business Rescue process

In respect of any decision requiring the support of creditors voting interest, votes are proportional to the amount owed by a company to the concurrent creditor in a liquidation reduced to a reasonable liquidation distribution.

The Business Rescue Practitioner must:

  • determine if the creditor is independent.
  • get a suitably qualified person to appraise likely distribution
  • give written notice of such an appraisal 15 days before meeting

Within 5 days of receipt, the affected person may apply to court to:

  • review Business Rescue Practitioner’s determination that a creditor is independent or not
  • review, re-appraise and revalue the voting unit.

Section 146 – Participation by holders of the company’s securities

During Business Rescue, each holder is entitled to :

  • notice of court proceedings, decisions, meetings or other Business Rescue relevant events
  • participate in court proceedings during Business Rescue
  • formally participate in Business Rescue proceeding in terms of Chapter 6
  • vote for approval/rejection of Business Rescue plan, if rights of the class of securities could be altered as a result.

If Business Rescue Plan rejected:

  • Propose development of alternative plan.
  • Present offer to acquire part or all creditors or other holders of securities.

Section 147 – First meeting of creditors

The first meeting of creditors is to be convened within 10 days of the appointment by Business Rescue Practitioner at which he:

  • Informs the meeting of whether the prospects of rescue are reasonable.
  • Receives proof of claims.
  • Creditors determine the need for creditors committee and may appoint one.

The Business Rescue Practitioner gives detailed notice of meeting to each known creditor.

Voting at this meeting is by simple majority of independent creditors.

Section 148 – First meeting of employee’s representative

The first meeting of employees is to be convened within 10 days of appointment by the Business Rescue Practitioner at which he:

  • Informs the meeting of whether the prospects of rescue are reasonable.
  • Receives proof of claims.
  • Employees determine need for an employees representative committee and may appoint one.

Business Rescue Practitioner gives detailed notice of meeting to each known creditor and employee.

Section 149 – Functions, duties and membership of committees of Affected persons

Committees of creditors and employees may :

  • Consult with business practitioner on any Business Rescue relevant matter but not direct the Business Rescue Practitioner.
  • May receive and consider Business Rescue related reports.
  • Must act independently of the Business Rescue Practitioner to ensure fair and unbiased representation of creditors and employees interests.

To be on such a committee one needs to be an independent creditor or employee of the company or its proxy agent or representative or power of attorney and must be authorized in writing to act.

The Business Rescue Plan: Development and Approval

Section 150 – Proposal of Business Rescue Plan

The Business Rescue Practitioner, after consulting with Affected Persons and the company management, must prepare a Business Rescue Plan for consideration.

Contents of Business Rescue Plan:

A  Background – to include at least:

  • List of material assets classed as encumbered / unencumbered.
  • List of creditors indicating secured, statutory preferent and concurrent and indicating which have proved claims.
  • Probable distribution per class of creditor in a situation of liquidation.
  • A list of holders of issued securities.
  • A copy of the agreement for the Business Rescue Practitioner’s remuneration
  • A statement whether the Business Rescue Plan includes proposals made informally by company creditor.

B  Proposals – to include at least:

  • The duration of any moratorium contained in the Business Rescue Plan.
  • The Extent of any debt release and any proposed conversion of debt to equity.
  • The ongoing affairs and treatment of any existing agreements.
  • Property available to pay creditors if the Business Rescue Plan is adopted.
  • The benefits of adopting Business Rescue Plan contrasted with benefits by creditors if company were liquidated.
  • The effect on each class of security held.

C  Assumptions and conditions – to include at least:

  • A statement of conditions if any, to be satisfied for the Business Rescue Plan to come into operation and be fully implemented.
  • The effect if any, on number of employees and their terms and conditions of employment.
  • Circumstances which we’ll give rise to termination of Business Rescue Plan.
  • A Projected Balance Sheet and Statement of income and expenses for three years which must include material assumptions and may include alternative projections based on varying assumptions.
  • A Certificate by the Business Rescue Practitioner stating actual information to be accurate, complete and up to date and projected information to be made in good faith and based on factual information and assumptions set out.

The Business Rescue Plan is to be published within 25 business days of the Business Rescue Practitioner being appointed unless extended by court on application by the company or creditors by a voting majority.

Section 151 – Meeting to determine company’s future

The Business Rescue Practitioner convenes and presides over such a meeting within 10 business days after publication of a Business Rescue Plan.

