Lowvelder Article for 21 April 2017
The Companies Act provides for a company in financial distress to commence with business rescue proceedings in an attempt to rescue the company. However, the Act also makes provision for a company to enter into a compromise or arrangement with its creditors.
Business rescue is a comprehensive procedure where a business rescue practitioner is appointed for the implementation of a plan to rescue the company from its financial distress. On the other hand, a section 155 compromise makes provision for the restructuring of the company’s affairs without the appointment of a business rescue practitioner. In terms of Section 155, the company may propose a compromise or arrangement to its creditors.
This process is not new to South Africa law and the Companies Act of 1973 already made provision of this kind, however, it was costly and cumbersome. The company also did not have an automatic moratorium available to prevent creditors from taking legal action against the company as it does have during business rescue proceedings.
A company which is in financial distress it would seem have only two options, either commence with business rescue proceedings or enter into a restructuring agreement with its creditors.
When a company intends to enter into a compromise or arrangement with its creditors the company must provide a detailed proposal, similar to that of a business rescue plan, to its creditors together with a notice as to when the meeting is scheduled for the creditors of the company to vote on the proposal.
In order for a Section 155 compromise or arrangement to be accepted 75% of the company’s creditors must vote in favour of the compromise or arrangement.
A Section 155 compromise or arrangement procedure is more streamlined than business rescue proceeding but it is to be noted that the company does not have the protection of an automatic moratorium against legal action during the period of renegotiation as it is the case with business rescue proceedings.
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