With the introduction of the new Companies Act (“the new Act”), the phenomenon of business rescue has come to the fore.

Where a company can be proven to be financially distressed, that it is just and equitable to do so for financial reasons and that there is a reasonable prospect of rescuing the company, the directors of the company may pass a resolution in terms of which the company in question is placed under business rescue.

This, however, entails that the directors of the company strictly adhere to the requirements of the new Act with regard to the time periods within which interested parties (such as creditors etc) are to be notified in a timely manner of the resolution passed by directors placing the company under business rescue and appointing a business rescue practitioner.

In the matter of Swart v Beagles Run Investments 25 (Pty) Ltd, the sole director and shareholder, Mr S, applied for business rescue of the company in an attempt to postpone and avoid the payment of certain debts owed by the company.

The court made it clear that an abuse of the business rescue provisions of the new Act will not be sanctioned and that an application for business rescue entailed the weighing up of competing rights of the creditors on the one hand and those of the company, on the other. Unless special circumstances can be proven, the interests of creditors will prevail and the court will not easily allow a business rescue to continue if it appears to the court that the proceedings have been initiated with an ulterior motive in mind.

Clients should take note of the fact that the business rescue practitioner has the right, should the directors of the company not co-operate, to apply for the discontinuance of business rescue proceedings and to seek an order that the company in question be liquidated, to avoid a situation where the company trades in insolvent circumstances, to the detriment of inter alia its creditors.

Creditors are able to oppose applications for business rescue where the strict formal requirements of the new Act have not been complied with by the directors who applied for the business rescue of the company.

It seems therefore that the question whether or not to apply for the business rescue of a company is not a decision which should be taken lightly and without due consideration of the rights of the creditors of the company. This decision of the High Court should therefore be welcomed by creditors as interested parties of distressed companies.

Written by Leander Opperman, Partner, Adams & Adams