Too soon for business rescue

Apr 6, 2020

Business Rescue is not covered in the practice note issued by CIPC. Here some things of which you should be aware.

The Companies Act, Section 129 (7):

If the board of a company has reasonable grounds to believe that the company is Financially Distressed, but the board has not adopted a resolution placing the company in business rescue, the board must deliver a written notice to each Affected Person, setting out the criteria referred to in section 128 (1) (f) that are applicable to the company, and its reason for not adopting a resolution contemplated in this section.

Section 128 (1) (a) “Affected Person” means

  • A shareholder of the company
  • A creditor of the company
  • Any registered trade union representing employees of the company
  • Any employees not represented by a registered trade union.

Section 128 (1) (f) “Financially Distressed” means

(i) it appears to be reasonably unlikely that the company will be able to pay all its debts as they become due and payable within the immediately ensuing six months; or

(ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

So what now?

We expect banks to behave in a manner inconsistent with the spirit of the State of Disaster. I have already heard stories, first hand.
Banks and other creditors will use all the leverage they have at the end of this period. And yes, you can always resort to “Covid19 being the reason” for non-payments and so forth.
I am not an attorney. You should give your own friendly legal bloke a call to check on where you stand with force majeure. You may want to talk that through for both debtors and creditors.

And then ask your attorney:

  • Would they use every angle at their disposal to win a case for you?
  • Does that include collecting from your debtors?
  • If the insolvent debtors have not complied with the requirements laid out in the first part of this blog… Will they go after the directors, personally?

Of course, the answers are yes, yes, and yes.

So here we are.

Small businesses all over the world are facing cash flow problems and worse. Goodwill amongst their owners is reasonably healthy right now.
But that isn’t going to last. And if your attorney is going to go after your debtors for you, why won’t your creditors do the same to you? Through their attorneys, of course.
Perhaps while you are on that call with the legal bloke, ask him about completing a CoR123.3.

There are two questions to be answered in the form.

  • The first involves a declaration that the company is reasonably likely to be unable to meet its obligations as they fall due in the next 6 months; and
  • The second involves an explanation which can be loosely summarised as: “The reason is that the world as we know it is busy changing, and the ability to make our usual sales is going down the toilet. But we are confident that once sanity returns we will be able to make profits again.” You may want to rephrase that.

I think your lawyers will tell you that this document will mean that the directors will not be sequestrated on the alter of a company liquidation.
Unless of course, those directors have signed sureties for credit lines. That’s another issue.
But at least the directors will not be declared delinquent through the process.
Just make sure you have it delivered to every single Affected Person as described above. Oh, and make sure you have a meeting of directors and that this decision is properly minuted.
There is also some confusion between the CIPC website which says the document must be filed with it, and the Companies Act and the Companies Regulations which do not say so.

Again, if you’re going to protect yourself properly… Your legal guy… but you know that.


business rescue, Cashflow, Covid19, Funding, State of Disaster

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