LAES Business Rescue CH 12-15 PDF

LU 11 LO1: Explain the initiation and process of Business Rescue entails with reference to the definition in section 128 of the Companies Act. LO2: Explain the meaning of o financially distressed; o affected persons. LO3: Discuss the role of the business rescue practitioner. LO4: Advise on the lega...

LU 11 LO1: Explain the initiation and process of Business Rescue entails with reference to the definition in section 128 of the Companies Act. LO2: Explain the meaning of o financially distressed; o affected persons. LO3: Discuss the role of the business rescue practitioner. LO4: Advise on the legal consequences of business rescue proceedings with reference to a set of facts LO5: Discuss the meaning and purpose of compromise. LO6: Compare the process of comprise as it existed before and after the Companies Act, 2008. LO7: Discuss the information that a proposal for compromise must contain. LO8: Briefly outline the requirements for a compromise LO9: Broadly differentiate between winding-up and deregistration of companies What is business rescue? A failure of a company affects not only s/holders and CR but also its employees, suppliers, distributors and customers, socio-economic problems within communities Attempts to rescue the company/business suffering from a temporary setback but which has the potential to survive must be made ie. Business rescue SA one of the first countries to introduce judicial management into its legal system Business rescue proceedings set out in the Companies Act 2008 s 128(1) (b)“achieving the goals set out in the defintion of business rescue”  Companies Act ,2008 S 128 (1)(b) (b) ‘‘business rescue’’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for— (i) the temporary supervision of the company, and of the management of its affairs, business and property; (ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and (iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company; In terms of s128(1)(f) a Company is financially distressed in the following circumstances 1) If it appears reasonably, unlikely that the company will be able to pay all its debts as they become due and payable within the immediately ensuing 6 months (commercial insolvency) 2) If it appears reasonably likely the company will become insolvent within the ensuing 6 months (actual/factual insolvency) Strictly a corporate rescue procedure- procedure aimed at rescuing the entire company Sect 7 (k) refers to the efficient rescue and recovery of financially distressed Pty’s in a way that balances the rights and interests of all the relevant stakeholders  Affected person Affected person” s 128(1)(a)- are every s/holder, CR of the company , registered trade union representing Company’s employees and those employees/representatives who are not represented by a registered by trade union There are 2 ways in which business rescue proceedings can commence: a) Resolution by the BOD of the company b) Court order Important ?’s asked are, a) who can apply for Business Rescue proceedings, b) what is the effect of the Business Rescue on the control of the Company ?’s, Creditors of the Company ?’s, employees of the Company ?’s, on shareholders ?’s, agreements with 3rd P ?’s, the qualifications of the business practioner ?’s, who is the affected person and what are their rights ?’s Resolution by BOD to begin Business Rescue PROCEDURE Companies Act 2008 provides the procedure that a BOD must use to commence proceedings 1. Firstly Passing of a 2. Followed by Filing resolution by the of the resolution with BOD the Commission 4. And the 3. Then Notification Appointment of a to all affected parties Business Rescue practitioner  Business Rescue resolution by board of directors Business Rescue Resolution by BOD The BOD may take a voluntary formal decision to begin BR The business rescue resolution will only become effective once it is filed with CIPC (Commission) A business recue resolution taken by directors may not be adopted if liquidation proceedings by/against the company has been initited Act uses “initiated” instead of commenced Uncertainty to the meaning of initiated = First Rand Case held it is assumed to mean the same as commenced Once Directors have taken the resolution to commence Business Rescue proceedings and as long as its valid, the company may not commence liquidation proceedings Business rescue proceedings Officially commence on date of filing  NOTIFICATION OF AFFECTED PARTIES Within 5 business days/more if Commissioner grants permission after filing the resolution, the company must notify, in the prescribed manner every affected person of: 1) the resolution 2) the date on which it became effective 3) grounds set out in the sworn statement on which the Resolution was taken According to the definition of affected person in s 128 (1)(a) the company must NOTIFY every shareholder, creditor, trade union, employees 2008 Act allows for electronic notification if the recipient can print it in a reasonable time at reasonable cost/provide recipient with a summary of the contents and instructions on how to obtain the full document Within the same 5 business day period the company must appoint a business rescue practioner to oversee the company and its rescue proceedings This person must meet s 138 requirements and provide written consent to be appointed Within 2 business days after the business rescue practioner has been appointed the company must file a notice of the appointment to the Commission and within 5 business days after filing the company must make a copy of the notice of appointment available to every affected person  If a Company does not comply with s 129 fails to inform