Alternative to Liquidation and Business Rescue
The Companies Act 71 of 2008 (“Companies Act”) provides the framework to liquidate a company, but also introduced an alternative to liquidation, namely business rescue proceedings – the biggest advantage of a successful business rescue being that the company continues to exist and employees are retained. Both liquidation and business rescue proceedings are draconic measures and are stringently regulated by legislation. Liquidators and business rescue practitioners are subject to control by the Master of the High Court (the Master) and the Companies and Intellectual Property Commission (CIPC) respectively, resulting in tedious, prolonged, as well as expensive administrative processes.
In both these options, control of the company no longer lies with the directors and is relinquished to an outsider, namely the liquidator or the business rescue practitioner.
However, this is not the case should a company propose a compromise with its creditors, as the compromise will be an agreement between the company and its creditors and neither the Master of the High Court nor the Companies and Intellectual Property Commission will be involved in the process.
The section 155 procedure and its advantages
Luckily section 155 of the Companies Act provides an alternative to both of the above mechanisms: the framework for a company (or a close corporation) to enter into a compromise with its creditors, the result of which is largely the same as a successful business rescue. Given the effect on the economy of the regulations promulgated to address Covid-19, coupled with the fact that it is illegal for companies to trade when insolvent, the section 155 compromise is an attractive solution to relieve companies of their financial obligations towards creditors and to assist companies in recovering from financial distress.
Section 155(1) of the Companies Act provides that a company may engage the procedure set out therein, irrespective of whether the company is financially distressed or not. The only requirement is that the company must not presently be undergoing business rescue proceedings. These principles are equally applicable to close corporations. The rationale behind section 155 is that the majority of businesses should be able to trade themselves into more favourable financial positions upon reaching an agreement with creditors.
The process entails the board of directors proposing a compromise to the company’s creditors (or to all of the members of a particular class of creditors), achieved via delivery of the compromise – which must contain sufficient detail to place creditors in the position to assess whether to accept or reject – as well as the notice of the meeting to be convened to consider the compromise. These two documents must be delivered to each creditor. The compromise must be supported by a majority in number, representing at least a 75% in value of the creditors or the class of creditors, present at the meeting and voting either in person or by proxy. Once the proposal has been adopted by the creditors, the company or close corporation may apply to court for an order approving the proposal which, if sanctioned, has the effect of making the order final and binding on all the business’ creditors or the members of the relevant class of creditors to whom the compromise is applicable.
Cost Effective Process
Simpler less stringent process
Remain in Control of your Company
The biggest advantage of the section 155 procedure (and of a successful business rescue) is the continued existence of the business and the minimisation of job losses in the economy, while the added bonus of the section 155 procedure is that control of the business remains with the directors who are, in theory, in the best position to manage the affairs of the company. Both liquidation processes and business rescue proceedings are expensive and lengthy, thereby making section 155 a more favourable option.
We need to evaluate your Business with the following as considerations:
Is there any current litigation or pending litigation
What is the size of the Debt that need to be covered in terms of our Corporate Guarantees
What are the assets of the company that could cover our Corporate Guarantees (30, 60, 90, 120 Days)
What is the current cashflow of the company
What is the probability to increase the cashflow and what plans are being made to achieve this
Do we need to activate our Business Development Team
What is the current overhead and expense structure of company and are there opportunities to reduce the overhead and expense structure
Do we need to onboard any other professionals such as auditors, advocates or other consultants
Our fees will be fully disclosed in the Initial Term Sheet. However the following are the principles that cover our fee structure:
Our fees must at all times be reasonable in terms of the service we provide
There are no hidden fees
Fees are designed to ensure the ongoing existence and future viability of the company
The fees must not compromise the company's financial position any further i.e it must not unreasonably or over burden the company
The fees must be recoverable from pro-rata trade and business improvement