3 Risks of business rescue you probably didn’t know about

The perspective of an experienced business rescue practitioner (BRP) adds some colour to the general consensus amidst the impact of the corona that seems to favour business rescue as a cure-all for companies in distress. It isn’t. It comes with very real risks. This is part one of a series of articles that will address some of the common misconceptions and risks associated with business rescue. 

Considerations for business rescue need to be adjudicated by the high court

Should the company be in the position where a creditor has applied for liquidation and the papers are with the courts, an application has to be made to the High Court to go into rescue. This application brings with it substantial cost. The application and the grounds upon which the Directors believe there is a case, has to go before a High Court judge. Having taken years to get into distress, the Directors will be hard-pressed to have available a detailed business case to put before the judge. If the judge doesn’t agree with the case presented, the Directors find themselves in a worse position than before and by this time the knowledge of the distress is in the public arena. If the judge accepts the business case, the company is in rescue!

Business rescue can, if there is no liquidation application in the works, be applied for, after the preparation of a company resolution in the approved format. This is a relatively simple process and can be done quickly. Once the CIPC (Companies and Intellectual Property Commission) has issued the necessary paperwork, a BRP must be engaged within 5 business days of filing the resolution with CIPC. They must find a competent person, who is available and who believes in the business being capable of being rescued.

The Directors have no authority

The Directors of the Company must understand that once the rescue practitioner is appointed, control of the business in all respects, is out of their hands. The BRP is now in control completely, subject only to the approval of the majority of the independent creditors. The BRP has no obligation to take instruction from the Board of Directors. The Board and the shareholders are rendered toothless. 

The BRP has the power to manage the company as they see fit. He can incur expenditure as he sees fit. Their duty is to act in the interests of the body of creditors.

Legal costs can be substantial

As the process is legalistic, and attorneys must be used in almost every stage of the process. Once you start the journey, there is no stopping it unless another application is made to the High Court at great expense.

 *We have attempted to make the reader aware of some of the pitfalls of business rescue. Be careful before embarking on this journey.

In conclusion, contrary to popular belief, distressed companies should consider ALL the other options before embarking on business rescue. There are a number of alternative processes and actions that may deliver a a more favourable result.

Read part two of this series of articles to learn more about the process of business rescue in South Africa.