affected persons, Business Rescue “ lapses and is a nullity” In addition to lapsing of the resolution s 129(5) provides that a Pty will not be allowed to file another Business Rescue Resolution within 3 months after the date of adopting the one had lapsed unless a court on good cause Consequenc shown approves the filing of a further resolution by the company es of non- The application to court for permission compliance to court to file a new resolution before the expiry of 3 months is brought by a ex parte application which means there is no need notify affected persons of application Business Rescue proceedings will regard as having commenced when the company applied to court for its consent READ FURTHER  have reasonable grounds to believe that the company is financially distressed and that there is a reasonable prospect of rescuing the company Even though the court is not involved in commencing business rescue by a board resolution the resolution can be set aside by the court on application by an affected Circumstanc person on grounds that the requirements of es under financial distress has not been met or reasonable prospect of rescue proceedings which has not been met business rescue Once the board has grounds to believe that the company is financially distressed it must resolution pass a business rescue resolution or deliver a may be written notice to each affected person explaining taken which 2 possible grounds the company believes it to be financially distressed and b) why they have decided to adopt a business rescue resolution 4. Each affected person must receive a copy or be informed of the availability of a copy of the  Business rescue has consequences for the company's activities and stakeholders namely: Most civil legal proceedings are stayed until the end of the business rescue process Disposal of the company's property is restricted Re- Financing of the company is supported by Legal allowing the company assets to be used to secure loans consequenc Employments contracts are protected es of Other contracts are suspended or cancelled in certain circumstances business The status of issued shares may not be altered and shareholders may only participate in rescue decisions about business rescue if their interest proceedings are affected Directors must co-operate with the business rescue practitioner, and they will be excused from certain of their duties and liabilities while operating under the instructions of the business rescue practitioner VERY IMPORTANT to Read further for a broader understanding  QUALIFICATIONS of the Business Practitioner There are now 6 qualifications for appointment: Be a member in good standing of legal, accounting or business rescue management profession accredited by the Commission Be licensed by the Commission to practice as a APPOINTMEN business rescue practitioner – the Commissioner can also suspend/withdraw such T OF license as well as make regulations and prescribing minimum qualifications BUSINESS Not subject to an order of probation in terms of s 162(7) RESCUE Not be disqualified from acting as a director of PRACTIONER the company in terms of s 69(8) Not have any other relationship with the company that would lead a reasonable and informed 3rd P to conclude that their integrity, impartiality or objectivity is compromised by that relationship Not be related to a person who has such a relationship  The only way in which a business practitioner can be removed is by court order in terms se 130 or s139 S139 order is made on application by an Removal and affected person or on the court's initiative based on the following grounds: replacement incompetence or failure of the person to perform of business his/her duties Failure to exercise the proper degree of care in rescue performing his functions Engaging in illegal acts/conduct practitioner Failing to meet the requirements in terms of s138 A conflict of interest /lack of independence Becoming incapacitated and unable to perform the functions of the practitioner and being unable to gain capacity within a reasonable time  Take full responsibility for the management of the company Duties and Investigating and monitoring the company's affairs liability of a Developing and implementing a business rescue plan business practition Accepting liability for breach of duties er The business practitioner may not be appointed as liquidator if the company is liquidated after business rescue ends READ FURTHER  Business practitioner is entitled to a remuneration by the company with a tariff Prescribed by the Minister The practitioner may also enter into an agreement with the company to pay an additional contingency fee if a rescue plan is adopted or a specified result is achieved Remunerati This agreement will be binding only if approved by the majority-in-value of creditors who attend the meeting and the majority of shareholders who are entitled to a portion of on of the the residual value of the company on liquidation A creditor/shareholder who votes against the approval of the business agreement may apply to court within 10 business days after the date of voting to have the agreement cancelled on the practitioner grounds that it is not just and equitable or that it is unreasonable in light of the company’s financial circumstances. The practitioner is also entitled to be reimbursed for actual costs or expenses reasonably incurred in carrying out their functions and to facilitate the conduct of the company's business rescue proceedings The costs and expenses are restricted to functions related to the business practitioner and not payments like rental for premises occupied by the company, rates, taxes or payments to other service