Business rescue must be used judiciously
THE new Companies Act, which came into operation on May 1 last year, is set to have a dramatic impact on how future business practice is conducted 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 which in itself 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 interesting and of extreme significance in that it is the first reported decision which deals with the controversial business rescue provisions in the new Companies Act.
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 opposed by intervening creditors who argued that the application for business rescue was an abuse of process and simply an attempt to try to take advantage of the business rescue provisions in order to avoid and postpone payment of the respondent’s debts.
It was emphasised by the court that the purpose of the business rescue provisions in the act were to assist a fi- nancially distressed company by way of a business rescue plan in order maximise the possibility of it not only continuing on a solvent basis but also to 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, in arriving at its decision, 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 up against that of the company, the interests of the creditors should prevail.
Having failed to illustrate that the commencement of a business rescue, as envisaged by the act, 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.