Frequently asked questions
What is Business Rescue?
Business rescue proceedings is a mechanism provided for as per the companies act 71 of 2008. The act offers companies and closed corporations that experience financial distress to file for business rescue proceedings. Business rescue proceedings require an accredited business rescue practitioner to be appointed over the business. The rescue practitioner is empowered to place a temporary hold on all creditors and financiers of the company. The rescue practitioner has a specific timeframe to analyse the business and determine if the business holds a reasonable prospect of continuing trade or holds no prospect and should be liquidated. The ultimate goal of business rescue is to provide a company with a prospect of continuing trade with the opportunity to avoid liquidation, by restoring cash flow.
What is the difference between voluntary business rescue vs a court order?
A voluntary business rescue resolution is adopted by the board of directors or members, in the case of a closed corporation. The responsible officers have decided that it would be best for the business to be placed in business rescue as a result of financial distress. The board of directors can file for a voluntary resolution for business rescue proceedings should there are no legal proceedings launched against a company or closed corporation for defaulting on debt payments(Liquidation application). Business rescue via a court order is when the board fails to act in the interest of all affected parties. An affected party applies to the court to place a business in rescue to enforce an independent party to take control of the company and act in the interest of all affected parties.
Why appoint a Business Rescue Practitioner vs my Executive team?
The business lifecycle tells us that it is common for a business to go through a phase of comfortability and complacency in a dynamic and competitive environment. What business executives often fail to realise is the advancement of competitors, technology, business cost and staff efficiency. Business executives also fail to focus on product offering, market share and customer obsolescence.
To conclude, maturing businesses often fall in the complacency trap, and they fail to identify the declining indicators early enough. A distressed business is not directly related to a failed business. Often companies need an independent intervention to renew the business case and restore the reasonable prospect.
What is the requirements for Business Rescue proceedings?
Section 128 of the companies act 71 of 2008 defines "financially distressed". A company is financially distressed when it is not in the position to pay all of its obligations immediately or in the ensuing six months.
Reasonable prospect is the second criteria for successful business rescue. A company must show evidence of a profitable business case. Reasonable prospect is based on the analysis of the health of five critical elements: employees, Operations, Finances, Demand and Supply.
What qualifications does a Business Rescue Practitioner require?
Section 138 of the companies act 71 of 2008 stipulates the qualifications of a business rescue practitioner. A business rescue practitioner is a professionally qualified individual licensed by the Companies and Intellectual Property Commission(CIPC). A business rescue practitioner is an officer appointed by the court of law. The primary professional bodies regulating the competencies of business rescue are as follows: TMA, SARIPA, LAW Society, SAICA. In 2017 the CIPC introduced regulations to all professional bodies and implemented qualifying criteria to ensure that business rescue practitioners are certified and accredited at highest of standards.
When deciding on a business rescue practitioner ensure that you have evaluated the following, personal & business tax clearance certificates from SARS, a letter of goods standing with a professional body, a CIPC license, a proffesional resume with qualifications. All professional bodies prescribe that rescue practitioners have completed the Certified Rescue Analyst program from the University of Pretoria. Rescue practitioners are also required to be accredited by their bodies whereby they receive South Africa Quality Accreditation(SAQA) accreditation).
What are acts of Insolvency?
The Insolvency act 24 of 1936 of South Africa stipulates acts of insolvency. Business professionals tend to negotiate with their suppliers when cash flow challenges are experienced. Business-wise this makes sense; Legally, the is the worst thing that one can do. Any payment arrangement or request for extended terms is regarded as an inability to pay your obligations. It can be used against you in a liquidation application submitted to a court.
Take extreme care when managing financial distress and committing to arrangement or terms on any form of written communication.
Should I do trade with a customer when in business rescue?
Business rescue is not an act of bankruptcy. Business rescue is a toll for companies and closed corporations to restructure its operations and finances. Post-commencement finance is when a supplier has provided a company with goods or services after filing for business rescue. Amounts due post-business rescue receive preferent payment staus, and a rescue practitioner is obliged to pay that invoice in full. Suppliers tend to place all supply on hold until they receive their old monies due. Do not penalise yourself because there are businesses that managed to restructure successfully and remain dependant on their suppliers for continuing trade.
How can I ensure my business is protected against a debt compromise or liquidation proceedings?
It would seem the business managers are not always aware of the fact that there are institutions that ensure companies, debtors. Debtor insurance protects a company or business against bad debts. It ensures that a company receives their full invoice value should a material event occur with your customer who is not in a position to pay your invoices due. A typical example of such a company is Credit Guarantee.
When is a business rescue successful?
As mentioned earlier, the objectives of a business rescue are determined during the first phase of analysis of the reasonable prospect. Not all businesses are rescuable. A good practitioner engages with all stakeholders transparently. Business executives tend to be ill-informed of sureties signed in their personal and business capacities. Most of the times, one would realise that sureties have been signed for credit terms and that assets are pledged towards suppliers. If this is the case, in most instances, the proceeds that need to be distributed to the unsecured creditors are not sufficient.
Liquidation forces a business to stop trade where areas a business rescue provides an opportunity to continue trade. The only way all affected parties are treated equally is through continues trade under the supervision of an independent professional. If a business can be rescued and a better return than in liquidation can be rendered to all affected parties, the rescue was successful.
How long should business rescue proceedings be?
The companies act 71 of 2008 stipulates clear time restrictions for the proceedings. If a rescue practitioner does not adhere to these timelines, the business rescue proceedings are non-compliant and null and void.
A competent practitioner does not implement changes immediately, and time is required to understand the business. A plan should not take longer than 60 working days to publish, and depending on the size of the company, an average turnaround takes 16 months. Each case has its own merits, but a rescue case should not be longer than 24 months unless there is a strong business case to do so.