providers On liquidation the business rescue practitioner must prove a  The business rescue plan It is the duty of the business rescue practitioner to prepare a business rescue plan, but they must consult the creditors, other affected persons and the management of the company Prescribed contents – contain all the information that affected persons need to decide whether they should accept of reject the plan S 150(20 states that the plan ,must be divided into 3 parts an must conclude a certificate The first part requires all the information reasonably required to assist affected persons in deciding whether to accept the plan PART A – Background PART B – Proposals PART C – Assumptions and Conditions The business rescue plan must conclude with a certificate by the business rescue practitioner which states that the information provided in the plan appears to be correct and up to date and that the projections were made in good faith on the basis of factual and assumptions set out in the statement  Publication, meeting, effects, termination of the plan The plan must be published within 25 business days after the appointment of the business rescue practitioner unless a longer period is allowed by the court on application by the company or the holders of most creditors voting rights agree to allow more time Business rescue practitioner must convene a meting with the company’s creditors to consider the plan within 10 business days after publication of the plan. All affected persons must be notified whether they have the right to vote or not Approval of the plan makes it binding on the company and all its creditors irrespective whether such persons voted for or against the plan If the plan is rejected by creditors or shareholders, the business practitioner can get approval from the holders of the voting interests (creditor) to prepare an publish a revised plan or inform the meeting that the company will have to apply to court to have the result of their votes set aside on grounds that the majority decision was not appropriate 2008 Act intends rescue proceedings to take no more than 3 months and if it cannot the rescue practitioner can apply to court for more time or deliver a monthly progress report to each affected person  Termination of Business Rescue Plan Court order of setting aside the resolution Court converting it to liquidation proceedings Practitioner filing for termination with the Commission The plan being adopted and implemented Rejection of the plan without further steps being taken by the affected person to extend proceedings What is Compromise? Another option for financially distressed companies Prior to the 2008 Companies Act , the 1973 Companies Act ito ss 311 to 313 provided for a Company to enter into a compromise with its CR/or an arrangement with s/holders It was a Court driven procedure from time of commencement till the time the court sanctions the compromise and arrangement A Compromise is an agreement between a Company and its CR where the CR agree to accept less than their full claims against the Company accept 50c in the Rand in full settlement of what is due to them Reason for the court involvement is to protect parties who may be affected by the compromise and to ensure parties are not prejudiced 2008 Act does away with court involvement in commencing the procedure and in reaching a compromise 2008 Act compromise can apply to a Company even if it is not financially distressed, but they do not apply to a Company already engaged in BRP/ a company is s 128(1) of the 2008 Act See table 12.1 – who may propose a compromise- BOD, Liquidator Read further PART A – C  The information that a proposal for compromise must contain The proposal must contain all information reasonably required to assist creditors in deciding whether to accept or reject it. It must contain Part A-Background, Part B-Proposals, Part C- Assumptions and Conditions and a certificate by an authorised director. Who can To whom? How? To whom? propose a compromise BOD Company Deliver a copy Every creditor liquidator creditor of the of the Members of proposal and company any class of notice of Every the company meeting to member of creditors consider the the class of proposal the relevant creditor Commissioner  Briefly outline the requirements for a compromise The details of the proposal (Part B) must include, amongst other things: Details of any proposed debt moratorium Extent of any release of the company from payment of its debts Any conversion of debt to equity Treatment of contracts The property that will be available to pay creditors’ claims and the order of preference for payment of creditors The benefits of adopting the proposal as opposed to the benefits that creditors would receive in the event of liquidation.  Broadly differentiate between winding-up and deregistration of companies Winding Up of a Solvent Company dealt with in 1973 and 2008 Act – Chapter 15 1. A solvent company can be dissolved by Voluntary winding up initiated by the a) Company or b) winding up and liquidation by a court order 2. A solvent company does so voluntarily when the Company adopts a special resolution to do so. The company remains a juristic person and retains all its powers while being wound up voluntarily, but it stops carrying on business to the extent required for the beneficial winding up, the powers of the directors cease except where they are authorised by the liquidator, shareholders or creditors Before the resolution and notice is filed the Company must: a) Arrange for security to pay the Company’s debts no more than 12 months after the start of winding up b) Obtain consent of the Master to dispense with security c) Read further