With the introduction of the Companies Act 71 of 2008, which came into effect in 2011, companies who find themselves in financial distress are now afforded to opportunity to attempt corporate restructuring, or business rescue, in order to avoid bankruptcy. This replaces the old system of judicial management and makes way for a new way of looking at business in need of help while keeping the needs of all stakeholders in mind.
Under the act, a company may approach a business rescue practitioner who may be able to advise them on how to reorganise and restructure their business in order to turn it back into a profitable entity once again. Some of these actions include creating a payment scheme for creditors, ensuring that jobs aren’t lost and eliminating those areas where the business may be bleeding money. It is exactly what the name says, a restructuring of the commercial entity in order to make it run more efficiently.
The ultimate goal of business rescue is to rehabilitate a company to the point that is no longer considered financially distressed. This also includes placing a moratorium on any liquidation proceedings when a company is the process of business rescue – which may, in turn, affect the creditors, shareholders and employees of the company. Not an easy task to balance both sides of the coin. Although not entirely accurate, let’s look at an example of a “compromise” between a commercial entity and creditor. A recent large clothing retailer found itself in financial distress and as part of its restructuring attempts, it struck a deal with its landlords in various locations. In exchange for a considerable reduction in rent, the landlords were promised a share in the profits when the retailer got back on its feet again. Compromises like these are provided for under section 155 of the act.
In order to qualify for commercial restructuring, a business needs to prove that it is in fact in financial distress – which means they are unable to pay all their debt within the next 6 months, after which they will be insolvent.
If you are in need of advice regarding commercial restructuring, do not hesitate to send us a query and we can refer you to a commercial lawyer who can advise on the best business rescue practices.
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