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Business Rescue
E-mail address: businessrescue@cipc.co.za
Forms
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Type of Form
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Description
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Conditions
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| CoR 123.1 |
Notice of Start of Business Rescue Proceedings
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| CoR 123.2 |
Notice of appointment of Practitioner
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Payment of R 80 filing fee
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CoR 123.3
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Notice to not commence business rescue proceedings
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| CoR 125.1 |
Notice concerning status of Business Rescue Proceedings
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| CoR 125.2 |
Notice of Termination of Business Rescue Proceedings
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| CoR 125.3 |
Notice of Substantial Implementation of a Business Rescue Plan
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CoR 126.1
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Application for license as a Business Rescue Practitioner
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Payment of R 500 application fee
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CoR 126.2
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Certificate of Practitioner License
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All businesses that are financially distressed and want to takea decision to start rescue proceedings can file notices prescribed in the Act.
Chapter 6 of the Companies Act 2008 (Act 71 of 2008) provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders.
Principles relating to corporate rescues are introduced which brings South Africa in line with international principles of turnarounds and corporate rescue as they exist in foreign jurisdictions.
The regime of judicial administration of failing companies is overhauled with a modern business rescue regime that is:
- largely self-administered by the company,
- under independent supervision (practitioner)
- subject to court intervention
The Act recognises the interests of stakeholders in general (shareholders, creditors and employees) and provides for their respective participation in the development and approval of a business rescue plan.
It is envisaged that the function will stretch further than the administration and filing of Notices to start and end business rescue processes and will also involve the establishing of business rescue as a profession through the establishing of an accreditation model for business rescue practitioners.
The success of business rescue will be closely monitored to ensure that South Africa sets an example not only nationally, but also internationally.
Taking a section 129 decision and appointing a deserving practitioner
Looking at the wider meaning of the words rescue and business will shed some light on the intention of and or the spirit of the Companies Act that is often referred to in conversations. The definition of rescue as it is found in the dictionary (Funk and Wagnells Standard Dictionary International Edition), means “To save or free from danger, captivity or evil” and Business is “A pursuit or occupation, trade, profession, calling and further Commercial affairs enterprise or establishment and To mean business - Is to be serious!!
The decision to file a Notice of Beginning Business Rescue is a serious one and should be treated in that way as the implications are far reaching. Business rescue is aimed at assisting with the rehabilitation of a company in financial distress. The process provides:
- temporary supervision of the company,
- a temporary moratorium on the rights of creditors and
- a plan to rescue the company and help it to stay solvent and in business.
Companies that qualify for this process are those that are likely to become insolvent (where liabilities exceed assets) or those unlikely to be able to pay their debts as they fall due and payable in the coming six months. The timing of the decision is the most important element that determines a successful saving, followed shortly by making the right choice when appointing a business rescue practitioner.
The key consideration will be in the ability on the part of the practitioner to work with existing management and directors and to ultimately then be successful in the turnaround of a financially distressed company.
Important provisions affecting the rights of creditors
Some of the most important provisions are those affecting the rights of creditors.
Section 133 of the Companies Act, 2008 (Act 71 of 2008) places a general moratorium on legal proceedings against a company in business rescue. Third parties will also not be able to enforce any guarantee or surety without permission from the court.
According to section 154(1) of the Act, a business rescue plan may provide that a creditor who has acceded (voted in favour) of the discharge of the whole or part of the debt owing to that creditor, will be prohibited from enforcing the relevant debt or part of it against the company.
A concern that has been raised with the CIPC from a creditor’s point of view is that they are not notified in time that a company is in financial distress and had opted to file a Notice of Beginning Business Rescue. They are further also not informed who the appointed practitioner is. In such instances creditors feels frustrated as they will not be able to use legal proceedings to recover money while the company remains in business rescue. Comprehensive communication that is done on time and to all relevant parties is therefore a crucial element of a successful rescue operation.
The practitioner must realise that he or she is appointed in a powerful position that, if not handled responsibly, could result in the business rescue provisions of the Act being abused and perceived as an interim step before liquidation or as staying tactics to prevent liquidation.
Employees, their rights and remedies
Protection is provided to employees and workers as part of various “Affected Persons” and they are also in a position to bring business rescue proceedings in terms of the Act. These include any registered trade union or any employee of the company or their respective representatives.