Read s 80  Broadly differentiate between winding-up and deregistration of companies. Pending the enactment of a new unified Insolvency Act, the winding-up of insolvent companies continues to be in terms of the 1973 Companies Act The winding-up of solvent companies is dealt with partly in terms of the 1973 Companies Act, and partly in terms of the 2008 Companies Act In terms of the 2008 Companies Act, solvent companies may be wound up: Voluntarily by special resolution of the shareholders By court order. The shareholders of a solvent company may resolve to wind it up by passing a special resolution to that effect Before filing the resolution, the company must either: Lodge security for the payment of its debts with the Master, or Submit to the Master: A sworn statement by a director that the company has no debts, and A certificate issued by the company’s auditor or accountant stating that the company has no debts. Broadly differentiate between winding-up and deregistration of companies A company is dissolved (and therefore no longer exists as a juristic person) from the date that Companies and Intellectual Property Commission removes the company’s name from the companies register The dissolution of the company does not absolve former directors or shareholders from any liability which they may have incurred as a result of any acts or omissions which occurred while the company was still registered. Deregistration takes place when: The Master files a certificate with the Commission confirming that the company has been completely wound up The company has transferred its registration to a foreign jurisdiction The company has failed to file an annual return for two or more successive years The company has been inactive for seven years The directors request deregistration as the company has ceased to conduct business and has no assets. 80. Voluntary winding-up of solvent company (1) A solvent company may be wound up voluntarily if the company has adopted a special resolution to do so, which may provide for the winding-up to be by the company, or by its creditors. (2) A resolution providing for the voluntary winding-up of a company must be filed, together with the prescribed notice and filing fee. (3) If a resolution contemplated in this section provides for winding-up by the company, before the resolution and notice are filed the company must- (a) arrange for security, satisfactory to the Master, for the payment of the company‟s debts within no more than 12 months after the start of the winding-up of the company; or (b) obtain the consent of the Master to dispense with security, which the Master may do only if the company has submitted to the Master- (i) a sworn statement by a director authorised by the board of the company, stating that the company has no debts; and (ii) a certificate by the company‟s auditor, or if it does not have an auditor, a person who meets the requirements for appointment as an auditor, and appointed for the purpose, stating that to the best of the auditor‟s knowledge and belief (4) Any costs incurred in furnishing the security referred to in subsection (3) may be paid by the company. (5) A liquidator appointed in a voluntary winding-up may exercise all powers given by this Act, or a law contemplated in item 9 of Schedule 5, to a liquidator in a winding-up by the court- (a) without requiring specific order or sanction of the court; and (b) subject to any directions given by- (i) the shareholders of the company in a general meeting, in the case of a winding-up by the company; or (ii) the creditors, in the case of a winding-up by creditors. (6) A voluntary winding-up of a company begins when the resolution of the company has been filed in terms of subsection (2). (7) When a resolution has been filed in terms of subsection (2), the Commission must promptly deliver a copy of it to the Master. (8) Despite any provision to the contrary in a company‟s Memorandum of Incorporation- (a) the company remains a juristic person and retains all of its powers as such while it is being wound up voluntarily; but (b) from the beginning of the company‟s winding-up- (i) it must stop carrying on its business except to the extent required for the beneficial winding-up of the company; and (ii) all of the powers of the company‟s directors cease, except to the extent  Winding up of Solvent company by Court Order 81. Winding-up of solvent companies by court order (1) A court may order a solvent company to be wound up if- (a) the company has- (i) resolved, by special resolution, that it be wound up by the court; or (ii) applied to the court to have its voluntary winding-up continued by the court; (b) the practitioner of a company appointed during business rescue proceedings has applied for liquidation in terms of section 141(2)(a), on the grounds that there is no reasonable prospect of the company being rescued; or (c) one or more of the company‟s creditors have applied to the court for an order to wind up the company on the grounds that- (i) the company‟s business rescue proceedings have ended in the manner contemplated in section 132(2)(b) or (c)(i) and it appears to the court that it is just and equitable in the circumstances for the company to be wound up; or (ii) it is otherwise just and equitable for the company to be wound up; (d) the company, one or more directors or one or more shareholders have applied to the court for an order to wind up the company on the grounds that- (i) the directors are deadlocked in the management of the company, and the shareholders are unable to break the deadlock, and- (aa) irreparable injury to the company is resulting, or may result, from the deadlock; or (bb) the