Importance of business rescue plan when instituting rescue operation

It is clear from the definition of business rescue that, if a company cannot be rescued, a plan must be formulated that would achieve a better return (dividend) for the company's creditors than a dividend that would have been achieved if the company had immediately been liquidated.

This is termed the alternative object of business rescue.

The prerequisites for a business rescue order are that the company is financially distressed: it has failed to pay over any amount in terms of an obligation under or in terms of a public regulation or contract with respect to employment-related matters; or it is otherwise just and equitable to do so for financial reasons and there is a reasonable prospect for rescuing the company.

The court in the AG Petzetakis International Holdings Ltd vs Petzetakis Africa (Pty) Ltd and Others (Marley Pipe Systems (Pty)Ltd and Another Intervening) 2012 (5) SA 515 (GSJ) had to decide whether, on the contents of the founding affidavit before it, a business rescue order could be granted.

A reasonable prospect of rescuing the company must be present

The court held that the requirement of a reasonable prospect of rescuing the company must be present, irrespective of whether the company is financially distressed, irrespective of whether the company has failed to pay over any amount as alluded to above, and irrespective of whether it is just and equitable for financial reasons to place the company in business rescue.

The court held also that the likelihood of achieving a better return for the company's creditors must appear on the founding papers.

Importantly, the case demonstrates that the court accepts that the business rescue application predates the actual business rescue plan.

However, the court contends that the future business rescue plan is a factor to be taken into account when it considers the business rescue application. If the court is given an achievable draft business rescue plan with substantial support at the time of the court application, the prospects of it granting the application will be improved.

It is also important to be aware that the absence of a final business rescue plan at the time of the hearing of the application will not necessarily be fatal to the application.

Petzetakis has now brought certainty to an issue that attorneys and business rescue practitioners have been debating since the Act came into effect: whether or not a business rescue plan must be in existence at the time of instituting business rescue proceedings.

The two most important issues to be remembered from the Petzetakis case when drafting business rescue applications are that the founding affidavit must:

• Demonstrate a reasonable prospect of rescuing the company; and
  
• Highlight a draft business rescue plan which is achievable and substantially supported. The draft plan can always be modified by the creditors later.