During a company’s business rescue proceedings, employees of the company, immediately before the commencement of these proceedings, would continue to be employed by the company on the same terms and conditions, except to the extent that:
- changes occur in the ordinary course of attrition;
- or the employees and the company, in accordance with applicable labour laws, agree different terms and conditions; and
- any retrenchment of any such employees contemplated in the company’s business rescue plan will be subject to the relevant provisions of the Labour Relations Act, 1995.
They are further protected by:
- recognising them as creditors of the company with a voting interest to the extent of any unpaid remuneration before the commencement of the rescue process;
- Requiring consultation with them in the development of the business rescue plan;
- Permitting them an opportunity to address creditors before a vote on the plan; and
- Gives them, as a group, the right to buy out any unco-operative creditor or shareholder who has voted against approving a rescue plan.
Rescuing businesses in distress not a task for “sissies”
The heading above is luckily, not 100% completely true in this instance. From the 1st of May 2011 when the new Companies and Intellectual Property Commission (CIPC) opened its doors, 165 Applications for Practitioner’s Licence in terms of section 138 of the Companies Act were received and of the 165 applications, 16 applications were from females. Therefore, a mere 9.7% of applications were from woman. While perhaps insignificant when expressed in numbers, there are definitely woman practitioners and they are taking care of or are involved in some of the biggest projects running.
The first lady issued with a conditional interim license, which is operating from a Cape Town based office is co-appointed in a property group that consists of nine companies. The property syndication group is made up of 5 private companies and 4 public companies.
The second provisionally licensed lady is based in Pretoria and she currently supervises the rescue operations of 2 private companies and 3 close corporations. One of them is nearing the end of a successful rescue operation, where the rescue plans prepared were unanimously accepted
Two others have joint appointments. The rest have not been issued with a conditional license yet.
The provisions and remedies available in chapter six of the Companies Act do not exclude small businesses registered as close corporations. Business formats that are, however, excluded are trusts as set up through the Master’s office, partnerships and sole proprietors.
Responsibilities of directors and members when companies or close corporations are financially distressed
A director or a member would have a duty to pass a resolution for a company’s business rescue or alternatively resolve to wind up or liquidate as soon as he or she becomes knowingly aware that the company is either:
- financially distressed or
- is trading in insolvent circumstances (both factually in that its liabilities exceed its assets, and commercially in that it cannot pay its debts to creditors as and when they fall due).
The definition of financial distress in reference to a particular company at any particular time is further elaborated on and means that:
- it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuring six months; or
- it appears to be reasonably likely that the company will become insolvent within the immediately ensuring six months.
If a company is financially distressed and directors decide not to place it into business rescue, directors will be under a statutory obligation, in terms of section 129(7), to deliver a written notice to each affected person, confirming that:
- the company is financially distressed and
- is not being placed into business rescue and
- providing reasons for this.
The decision by a board to pass a resolution for business rescue needs to be done urgently to enable the business rescue practitioner to take control for the purposes of having a business rescue plan approved and thereafter implemented.
Responsibilities of directors and members when companies or close corporations are under business rescue
During the company’s business rescue proceedings, each director of the company:
- would continue to exercise the functions of a director subject to the authority of the practitioner duly appointed
- must assist the practitioner that is expected to operate the company and to continue to run its business
- may delegate any power or function to the practitioner duly appointed that would have full management control of the company in substitution for its board and pre-existing management.
Conditional interim licenses – the “win win” solution
The Companies and Intellectual Property Commission (CIPC) has decided to thoroughly investigate turn around practices locally and internationally before final licenses are granted to appropriate applicants to execute business rescue proceedings.
Discussions are being held with academics and other interested parties to craft a way forward that would support the spirit of the Act. It is envisaged that the final criteria will be in place and ready to be rolled out at the end of March 2013.
It will, however, serve little purpose to apply unless you have been approached by a business in financial distress to serve as their rescue practitioner.
In the interim, all businesses that are financially distressed and want to take a decision to start rescue proceedings can file notices prescribed in the Act on form CoR 123.1 with the CIPC
Businesses are advised to identify a prospective practitioner that will have to apply to the CIPC to be issued with a license. Such licenses will be considered on an urgent basis. The interim conditional licences will be granted for a limited period and will relate only to that specific business.
