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LAW: New Companies Act Business Rescue Section - a Concern


Recent Gauteng Business News

Credit insurer Coface South Africa says the new Companies Act will have serious implications on creditors.

Tabled early in 2009, it has successfully gone through various parliamentary processes and is likely to be implemented by July 2010.

The Act introduces the new but untested process of 'business rescue'. This will provide companies with an alternative to liquidation and replace the current unsuccessful process of judicial management of insolvent companies, says Coface compliance officer, Anine Greeff.

“Business rescue is aimed at assisting with the rehabilitation of a company in financial distress. The process provides temporary supervision of the company, a temporary moratorium on the rights of creditors and a plan to rescue the company and help it to stay solvent and in business, if possible,” says Greeff.

Companies that qualify for this process are those that are likely to become insolvent (where liabilities exceed assets) or those unlikely to be able to pay their debts as they fall due and payable in the coming six months.

Some of the most important provisions are those affecting the rights of creditors. During the business process no legal proceedings may be started or continued against the company. Third parties will also not be able to enforce any guarantee or surety without the permission from the court, says Greeff.

“The concern from a creditor’s point of view is that if they are owed money by a company that goes into this business rescue process, they will not be able to use legal proceedings to recover that money while the company remains in this process.”

Business rescue also has a potentially negative effect on contracts resulting from the powers given to a “practitioner” who will manage the process.

Once the decision is made to start with business rescue proceedings, the business rescue practitioner is appointed to oversee the company during the proceedings. The practitioner will have full management control of the company and will also develop and implement a business rescue plan.

Greeff says it is important that creditors participate in the appointment of and consultation with the practitioner during this process to protect their rights.

While the company is in the business rescue process, the appointed practitioner may cancel or suspend any provision of an agreement to which the company is party at the commencement of the business rescue period, other than an agreement of employment.

This means that a creditor cannot protect itself contractually against the business rescue practitioner’s right to exclude parts of a contract during this process. Should this happen, only damages can be claimed against the company.

What can creditors do?
“The implications of the restructuring of creditor rights, the restriction on legal proceedings to recover bad debt, and the power of the practitioner to cancel elements of contracts are all areas of concern for any organisation which sells on credit,” says Greeff.

“As with all legislation, only time and case law will define how these rights will be enforced, and how long an organisation will be able to remain in the business rescue process. At this point, the best option would be to avoid a business rescue scenario at all costs. This can be done through an open flow of information, regular financial checks on buyers, and a thorough up-front screening process of all parties applying for credit with your company.”

Greeff says there are a number of ways in which business rescue proceedings can be initiated by a company when it believes it is ‘financially distressed’. Firstly, the company’s board may resolve that the company begin these proceedings voluntarily by placing it under supervision.

Secondly, business rescue can also be initiated by an affected person, including a shareholder or creditor of the company, any registered trade union representing employees or employees not represented by a trade union, applying to court. Finally, the court may make an order placing the company under supervision during liquidation proceedings.

“It will be interesting to see how the new business rescue process plays out in the market, and equally interesting to see if the South African business community is able to adapt quickly enough to avoid long drawn out debt collection processes,” she says.

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