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FAQ
What does it mean when a company is in 'financial distress'?
‘Financial distress’ means it is reasonably unlikely that a company will be able to pay its debts when they fall due for payment in the immediately ensuing six months, or when it is likely that a company will become insolvent in the immediately ensuing six months.
Should a company consider business rescue or liquidation if it finds itself in financial distress?
f a company is in financial distress but there appears to be good prospects that, given some time, the company will be able to trade out of the financially distressed circumstances, then business rescue should be pursued and it should be pursued at the first signs of financial distress.
If a company is in financial distress but there are no prospects that the company will be able to trade out of those circumstances, then a company should consider liquidation.
What is business rescue?
Business rescue is a legal process aimed at rehabilitating a company in financial distress. This is done under the supervision of an appointed business rescue practitioner who manages the company’s affairs and business in accordance with an approved business rescue plan. The goal is to help a company trade out of its financially distressed circumstances. If business rescue fails, the prospect of liquidation will then have to be explored.
How is a company placed in business rescue?
There are two ways in which a company can be placed in business rescue, namely by way of a board resolution (voluntary business rescue) and by way of an application to court (compulsory business rescue).
A company can be placed in business rescue voluntarily by the board of directors adopting and filing a resolution to commence business rescue proceedings and placing a company under the supervision of a business rescue practitioner. The resolution is passed by the board if:
- there are reasonable grounds to believe that the company is financially distressed; and
- there appears to be a reasonable prospect of rescuing the company financially.
A company can be placed in compulsory business rescue when an affected person makes an application to the High Court for an order placing the company in business rescue where:
- the company is financially distressed;
- the company has failed to pay any amount in terms of an obligation; or
- it is just an equitable to do so for financial reasons and there is a reasonable prospect of rescuing a company.
Who are the 'affected persons' in terms of business rescue?
Affected persons are the shareholders, creditors and employees of a company in business rescue, as well as registered trade unions representing the employees of a company.
What is the next step after a company’s board resolves to undergo business rescue?
The board must file its resolution to place the company in business rescue with the Companies and Intellectual Property Commission (CIPC). The board must then appoint a business rescue practitioner within five business days after having filed the resolution with CIPC.