The directors of a company, which will not be able to pay its debts in the immediately ensuing six months, has an obligation to make a decision whether or not the company will commence with business rescue proceedings.
In the event that the directors decide not to commence with business rescue proceedings, the Companies Act stipulates that the company must deliver a written notice to each affected person setting out the test for financial distress and the extension to which it applies to the company, as well as the reasons why they decided not to pass a resolution for the commencement of business rescue proceedings.
The consequences of this notice may be severe, because such a notice advises the world at large that the company is in financial distress and is on the verge of insolvency. Therefore the decision to send out the notice must be carefully considered and exercised with caution.
In the event that the directors of a company do decide to commence with business rescue proceedings, the directors will simply pass a resolution that the company voluntarily commence business rescue proceedings and will be placed under supervision of a business rescue practitioner.
When the directors of a company cannot agree on whether or not the company must commence with business rescue proceedings, only a majority vote is required to place the company under supervision.
The company will appoint a business rescue practitioner.
It is also possible for any affected person to formally apply to court for an order placing the Company under supervision and commencing business rescue proceedings on the basis that –
- The company is financially distressed;
- The company has failed to pay over any amounts in terms of its obligations; or
- It will be just and equitable to do so for financial reasons.
The affected person must however also indicate that there are reasonable prospects of rescuing the company.
Once the court made an order placing the company under supervision, the court will temporally appoint a business rescue practitioner. At the first meeting the creditors will the decide who will be the business rescue practitioner.