Similar headlines are unfortunately likely to continue hitting the market in the coming days and weeks. Numerous other retailers have followed suit in announcing that they would be unable to discharge their rental obligations for at least the period of the lockdown. As recently as last week Wednesday, South Africa’s e-commerce giant Takealot announced that it is likely to take a R350 million revenue hit during the lockdown, leaving the company in distress.
Chapter 6 of the Companies Act allows financially distressed South African companies an opportunity to reorganize and restructure their financial affairs through the business rescue process. The Companies Act considers a company to be financially distressed if, within the immediately ensuing six months: (i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable; or (ii) it appears to be reasonably likely that the company will become insolvent.
Business rescue proceedings aim to facilitate the rehabilitation of a financially distressed company by providing for, amongst other things: (i) the temporary supervision and management of the company’s affairs, business, and property by a business rescue practitioner; (ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; (iii) the ability for the company to obtain post-commencement financing, which may be secured to the financier by utilizing any asset of the company that is not otherwise encumbered; and (iv) the development and, if approved, implementation of a business rescue plan to restructure its business, debt, property, equity, affairs, and other liabilities.
A company’s board of directors can initiate voluntary business rescue proceedings by resolving that the company is financially distressed and that there appears to be a reasonable prospect of rescuing the company. A company can be placed into involuntary business rescue proceedings by an affected person (shareholders, creditors, employees or registered trade union representatives) making a formal application to court where: (i) the company is not already in voluntary business rescue; (ii) the company is financially distressed; (iii) the company has failed to fulfill a payment obligation under or in terms of a public regulation or contract, with respect to employment related matters; or (iv) it is otherwise just and equitable to do so for similar financial reasons, and there is a reasonable prospect of the company being rescued. Business rescue provides a moratorium on insolvency or legal actions against the company, affording it much needed “breathing space” to reduce its debt burden and deliver the best possible outcomes for business owners, creditors, employees, and shareholders alike.
As the economic shock of the coronavirus pandemic devastates local businesses, companies will need to consider how to best navigate these truly unprecedented times. Business rescue, and the opportunity it affords companies to restructure its financial affairs, may provide a much needed safety net for companies being battered by the prevailing local and global economic storms.
This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.