Before 2011, under the old 1973 Companies Act the first signs of “financial illness” of businesses were mostly ignored and management invariably waited for the problems to “go away” instead of taking the necessary “medicine” early. This then led to more financial hardship which in most cases caused companies to go into liquidation with a very difficult prospect of restructuring its affairs.
Since 2011, with the promulgation of the new 2008 Companies Act, the options available to businesses showing the first signs of distress are more flexible and present opportunities for not only restructuring professionals but also to investors who wish to invest in potentially distressed situations at a lucrative return.
A further consequence of the new 2008 Companies Act is that directors need to be mindful that a failure to take the necessary action when the first signs of distress appear may lead to personal liability. This is provided for in section 129 (7) of the new Act.
Whilst it is so that entrepreneurs do not readily concede that they may have problems. It will be foolish not to seek official help with the first signs of “financial illness” appear. When positive cashflow is still available and potential shareholder assistance is still possible, the chances of the successful restructuring of the business showing such early signs of distress are so much greater. All that it requires is to seek early professional assistance!
The term ‘business rescue’ describes the purpose and aims of the corporate rescue procedure included under Chapter 6 of new Companies Act, and is also used as a noun to describe the proceedings encapsulated in Chapter 6 as a whole. The term ‘financially distressed’ means that when it ‘appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months’, or ‘appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.’
Business rescue proceedings can be initiated on a voluntary basis by way of a resolution of the board of directors of the company to begin business rescue proceedings, and also on a compulsory basis by way of an application to court by an ‘affected person’ – a shareholder, creditor, the registered trade union representing employees or any of the employees of the company.
Two requirements must be satisfied for the board of directors to voluntarily commence business rescue proceedings, namely, that the company is financially distressed and that there appears to be a reasonable prospect of rescuing the company. The board of directors of a company may accordingly commence business rescue proceedings by passing a board of directors’ resolution supported by a majority vote. When passing a resolution, the directors must act in good faith. Bad faith will be demonstrated when the intention of the directors in passing the resolution is an abuse.
Upon early signs of financial distress multiple layers of services are available to restructure such potential distressed financial affairs. There are multiple levels of skills available, such as the restructuring of employment contracts, a thorough look at a business’s tax affairs, assistance on cyber forensics, advice on corporate finance and then, if necessary, advice on business restructuring. Most importantly, where directors take pro-active steps to engage with its creditors, being its business’ most affected stakeholders during times of distress, they may, in the fullness of time, be seen to have taken all the reasonable steps necessary under such circumstances. A failure to do so may lead to undesirable consequences
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