The number of applications for business rescue by companies that are financially distressed has started to increase since the implementation of the New Companies Act.

According to statistics published by the Companies and Intellectual Properties Commission (CIPC), there have been 175 filings for business rescue since 1 May 2011.Only two companies have terminated their business rescue proceedings, one because liquidation proceedings intervened and the other due to refinancing.

Additionally, statistics published recently by Statistics South Africa, indicate that the number of liquidations rose by almost a quarter (from 243 to 302) year-on-year as at August 2011.This was mainly due to an increase in the number of voluntary liquidations (67 more).

Many of the companies that have filed for business rescue might ultimately be liquidated because their prospects of being rescued are low or because they may deliver a better dividend via liquidation. This could very well be a contributory factor in the spike in liquidations for August 2011.

In many instances, resolutions passed for business rescue were probably nothing more than attempts to delay the ultimate demise of companies that clearly could not pay their debts. Financial institutions are often met with resolutions for business rescue. This is because their attempts to pursue their claims by way of legal proceedings are halted once business rescue proceedings commence.

As a result, many believe that the filing for business rescue in these circumstances is nothing more than an abuse and should be dealt with very circumspectly by the courts.

A recent judgement supports this view. In the matter of Swart vs Beagles Run Investments (in May 2011), His Honourable Mr Justice Makgoba ruled that if the court had to weigh up the competing interests of the company and its creditors, the interests of the creditors must prevail.

Mr Swart, the only director and shareholder of Beagles Run Investments, applied for an order placing the company in business rescue. He alleged that the company was financially distressed, but needed time to dispose of moveable assets. He argued that the company would be able to pay all its creditors in full under a business rescue plan if allowed to continue doing business.

Several creditors intervened and submitted that the business rescue application was nothing more than an abuse of process and an attempt by the company to avoid or postpone paying its debts. They alleged that the company had been trading recklessly for well in excess of a year and had refused to sell any of its assets in order to pay creditors during that time.

The Judge ruled that no case had been made that the creditors would be better off in business rescue than in liquidation and dismissed the application for business rescue.

When an application for business rescue is dismissed, all creditors are free to proceed with individual enforcement actions or to apply for a company's liquidation.

While the new business rescue procedure provides companies in financial distress with alternatives, and specifically with the possibility of trading their way out of financial predicament under the supervision of appointed business rescue practitioners, not every company is suitable for business rescue. Thus directors must be very careful before embarking on the business rescue path as liquidation may be the only viable option.

Contact:
Eric Levenstein
Direct line: +27 (0)11 535 8237
Email: elevenstein@werksmans.com