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No easy entry into the business rescue regime

The courts are not easily persuaded to admit struggling companies and close corporations into the business rescue regime of the new Companies Act

Applications to place financially struggling companies or close corporations under business rescue continue to come before the courts, but it is already clear that judges do not view the prospects of a successful rescue through rose-tinted spectacles. In terms of the new Companies Act of 2008, the court must be satisfied, inter alia, that "there is a reasonable prospect" for rescuing the company" before it will grant an application for the company to be placed under supervision under the business rescue provisions of the Act.

As the court observed in Koen v Wedgewood Village Golf and Country Estate 2012 (2) SA 378 WCC at para [17], an applicant

" must satisfy the court that there is a reasonable prospect that the subject company can be rescued in the relevant sense by being placed under supervision. The information or evidence that will suffice to meet this requirement will depend on the object of the proposed business rescue, viz whether it is to achieve the continued existence of the company on a solvent basis; alternatively, to allow the company's business to be managed for an interim period to allow for a better return for the company's creditors or shareholders than would result from the immediate liquidation of the company. Whatever the object of the proposed business rescue, however; in order to succeed in the application the applicant must be able to place before the court a cogent evidential foundation to support the existence of a reasonable prospect that the desired object can be achieved."

In Breedt v P G Breedt Boorkontrakteurs CC [2013] ZAGPPHC 17 in which judgment was given on 4 February 2013, Hughes AJ said that in an application to place a company under supervision and commence business rescue proceedings in which the object is to secure a better return than would be obtained under immediate liquidation, as distinct from an application aimed at restoring the company to financial viability,

"the applicant would be required to set out in the founding papers a reasoned factual basis for the alternative scenarios that the court will have to consider, and lay a cogent foundation to enable the court to determine that there is a reasonable prospect that the better return evident on one of those scenarios can be achieved."

The court went on to say that "vague and speculative averments in the founding papers will not suffice" in this regard.

In this particular case, the applicant (who held a 70% member's interest in the close corporation in question) which owed him nearly R5 million on his loan account, submitted a 45 month cash flow forecast for the close corporation that showed a large injection of funds into the close corporation by way of fees to be paid for services in terms of a new contract. The applicant annexed to his affidavit a "letter of appointment" confirming this contract, which was projected to extend over a 72 month period.

The court, however, viewed this prospective contract with some scepticism, pointing out that it failed to disclose the progress made in the work that had been undertaken or the funds received by the close corporation in the ten months preceding the hearing of the application to court for business rescue proceedings to commence. Moreover, the close corporation had failed to respond to a request from the parties who were opposing the business rescue application to have sight of the contract itself.

From this, the court inferred that the contract had not yet been formalised and that the application to commence business rescue proceedings was merely a delaying tactic.

A person who has a prior business relationship with the company or close corporation that compromises his impartiality cannot be appointed as its business rescue practitioner

The court also pointed out that the person who was being proposed as the business rescue practitioner did not meet the qualifying criteria laid down in the Companies Act in that he had had a prior business relationship with the close corporation and that the resultant conflict of interest disqualified him from appointment in terms of section 138(1)(e) of the Act.

The court concluded that the application to commence business rescue proceedings was flawed and lacking in essential averments or was vague on pertinent issues. The court accordingly dismissed the application.

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