A financially distressed company is eligible, in general terms, to be placed under business rescue if, through the adoption of an approved business rescue plan:

1. There is a reasonable prospect of rescuing the company and continuing in existence on a solvent basis; or
2. If that is not possible, it is likely to result in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

The protection of jobs which would otherwise be lost in liquidation was an important policy objective of the legislature in providing for the business rescue regime.

The classic case for which business rescue was intended was in respect of a well-managed company that enjoys the confidence of its stakeholders, including financiers, customers and suppliers, and through unforeseen circumstances experiences liquidity constraints. Covid-19 gave rise to a plethora of such cases and in turn we have seen a multiplicity of companies being placed under business rescue.

For such companies, the question may be asked whether business rescue was the only, or indeed, the most appropriate, solution. To answer this question, it is necessary to set out the principal reasons in the circumstances set out above a company would choose to go into business rescue. These are:

1. The benefit of the statutory moratorium as provided in section 133 of the Companies Act. Essentially, the company needs to keep at bay “ransom” creditors while its financiers, major suppliers (including landlords) and major customers agree a package to restructure the company;
2. The advantage of suspending onerous contracts, or, with the consent of the court, cancelling onerous contracts; and
3. Formulating a business rescue plan which, when approved by the requisite majority of creditors, is binding on all creditors.

There are, of course, also disadvantages for a company to go into business rescue, the principal one being that it constitutes an event of default in many loan agreements and other contracts. This has the consequence of accelerating liability. Also, business rescue is a rigid regime and costly in the sense that the fees of business rescue practitioners must be borne by the company.

These are indeed attractive benefits. This gives rise to a further question: what solution exists for the company referred to above as an alternative to business rescue? That solution, to be attractive, must have similar advantages to business rescue while obviating its disadvantages. 

The envisaged alternative solution is a voluntary restructure. This generally comprises a set of remedial measures agreed between the company and its major stakeholders, being principally its financiers.

If it is necessary to make such an arrangement binding on all creditors, this can be achieved by means of an offer of compromise in terms of section 155 of the Companies Act. Such consensual restructure is generally less costly. Furthermore, competitive sensitive information is not subject to the same public scrutiny as applies in the business rescue regime. Naturally, this dispensation does require the ability to deal with ransom creditors without the benefit of the statutory moratorium.

In conclusion I would respectfully submit that the voluntary restructure has been successfully achieved in practice in a number of cases. It would be advantageous if it were used more often. BM/DM