When a company faces financial distress, as is common during these Covid-19 times, a few options are available to the company itself and its stakeholders like creditors and members to turn the situation around. Here we highlight business rescue proceedings on the one hand and schemes of arrangements and compromises on the other hand provided under the provisions of the Corporate Insolvency Act, 2017.
Business Rescue proceedings essentially are aimed at facilitating the rehabilitation of a company that is financially distressed. This is done by providing for the temporary supervision of the company and management of its affairs, business and property; temporary moratorium on the rights of claimants against the company or in respect of property in its possession and the development and implementation of a plan to rescue the company by restructuring its affairs. The business rescue plan is required to be approved in accordance with the provisions of the Act.
Members can resolve voluntarily, or at the application of a stakeholder such as a creditor, the court may order the commencement of business rescue proceedings and place the company under supervision. For this to happen, there must exist reasonable grounds to believe that the company is financially distressed and that there appears to be a reasonable prospect of rescuing the company.
There must be need to maintain the company as a going concern and achieve a better outcome for the company’s creditors as a whole than is likely to be the case if the company were to be liquidated and realize the property of the company in order to make a distribution to one or more secured or preferential creditors. This process is supposed to be spearheaded by an expert known as a business rescue administrator.
Business recuse proceedings commence when the Court makes an order placing the company under supervision upon which a general moratorium on legal proceedings against company kicks in. A business rescue administrator is then required, after all stakeholders of the company, prepare a business rescue plan which can then be approved by the affected persons. Once approved and implemented as required, all affected persons become bound by the business rescue plan and cannot enforce their rights against the company unless in line with plan.
On the other hand, an arrangement is a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares in shares of different classes or by both methods. A compromise is an agreement with creditors to the effect that creditors write off a percentage of the amounts owing to them or grant an extension for repayment. Unlike business rescue, a scheme of arrangement and compromise can be resorted to irrespective of whether or not the company is financially distressed.
The company, creditor or member of a company may apply to the Court for an order that a meeting of the creditors or members or class of members be convened and conducted to consider the compromise or arrangement. A compromise or arrangement can be concluded between the company and its creditors or any class of its creditors or the company and its members or any class of its members. Once an order for the convening the meeting is made by the court, the meeting of the creditors or members will then be convened to consider the proposed arrangement or compromise. At the meeting, the proposed compromise will be put to a vote, the voting power at a meeting of creditors being assigned to the creditors in proportion to the amount of the debt outstanding from the company to each
Creditor. If the arrangement or compromise is approved by a resolution passed by a majority of not less than seventy-five percent of the votes of those entitled to vote, it becomes binding on all affected stakeholders once approved by the Court and appropriate filing with Registrar of Companies.
Though different they are different options, through business rescue or a scheme of arrangement or
compromise, the fortunes of a company in financial distress can be turned around.
Client Legal Alert – Equitas Legal Practitioners@2020
*This scholarly article is a general guide and does not contain definitive legal advice. Readers considering taking action on any of the issues discussed should speak to their legal advisors before taking any such action. Equitas disclaims any liability whatsoever arising from acting on this article.