Prospective practitioners – Guidelines when approached by a business who wants to file a notice of beginning business rescue
GUIDELINES FOR PROSPECTIVE PRACTITIONERS
(A TICK LIST)
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Form CoR 126.1 (Applications for licenses to serve as a business rescue) |
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Customer code (Registration with CIPC - see process on website – Register as a customer) |
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Paid R500 into customer account that was opened with CIPC |
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A comprehensive resume containing full and detailed particulars of the applicant’s history and relevant practical experience in business turn around practice |
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Motivation to substantiate the specific group or category that the applicant wishes to be licensed for clearly demonstrating relevant experience for a:
senior practitioner (combined period of at least 10 years)
experienced practitioner (combined period of at least 5 years)
junior practitioner (combined period of less than 5 years) |
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Evidence to substantiate the factual information in respect of history and relevant practical experience |
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Provide applicable references that relate to the years of experience required for the specific category |
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Certified copies of suitable educational qualifications that will sufficiently demonstrate that you are equipped to perform the functions of a business rescue practitioner |
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Registration number/s that reflects membership of relevant professional body or bodies |
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Certified copy of your Identity Document or Passport |
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A letter from the business that is applying for business rescue proceedings that nominates the applicant as the rescue practitioner |
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Public Interest score of Company and Industry affiliation |
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A statement that the applicant is not disqualified from being appointed as a practitioner in terms of section 138(1) (c) or (d) and a letter in which he/she accepts the appointment |
“Publishing” as expressed in the Companies Act - an explanation
The expression “publish a notice” is defined in regulation 1 of the Companies Regulations as follows:
“’publish a notice’ means to publicise information to the general public, or to a particular class of persons as applicable in specific circumstances, by any means that can reasonably be expected to bring the information to the attention of the persons for whom it is intended;”.
The prescribed manner is contained in regulation 123 (2) and read as follows:
- After filing its Notice of Commencement of Business Rescue Proceedings, the company must publish that Notice as required in section 129 (3)(a), by—
- delivering a copy of the Notice and resolution to every affected person in accordance with Regulation 7; and
- conspicuously displaying a copy of the Notice––
- at the registered office of the company, the principal places of conducting the business activities of the company and at any workplace where employees of the company are employed;
- on any website that is maintained by the company and intended to be accessible by affected persons; and
- if it is a listed company, on any electronic system maintained by the relevant exchange for the communication and inter-change of information by and among companies listed on that exchange.
Publishing of the Business Plan is also prescribed in the Regulations 125(3) as follows:
A business practitioner must publish a proposed business rescue plan, as required by section 150 (5), by––
- informing each affected person of the availability of the plan, in the manner contemplated in section 6 (11)(b)(ii) and regulation 6;
- conspicuously displaying a notice of the availability of the plan––
- at the registered office of the company that is undergoing business rescue proceedings, the principal places of conducting the business activities of the company and at any workplace where employees of the company are employed;
- on any website that is maintained by the company and intended to be accessible by affected persons; and
- if it is a listed company, on any electronic system maintained by the relevant exchange for the communication and inter-change of information by and among companies listed on that exchange; and
- providing a free copy of the plan to any affected person who requests such a copy.
Steps to follow by companies that are “Financially distressed” as defined in the Act
- Business rescue proceedings begin when the Board passes a resolution that the company voluntarily begins business rescue proceedings, (section 129).
- Form CoR 123.1 completed and filed with CIPC - In support of this Notice, the company must attach a sworn statement of the relevant facts upon which the resolution was founded by a director representing the Board and the set out the reasonable prospects of being rescued.
- Send a letter to the Business Rescue Department to advise on recommended practitioner that will be accredited and issued with an interim conditional license.
- Within five days after filing a resolution, the company must appoint a business rescue practitioner, conditionally licensed for the project.
- File and Publish the Notice of appointment as prescribed in the regulations on Form CoR 123.2 with the CIPC within two days of appointment.
- The company must also inform all affected parties of the appointment.
No liquidation proceedings must have commenced against the company when a decision is taken in terms of section 129.
Judgements
New, but six months down the line, can one say “somewhat tested business rescue”
Recent Judgement:Cape Point Vineyards (Pty) Ltd v Pinnacle Point Group Ltd & others no 12746/2011 of 11 August 2011 (WCC)
Companies Act 71 of 2008, s 131(2), s 135(3), reg 124 read with reg 7
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Cape Point Vineyards v Pinnacle Point Group |
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Business rescue – notification requirements |
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The court can make a costs order in favour of an applicant for business rescue. Where it is practically unfeasible to comply with the requirements for the notification of affected persons, applicants should obtain an order for substituted service. |
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Facts
Pinnacle Point Group, a listed holding company, was placed in business rescue on the application of Cape Point Vineyards. The court did not have to deal with the merits of business rescue in the circumstances.