company‟s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock; (ii) the shareholders are company to be wound up; (e) a shareholder has applied, with leave of the court, for an order to wind up the company on the grounds that- (i) the directors, prescribed officers or other persons in control of the company are acting in a manner that is fraudulent or otherwise illegal; or (ii) the company‟s assets are being misapplied or wasted; or (f) the Commission or Panel has applied to the court for an order to wind up the company on the grounds that- (i) the company, its directors or prescribed officers or other persons in control of the company are acting or have acted in a manner that is fraudulent or otherwise illegal, the Commission or Panel, as the case may be, has issued a compliance notice in respect of that conduct, and the company has failed to comply with that compliance notice; and (ii) within the previous five years, enforcement procedures in terms of this Act or the Close Corporations Act, 1984 (Act No. 69 or 1984), were taken against the company, its directors or prescribed officers, or other persons in control of the company for substantially the same conduct, resulting in an administrative fine, or conviction for an offence. Winding up of an insolvent Company See TB page 385 Deregistration of Companies S 14 of 2008 Act deals with registration of Pty’s S 83 (1) – Pty is dissolved from the date its name is removed from the Companies Register S 83 (2) - removal of Pty’s name from the Companies register does not affect the liability of any former director/s/holder of the Pty/any other person iro any act/omission that took place before the Pty was removed from the register See procedure for deregistration of a Company S 82 (1) The Master must file a certificate of winding up of a company in the prescribed form when the affairs of the company have been completely wound up. [Subs. (1) substituted by s. 51 of Act 3/2011] (2) Upon receiving a certificate if the Commission must- (a) record the dissolution of the company in the prescribed manner; and (b)(b) remove the company's name from the companies register. (3) the Commission may remove a company from the companies register only if the company has transferred its registration to a foreign jurisdiction in terms of subsection 82(5), or-(i) has failed to file an annual return in terms of section 33 for two or more years in succession; and (ii) on demand by the Commission, has failed to give satisfactory reasons for the failure to file the required annual returns; or show satisfactory cause for the company to remain registered; or the Commission can remove a company if it has determined in the prescribed manner that the company appears to have been inactive for at least seven years, and no person has demonstrated a reasonable interest in, or reason for, its continued existence; or has received a request in the prescribed manner and form and 83. Effect of removal of company from register (1) A company is dissolved as of the date its name is removed from the companies register unless the reason for the removal is that the company’s registration has been transferred to a foreign jurisdiction, as contemplated in section 82(5). [Subs. (1) substituted by s. 52 of Act 3/2011] (2) The removal of a company’s name from the companies register does not affect the liability of any former director or shareholder of the company or any other person in respect of any act or omission that took place before the company was removed from the register. (3) Any liability contemplated in subsection (2) continues and may be enforced as if the company had not been removed from the register. (4) At any time after a company has been dissolved- (a) the liquidator of the company, or other person with an interest in the company, may apply to a court for an order declaring the dissolution to have been void, or any other order that is just and equitable in the circumstances; and (b) if the court declares the dissolution to have been void, any proceedings may be taken against the company as might have been  Questions 1. What does the term ‘business rescue’ refer to? 2. When is a company considered to be financially distressed? 3. How is an affected person defined in the context of a court order to commence business rescue proceedings? 4. What are the circumstances under which business rescue proceedings may not be adopted by a resolution of the board 5. According to the Companies Act 71 of 2008, how can business rescue proceedings be commenced? 6. Who is the business rescue practitioner? 7. What role do they play? 8. What is the business rescue plan? What information must the business rescue plan contain? 9. What are the legal consequences of business rescue proceedings? 10. What are the exceptions to the moratorium on civil legal proceedings? 11. How are employees protected during business rescue proceedings?  Questions 12. How can the procedure of compromise be defined? What is the purpose of a compromise? Who are the parties involved in a compromise? Who may propose a compromise to whom? 13. What does winding-up refer to? 14. How does the winding-up of a solvent company differ from the winding-up of an insolvent company? Why is the winding-up of insolvent companies still covered by the Companies Act 61 of 1973? How is winding-up different from deregistration? At what point is a company considered to be dissolved, in terms of section 83(1) of the Companies Act 2008? 15. What does section 83(2) state, regarding the liability of former directors or shareholders of a company, once the company’s name has been removed from the company’s register? 16. What occurs when a company is deregistered?