Is Business Rescue really a rescue?

Jivani Naidoo
Jivani Naidoo

BUSINESS RESCUE…IS IT REALLY A RESCUE?

The Companies Act (“the Act”), which was implemented on 1 May 2011, introduced the new concept of business rescue.  Its intention being to allow financially distressed companies to reorganize and restructure their management in order to keep them afloat, but whether the concept has achieved its purpose remains uncertain.

For a business rescue application to succeed, a number of procedural aspects must be fulfilled.  The business rescue proceedings must be started either by a resolution passed by at least a majority of the board of directors or by way of a court order and there must be strict adherence to the time limits prescribed by the Act.

The purpose of business rescue is to create a quick procedure to save a business rather than simply let it fail and be liquidated and if the application is successful there is a better chance of saving jobs.  A temporary moratorium is placed on creditor’s rights which enable the company concerned to focus on restructuring itself without the ongoing pressure from creditors.  There is also a possible suspension or even cancellation of onerous contractual obligations.  However, the disadvantage is that business rescue is costly.

Section 135 of the Act provides for post commencement finance for which the business rescue practitioner may apply.  He or she then takes over the management of the company and the control of the company by the directors is thus lost.  The skills and efficiency of the business rescue practitioner are obviously necessary to ensure the success of business rescue proceedings and, if this does not succeed, liquidation must follow.  Regrettably, statistics show that the current success rate of business rescue in South Africa is relatively low, which poses the question of whether business rescue really is a lifeline or just another costly measure to the inevitable end result of liquidation.

This article has been written by Jivani Naidoo, a Candidate Attorney at Garlicke & Bousfield Inc

For more information contact Jivani on telephone : +27 31 570 5428, email : jivani.naidoo@gb.co.za

NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of company law.

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