by Bilal Jhetam on 18/10/12 at 4:00 pm
A company may find itself in financial distressfor a specific reasonor it could be because of an exceptional chain of events, yet the possibility exists that it can still overcome the financial distress in time with cautious planning and careful actions from management.
A company is financially distressed if it appears to be reasonably unlikely that it will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or if the company is likely to be insolvent within the immediately ensuing six months.
The Companies Act No.71 of 2008 (hereafter “The Act”)aims to providea measurement of “relief” to companies that is heading towards misfortune and only needs some time and skillful intervention to get back into business. This is referred to as “business rescue proceedings” and is directedby Chapter 6 of the Companies Act.Business rescue is defined as proceedings to rescue and rehabilitate a financially distressed company.
Business rescue proceedings may be initiated by either the company itself when the board of directors resolves that the company shouldvoluntarilybegin business rescue proceedings and is place under supervision, or it may be initiated by an affected person through application to the court for an order to place the company under supervision and to commence business rescue proceedings. As per The Act, an “affected person” refersto a shareholder or creditor of the company; any registered trade union representing employees of the company; or any employee of the company not represented by a trade union.
It is important to note though, that the board of directors of the company cannot adopt a resolution to begin business rescue proceedings if liquidation proceedings have already been initiated by or against the company.
Consequently to placing a company under business rescue, a business rescue practitioner must be appointed. The business rescue practitioner has specific powers and duties laid outby The Act, including the preparation of a business rescue plan (after meeting with all creditors and other affected persons).
As soon as practicable after being appointed, the business rescue practitioner must investigate the company’s affairs, business, property, and financial situation and after having done so, consider whether there is reasonable prospect of the company being rescued. The directors of the company must co-operate with and assist the business rescue practitioner and deliver all books and records that relate to the affairs of the company and are in the director’s possession.
The business rescue plan (as prepared by the business rescue practitioner) may provide for the discharge of debts and claims by creditors relating to the company. The business rescue plan must contain all the information reasonably required to facilitate all the persons affected.
When the business plan has been approved and implemented, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of the business rescue process, except if the business rescue plan provide otherwise.
Employees of the company immediately prior to the commencement of business rescue proceedings continue to be employed on the same terms and conditions unless they agree to different terms and conditions in accordance with applicable labour laws. If retrenchments are contemplated as part of the business rescue plan, it must be carried out in accordance with the Labour Relations Act and other applicable employment related legislation. Employees do therefore enjoy a scope of protection under business rescue proceedings.
During the business rescue proceedings the directors must continue to exercise their functions as directors, but subject to the authority of the business rescue practitioner. A creditor, who has agreed to the discharge of the debt (or part of the debt) owed to that creditor, will lose the right to enforce the relevant debt or part of it and cannot upon rehabilitation claim the discharged debt.
Consideration must also be given to the possible tax consequences for the company under business rescue on the discharge of debt owed to creditors. In terms of the Income Tax Act No.58 of 1962 if a debt owed by a debtor to a creditor is reduced or discharged for no consideration or for a consideration that is less than the amount by which the face value of the debt has been discharged, a gain is made by the debtor. The company will therefore be liable to pay Capital gains Tax on the amount of debt discharged.
One of the core elements of business rescue is that no legal proceedings can be commenced or proceeded with (unless agreed by the business rescue practitioner or the court) against the company, or in relation to any property belonging to the company. Nor may any guarantee or surety by a company in favour of any other person be enforced against the company without the leave of the court.
Section 132 of the Act stipulates that business rescue proceedings will end when the court sets aside the resolution or order that began it, or convert it into liquidation proceedings; the practitioner has filed a notice of termination with the Commission; a business rescue plan has been proposed and rejected; or the plan has been adopted and the practitioner has subsequently filed a notice of substantial implementation of that plan.
It is important to point out that if the business rescue practitioner concludes that there is no chance for the company to be rehabilitated, then the practitioner must inform the court, the company and all affected persons and apply to the court for an order to discontinue the business rescue proceedings and to place the company into liquidation.
Bilal is CA (SA) and a partner at NexiaSAB&T. He has been with Nexia SAB&T for 10 years in total. He has also been a director at Business innovation Group which is a subsidiary of Simeka Business Group Ltd. Bilal is responsible for the Southern Region Consulting and Internal Audit division at Nexia SAB&T. He has experience from a broad client base ranging from listed companies to public sector entities. He sits on the board and audit committee of a number of companies and NPO’s such as the Cape Chamber of Commerce. Besides the governance environment Bilal’s other focus is Due Diligence investigations and Business valuations. He also sits on the Nexia International – valuations committee. Contact Bilal on email@example.com or visit Nexia SAB&T's website at www.nexia-sabt.co.za View more articles by Bilal Jhetam.
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