By Jehoshaphat John Njau 7 June 2023
The proverbial “new kid on the block” that is the Companies Act 71 of 2008 has introduced a new lease of life in the form of business rescue proceedings to companies in financial distress aimed at alleviating the pressure brought upon them by creditors demanding payment of the debts owing to them. In doing so, it keeps companies alive and prolongs the benefits enjoyed by the community which a company serves, saves jobs whilst creating a sustainable corporate environment.
However, for the company in financial distress to enjoy the benefits of business rescue it must show that there is a reasonable prospect of the company being rescued.
The objective of business rescue proceedings is twofold, firstly, to assist a company to trade back to state of solvency, where it is no longer financially distressed and secondly, to obtain a better return for creditors that would result if the company was liquidated. But to succeed with a business rescue court application, the company in financial distress bears the onus of proving that there are reasonable prospects of the company being rescued.
Unfortunately, the Companies Act of 2008 has not defined the phrase “reasonable prospect” leaving the courts and companies with a mountain to climb in attempts to establish and ascertain the meaning of this phrase.
In its recent judgement, the Supreme Court of Appeal (SCA) was called to decide in the case of Kgoro Consortium (Pty) Ltd and Another vs Cedar Properties 39 (Pty) Ltd, whether Kgoro Consortium (Pty) Ltd as the applicant, had proved that Cedar Park Properties had reasonable prospects of being rescued.
To be successful with its application, Kgoro Consortium had to convince the court that there were reasonable prospects of rescuing Cedar Park. To succeed, the SCA confirmed that Kgoro Consortium had to prove the following:
i. Prospects of trading out of financial distress:
- A company must establish that there are reasonable prospects of trading out of its financial distress to a state of solvency by showing that the company is capable of continuing to trade and continue to trade its was out of financial distress.
ii. Prospects of yielding a better return:
- Next, a company has to prove that there are reasonable prospects of obtain a better return for creditors than in a liquidation scenario by demonstrating how a better return could be achieved through rescue as opposed to liquidation.
In conclusion, for a company to succeed in proving a reasonable prospect of it being rescued it will have to advance concreted evidence supported by ascertainable facts in its business rescue plan that the business would return to solvency and provide better return for its creditors not just rely on vague speculative allegations.