At least 5 days prior, all Affected Parties get notice including date, time and venue, agenda and summary of voting rights.

The meeting may be adjourned until a decision is arrived at regarding the consideration of the Business Rescue Plan (Section 152).  The Business Rescue Practitioner Introduces the Business Rescue Plan for consideration by creditors and if applicable, shareholders.

At such a meeting the Business Rescue Practitioner:

  • Informs the meeting whether or not he continues to believe in the prospect of a successful Business Rescue.
  • Provides an opportunity for employees’ representatives to address the meeting.
  • Invites discussion and calls for votes on motions to:
  1. Amend the proposed Business Rescue Plan
  2. Direct that he adjourns the meeting to revise the plan for further consideration.
  • Calls for a vote for the preliminary approval of the Business Rescue Plan, as amended unless the meeting has adjourned for revision of the Business Rescue plan.

Preliminary approval is attained if 75%+ of creditors voting interests voted and supporting votes included at least 50% of the independent creditors.

If the proposed Business Rescue Plan is not approved on a preliminary basis, the plan is rejected and can only be considered under Section 153.

  • If the proposed plan does not alter the rights of any securities holder, its preliminary adoption also constitutes final adoption subject to any conditions within it which may yet require satisfaction.
  • If the proposed plan does alter the rights of holders of securities:
  1. The Business Rescue Practitioner is to hold a meeting seeking their vote of approval.
  • If supported by such a meeting, it is finally adopted; if not, it is rejected and only considered in terms of Section 153.
  • A Business Rescue Plan which is adopted is binding on the company and on each of its creditors and holders of securities even if such was present or absent or voted in favour or not or as a creditor who proved claim or not.

The Company, under the Business Rescue Practitioner’s direction must take steps to:

  • Attempt to satisfy any conditions on which the Business Rescue Plan depends.
  • Implement the plan as adopted.

In order to implement the Business Rescue Plan:

  • The Business Rescue Practitioner may issue additional securities and determine the price therefore, despite any provisions to the contrary (Section 38 & 40).
  • The Business Rescue Practitioner may amend the Memorandum of Incorporation (MOI) to vary rights in the MOI despite any contrary provisions.
  • Pre emptive rights fall away unless their retention is provided for in the Business Rescue Plan.

When the Business Rescue Plan is substantially implemented, notice to that effect is filed.

Section 153 – Failure to adopt Business Rescue Plan

If Business Rescue Plan is rejected, the Business Rescue Practitioner may:

  • Seek a vote from holders of securities for preparation and publication of a revised Business Rescue Plan.
  • Advise the meeting that the company will apply to a court to set aside results of a vote rejecting the plan on the grounds of its inappropriateness.

If the above actions are not taken, any Affected Person present at the meeting may:

  • ·Call for vote of approval from holders of voting interests requiring the Business Rescue Practitioner to prepare and publish a revised Business Rescue Plan.
  • Apply to court as per above i.e. inappropriateness.
  • Affected Person or a combination of Affected Persons may make a binding offer to purchase voting interest of one or more persons who opposed the adoption of Business Rescue Plan at a value determined on request of the Business Rescue Practitioner, to be fair and reasonable on a liquidation basis.
  • If the Business Rescue Practitioner of Affected Person informs the meeting that the court is to be approached, the Business Rescue Practitioner must adjourn the meeting for 5 days or lesser time for court to dispose of application

If at the instance of the Business Rescue Practitioner or Affected Person, the meeting directs that a revised plan will be prepared and published the Business Rescue Practitioner must:

  • Conclude the meeting, prepare and publish the plan which must be considered anew.

If an Affected Person makes an offer, the Business Rescue Practitioner must:

  • Adjourn the meeting for up to 5 business days to afford him time to revise the Business Rescue Plan to reflect the effect of the offer.
  • Set a date to resume the meeting without further notice as which Section152 & 153 consideration provisions apply afresh.

If no person acts to either have plan revised or set aside a result, the Business Rescue Practitioner is to file a Notice of Termination of Business Rescue.

The holder of a voting interest or acquiring such an interest on a binding offer, may seek a court variation order of value by an independent expert.

Section 154 – Discharge of debts and claims

The Business Rescue Plan may provide that if implemented, in terms of its terms and conditions, a creditor who has agreed to whole or part of a debt being discharged loses the right to subsequently enforce that debt.

If a Business Rescue Plan is implemented, debts due before Business Rescue cannot be enforced unless provided for in the Business Rescue Plan.