Understanding Business Rescue: It’s alarming that many business owners, and perhaps even more importantly their creditors affected by a failing business, know very little about the option of business rescue and the process involved.
Brief Summary of Business Rescue
In business rescue, a business rescue practitioner is appointed as the effective CEO of the company under financial distress. The practitioner’s job is to balance the rights of creditors, employees and shareholders while preparing a business rescue plan to address how the company might be saved.
To allow the practitioner sufficient opportunities for preparing a way forward, two things happen: 1) all debt which is owed by the company as of the date of business rescue is frozen; and 2) no legal action can be taken against the company in an attempt to apprehend payment. This protection against legal action remains effective while the company is under business rescue.
While analysing the business, the practitioner will likely determine that the liabilities of the company need to be compromised to a sustainable level to ensure continued trading. This compromise is included in the business rescue plan.
The business rescue plan is then presented to the creditors for a vote. Once voted the practitioner requires 75% of all creditors and 50% of independent creditors’ votes in order for a business rescue plan to be approved.
This means, realistically, that if the majority of creditors vote in favour of the business rescue plan and you, as a creditor, vote against the plan, the plan will still be approved and dissenting are bound to the compromise.
Below are some tips / guidelines on what to look out for if you are involved in a business rescue process. It is important to take note of these so that you are able to hold the practitioner accountable.
Below is a guideline which you are able to use detailing what meetings should be occurring when. In order to build a timeline the date the practitioners appointment is important as the meetings must be held within a number of days from that appointment date, namely:
• First meeting of creditors: within 10 business days after appointment of the practitioner.
• Publish a business rescue plan: within 25 business days after appointment of the practitioner.
• Notice and voting interests: within 5 business days after the business rescue plan has been published, the practitioner must notify creditors of the second creditors’ meeting and supply a list regarding the voting % of each creditor.
• Second meeting of creditors: within 10 business days after appointment of the practitioner.
• Status reports: 3 months after the date of the practitioner appointment, the practitioner must supply a monthly status report to all creditors updating on the progress.
It is imperative to attend these meetings as votes carried are calculated on the creditors present at the meeting as well as by creditors voting via proxy. Therefore, if you are not in attendance at the meeting or if you do not vote via proxy, your vote will not be counted towards any decision.
Even if you feel that your vote is insignificant, consider this scenario: if you are the only creditor arriving at the meeting and no creditor has voted via proxy, you will have 100% of the voting interest on any matter proposed in the meeting.
So if you are not able to attend please still vote via proxy, always request the topics which may require a vote beforehand to allow for an informed proxy vote.
We suggest that you keep a record of when meetings are to be scheduled so as to hold the practitioner accountable. If the dates do not correspond, then the practitioner should receive condemnation from the majority of creditors.
2. Submit creditors claim form
At the first meeting of creditors the practitioner may require proof from creditors substantiating the outstanding amount. It is important that creditors prove these claims in the manner requested by the practitioner.
3. The business rescue plan
The business rescue plan must include a forecasted income statement, balance sheet and cash flow. It is important before agreeing to any compromise, that you understand the projections; if they seem unreasonable, voice your concerns at the relevant meetings or directly to the practitioner.
Further to the above, it is also vital that you make suggestions to the practitioner for consideration.
4. Post commencement funding
Under business rescue, the company continues to trade; consequently, you as a supplier still retain the option of conducting business with the company. We advise that if you continue to trade with company after the commencement of business rescue that you place on record that the supplying goods constitutes post commencement funding.
Post commencement funding is ranked second behind practitioners’ fees in receiving any funds under business rescue, even ranking ahead of secured creditors, thereby reducing your risk as a creditor.
5. Claim the compromise as bad debt
Once the business rescue plan is approved, a creditor may write off the compromised amount as bad debt and claim this as input VAT and claim for income tax purposes, providing the other requirements of SARS are adhered. This write off effectively minimises the loss.
Should you require further assistance in this matter please do not hesitate to contact our offices.
6. Practitioner’s fees
Legislation has a prescribed rate per hour that a practitioner may not charge beyond, refer to section 128 of the companies regulations in terms of the Companies Act. The prescribed rate varies according to the size of the company determined by the public interest score. Below are the prescribed rates:
Small Company: R 1250 per hour (Inclusive of VAT),
Medium Company: R 1500 per hour (Inclusive of VAT),
Large Company: R 2000 per hour (Inclusive of VAT),
Request information pertaining to the associations with which the practitioner is affiliated so that the lack of compliance with the business rescue proceedings can be raised and reported to the appropriate controlling body.
8. Winding up under business rescue
If there is no reasonable prospect of rescuing the company, another alternative to liquidation is for the assets to be realised under business rescue, this often provides a better and quicker return than under liquidation.
If the practitioner is no longer of the opinion that the company has a reasonable prospect of being saved the company can be wound up under business rescue rather than via liquidation, in terms of 128(b)(ii) of the Companies Act.
9. Non-paying debtors
Business rescue is a viable option to consider if you are owed funds from a debtor. Rather than placing the debtor into liquidation apply to have the same company placed under business rescue and propose a business rescue practitioner.
The business rescue route may result in a better return to creditors than if the company was liquidated .It must also be noted that the costs of the business rescue are solely for the companies account and the creditors are not required to contribute in any way.
In conclusion, business rescue is a creditor driven process during which the practitioner must attempt to provide a better return to creditors than under liquidation. However the practitioner must comply with the legislation and it is important to keep him/her accountable.
Please be advised, there are other important aspects of business rescue which are not discussed in this article.
If you find yourself in need of business rescue advice please do not hesitate to contact our offices.
Justin Gordon ACMA CGMA via mypr.co.za
Junior Business Rescue Practitioner
About Hobbs Sinclair
Hobbs Sinclair Chartered Accountants, a medium-sized financial services firm situated in Claremont, Cape Town, has over 20 years experience. It is owned, managed and directed by two highly qualified and experienced partners in the business and financial services sectors.
For more corporate & commercial news articles visit here.