New act to change how busi­ness op­er­ates

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - AN­DREW DON­NELLY

THE new Com­pa­nies Act, which came into ef­fect on May 1, is set to change how busi­ness op­er­ates in the fu­ture in SA. One of the most sig­nif­i­cant changes is that the act caters for a process to res­cue com­pa­nies which are deemed to be in fi­nan­cial dis­tress.

These busi­ness res­cue pro­vi­sions have far-reach­ing con­se­quences, one of which is that while a com­pany is un­der busi­ness res­cue all le­gal pro­ceed­ings are sus­pended. This has ma­jor im­pli­ca­tions for cred­i­tors seek­ing ret­ri­bu­tion. These busi­ness res­cue pro­vi­sions were re­cently can­vassed in the North Gaut­eng High Court.

The case of Ri­aan An­ton Swart v Bea­gles Run In­vest­ments 25 (Pty) LTD and oth­ers is sig­nif­i­cant in that it is the first re­ported de­ci­sion which deals with the con­tro­ver­sial busi­ness res­cue pro­vi­sions. The ap­pli­cant herein launched an ur­gent ap­pli­ca­tion seek­ing to place the re­spon­dent, his com­pany, un­der su­per­vi­sion and that busi­ness res­cue pro­ceed­ings should be ini­ti­ated.

In his pa­pers the ap­pli­cant al­leged that the re­spon­dent was fi­nan­cially dis­tressed and un­able to meet its im­me­di­ate fi­nan­cial obli­ga­tions and un­less placed un­der su­per­vi­sion there would be no rea­son­able prospect of the com­pany pay­ing its debts.

The ap­pli­ca­tion was met with op­po­si­tion from in­ter­ven­ing cred­i­tors who ar­gued that the ap­pli­ca­tion for busi­ness res­cue was an abuse of process and sim­ply an at­tempt to try and take ad­van­tage of the busi­ness res­cue pro­vi­sions to avoid and post­pone pay­ment of the re­spon­dent’s debts.

The court em­pha­sised that the pur­pose of the busi­ness res­cue pro­vi­sions were to as­sist a fi­nan­cially dis­tressed com­pany by way of a busi­ness res­cue plan to max­imise the pos­si­bil­ity of not only con­tin­u­ing on a sol­vent ba­sis but also achieve a bet­ter re­turn for its cred­i­tors and share­hold­ers as op­posed to the com­pany be­ing liq­ui­dated.

The cru­cial is­sue which had to be de­ter­mined was whether there was a rea­son­able prospect of the re­spon­dent con­tin­u­ing busi­ness in sol­vent cir­cum­stances if busi­ness res­cue pro­ceed­ings were to be ini­ti­ated.

The court con­cluded that the re­spon­dent was hope­lessly in­sol­vent and that the ini­ti­a­tion of busi­ness res­cue pro­ceed­ings would not re­sult in cred­i­tors achiev­ing bet­ter div­i­dends. As a re­sult the court ques­tioned the bona fides of the ap­pli­cant in bring­ing the ap­pli­ca­tion.

The court em­pha­sised that where an ap­pli­ca­tion for busi­ness res­cue re­quires the in­ter­ests of the cred­i­tors to be weighed against that of the com­pany, the in­ter­ests of the cred­i­tors should pre­vail.

Hav­ing failed to show that the com­mence­ment of a busi­ness res­cue would place the cred­i­tors in a bet­ter po­si­tion than they would be in the event of the re­spon­dent be­ing wound up, the court dis­missed the ap­pli­ca­tion with costs.

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