The business rescue provisions in the Companies Act are regarded as progressive and world class and there is evidence that it has worked well.
Yet a 2016 survey showed that more distressed businesses opted for an informal approach and appear to be more successful than those opting for the remedies of the Companies Act.
Business rescue in terms of the Companies Act is a process whereby the company informs stakeholders of its situation and a business rescue practitioner is appointed to try and salvage the company. A moratorium is placed on creditors which gives the practitioner room to find a solution.
With an informal arrangement, the business enters into negotiations with some or all of its creditors.
The two significant differences between the two approaches are that –
Once a company becomes aware that it has run into or is going to experience financial difficulties, the directors are required by the Companies Act to perform liquidity and solvency tests and if these show the business cannot meet its obligations for the next six months, then it is required to either declare insolvency or apply for business rescue. Should the directors decide not to proceed with business rescue or liquidation, they are obliged to provide stakeholders with reasons for their decision in writing – hence the company’s stressed position is revealed to the public.
Therefore if you want to take the informal route you need to do this before the business becomes financially stressed as above.
You will also need to present creditors with a credible plan when you embark on this option. Clearly, monitoring of the cash position and planning a comprehensive strategy are critical to the success of the informal turnaround process.
Directors are personally liable for any losses as a result of their actions or inactions if it can be shown that they acted recklessly or negligently. So plan accordingly and carefully. Remember also that staff and stakeholders could be financially ruined if the business fails.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.