Only two procedural issues had to be determined in this matter:
- Whether the court could order Pinnacle Point to bear the costs of the application despite the fact that the Companies Act, 2008 (Act), did not provide for costs orders in business rescue applications.
- The notification of affected persons as required by s 131(2) of the Act read with regulation 7(1).
Although the application was launched on 27 June, it was only on 19 July, about a week before the hearing, that creditors were sent a copy of the application by email. Shareholders were not informed individually and did not receive a copy of the application, but an announcement was made on the JSE Securities Exchange’s notification system (SENS). The company’s 11 employees were not notified of the application.
The court had to decide if this non-compliance should be condoned. |
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Ruling
- Chapter 6 of the Act does not provide for the recovery of the costs of an application for a business rescue order. However, the High Court has an inherent jurisdiction to make cost orders in any type of proceedings.
- As business rescue seeks to advance the interests of creditors and shareholders in general, it is fair to instruct the company to bear the costs of the application.
- If the company is liable for the applicant’s costs, there will be a “claim arising out of the costs of the business rescue proceedings” under s 135(3). It will enjoy priority on the same level as the practitioner’s remuneration and expenses, ranking ahead of any post-commencement finance under s 135(1) and (2).
- Given the urgency of the matter and the practical difficulties in notifying a large number of shareholders, it was reasonable to condone the non-compliance.
- Despite the distinction in s 131(2)(a) and (b) between the “service” of a copy of the application on the company and the commission, and mere “notification” of affected persons, regulation 124 requires delivery of a copy of the court application in both instances. This is possibly ultra vires.
- It will often not be feasible to comply with regulation 124 and, as the court is empowered under regulation 7(3) to order substituted service, an application for directions on service is preferable to relying on condonation.
- The court condoned the departure from the notification requirements prescribed by regulation and ordered that the applicant creditor’s costs were payable by Pinnacle Point.
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Interpretation by Prof van der Linde of University of Johannesburg
This judgement not only provides much-needed guidance on certain procedural aspects of business rescue applications, but is also an early example of how the Act is interpreted to give effect to its purposes.
One of the purposes of the Act is the efficient rescue and recovery of financially distressed companies. The court argued that if applicants could not recover their costs in business rescue applications they would rather apply for liquidation, which would mean that the Act’s preference for rescue over liquidation would not be achieved.
It will be interesting to see whether regulation 124 will survive a direct attack based on its requirement that affected persons should be supplied with an actual copy of the court application, while the regulation was merely supposed to prescribe how affected persons should be notified.
The court further identified two practical difficulties in implementing the notification procedure, namely that companies may need time to align their registers of securities holders with the new requirements. The share registers under the 1973 Companies Act did not require e-mail addresses and notifications, therefore did not have to deal with difficulties in e-mailing data-heavy files to thousands of shareholders. These difficulties seem to suggest that applications for substituted service are likely to succeed when a listed company is involved.
Applicants should remember that their notification duties do not extend to informing affected persons that the order has been granted. It is unwise to assume this responsibility via a draft order.
The court also pointed out that as all affected persons had the right to participate in hearings, they did not have to apply for leave to intervene. Procedures for the filing of affidavits will have to be developed in order to ensure fairness to all parties.
Statistical information
Statistics - Totals
Notices of Beginning of Business Rescue Proceedings Filed |
200 |
Registration Certificates issued and BR appointed |
178 |
Discarded not valid filings |
7 |
CoR 125. 1 Notice to end Rescue |
5 |
Application for Liquidation |
5 |
Pending Notices filed |
5 |
Written Enquiries received |
245 |
Applications for practitioners licenses received |
165 |
Trends Analysis
- Liquidation applications are being brought by the practitioners where creditors are opposing proposed rescue plans
- Qualifications and suitability of practitioner being questioned through court application (Gauteng High Court)
- Impartiality of practitioner being attacked and providing of post rescue finance by practitioner as a conflict (Durban High Court)
What is happening?
- Business Rescue Accreditation Model Liaison Committee will be formed
- Workshops with all Banks
- Training and awareness on request
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