Advantages of voluntary corporate rescue

Proceedings

I have previously written several articles on insolvency practice covering both corporate rescue and liquidation. In this article I look at the advantages of voluntary corporate rescue proceedings versus involuntary corporate rescue.

Corporate rescue

In terms of section 121(1)(b) of the Insolvency Act (Chapter 6:07) (“the Insolvency Act”), corporate rescue means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:

the temporary supervision of the company, and of the management of its affairs, business and property.

a temporary moratorium on the rights of claimants against the company or in respect of property in its possession, and

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.

Types of corporate rescue proceedings

There are basically two types of corporate rescue proceedings:

Voluntary corporate rescue proceedings in terms of section 122 of the Insolvency Act, and

Involuntary corporate rescue proceedings in terms of section 124 of the Insolvency Act.

The main difference is that voluntary corporate rescue proceedings are done at the instance of the company whereas involuntary or forced corporate rescue proceedings are caused by affected person through securing a court order.

According to section 121(1) an affected person means a shareholder or creditor of the company, any registered trade union representing employees of the company and if any of the employees of the company are not represented by a registered trade union then each of those employees or their respective representatives.

Voluntary corporate rescue proceedings

According to section 122(1) the board of a company may resolve that the company voluntarily begin corporate rescue proceedings and place the company under supervision, if the board has reasonable grounds to believe that:

the company is financially distressed, and

there appears to be a reasonable prospect of rescuing the company.

According to section 122(2) the above resolution:

May not be adopted if liquidation proceedings have been initiated by or against the company.

Has no force or effect until it has been filed with the Master of the High Court and the Registrar of Companies.

According to section 122(3), within five (5) business days after a company has adopted and filed the voluntary corporate rescue resolution, or such longer time as the Master of the High Court, on application by the company, may allow, the company must:

Give notice of the voluntary corporate rescue, and its effective date, by standard notice to every affected person, including with the notice a sworn statement of the facts relevant to the grounds on which the board resolution was founded. According to section 2 “standard notice” means notice by registered mail, fax, e-mail or personal delivery.

Appoint a corporate rescue practitioner who satisfies the requirements of section 131 and who has consented in writing to accept the appointment.

According to section 122(4) after it has appointed a corporate rescue practitioner a company must:

File a notice of the appointment of a practitioner within two (2) business days with the Master of the High Court and the Registrar of Companies.

Publish a copy of the notice of appointment to each affected person within five (5) business days after the notice was filed.

Advantages of voluntary corporate rescue proceedings to the company

It is common cause that of late there have been companies placed under voluntary corporate rescue proceedings.

I explain below some of the considerations or advantages of voluntary corporate rescue proceedings.

Voluntary corporate rescue proceedings are at the instance or initiative of the company through its directors. Involuntary corporate rescue proceedings are forced by affected persons such as creditors through a court process.

The time of the corporate rescue proceedings is determined by the company itself through its directors.

The company has the opportunity to decide which corporate rescue practitioner to appoint. Corporate rescue practitioners, while they are independent, have different qualifications, experience, competencies or even styles. A company will have the chance to appoint a corporate rescue practitioner who meets its requirements for turning the company around.

The process of placing a company under corporate rescue is faster than involuntary corporate rescue as the latter has to go through the courts.

I can foresee voluntary corporate rescue proceedings being used more in the future due to its advantages to the company.

Disclaimer

This simplified article is for general information purposes only and does not constitute the writer’s professional advice.-herald