Business rescue presents an opportunity for a more flexible approach to company restructuring. A number of corporate steps can be taken to restructure a company. These include the issue of shares, a change in the terms or classification of issued shares, a share buyback or any other scheme of arrangement.

There is usually a range of specific approvals and formal steps to be obtained and taken to properly implement a restructuring. For a share issue, ordinarily the board would resolve to issue the shares after ensuring that the shareholders pre-approved it in terms of s41 of the Companies Act, where necessary.

A reclassification of issued shares would need to be approved by shareholders via a special resolution registered with the Commission. Shareholders may need to be informed of their appraisal rights under s164, and some shareholders may enforce those rights. For a share buyback or other scheme of arrangement, the board must consider the solvency and liquidity test and, in most instances, shareholder approval will be required after the issue of an independent expert’s report on the effects of the proposed buyback or scheme. But does the usual rigmarole apply if the transactions are part of a business rescue plan which is properly adopted?

Business Rescue

The Companies Act provides some guidance. Section 137(1) allows an alteration in the classification or status of issued securities to the extent contemplated in an approved business rescue plan. Section 152(6) allows a business rescue practitioner to:

• determine the consideration for and issue any authorised securities in accordance with the adopted business rescue plan; and
• amend the memorandum of incorporation to authorise and determine the terms of new securities so that they may be issued in accordance with the adopted business rescue plan.

In light of these sections, share issues, share reclassifications and amendments to the memorandum of incorporation may be done by the business rescue practitioner without the usual shareholder approval, providedhe or she acts in accordance with the adopted business rescue plan. Shareholders are protected in that where the business rescue plan alters the rights of any securities holders, the plan is only adopted if a majority of the affected securities holders voting approve it.

The Companies Act also does away with the need for the usual board approvals. During business rescue the directors are subject to the authority of the practitioner and the practitioner has full management control of the company in substitution for its board (s137(2)(a) and s(1)(a)). Where the business rescue practitioner takes action under an approved business rescue plan, there is no need for board resolutions. As the court maintained in Moodley v On Digital Media and others 2014 (6) SA 279 (GJ) at [50] in relation to a share buyback “The provisions of s 48(2), requiring compliance with the liquidity and solvency requirements of s 46, are inapplicable to business rescue proceedings where the company in business rescue is under the control of a business rescue practitioner and not its board.”

Scheme of Arrangement

One of the most useful mechanisms for restructuring is a scheme of arrangement, but the sections on business rescue do not expressly permit the use of a scheme. Does the “change of status of issued securities” permitted interms of s137(1) mean that a business rescue plan can provide for a scheme of arrangement? This is a key issue when a practitioner is brokering a deal for a new funder to take control of the company and a scheme of arrangement could be precisely what is needed to effect the change of control. Section 114 of the Companies Act states that unless it is in business rescue or liquidation, the board of a company may propose a scheme of arrangement. It is proposed that s114 reads this way because during business rescue it would not be appropriate for the board to propose a scheme.

The scheme should be proposed by the practitioner in the business rescue plan. Section 115 states that a scheme of arrangement may only be implemented if approved in terms of the section’s requirements or if it is pursuant to an approved business rescue plan. This arguably supports the view that schemes of arrangement may be used in business rescue. Business rescue is still a relatively new phenomenon. Business rescue practitioners are likely in favour of the courts interpreting the Companies Act to allow flexibility for restructuring and freedom from the obligation to discharge the usual formalities in the implementation of business rescue plans.