The new Companies Act, which will intro- duce principles relating to corporate rescue and brings South Africa into line with international principles of turnarounds and business recovery, is expected to become operational in October.

Werksmans Attorneys director of insolvency law Eric Levenstein says that business rescue brings South Africa into line with the Chapter 11 processes in the US, as well as the administration procedures available in the UK and Australia.

“The global trend has been a switch from liquidations to business rescue. The key to successful turnarounds will be an ability, on the part of the practitioner, to work with existing management and directors and to, ultimately, be successful in the turnaround of a financially distressed company,” Levenstein asserts.

He adds that this new legislation leapfrogs South Africa into a new turnaround dispensation, which will assist the corporate sector in res- cuing not only the company itself but also the jobs that might be lost in the event of a liquidation.

“There has been an 18,2% increase in liquidations from March 2009 to March 2010, with 410 companies being liquidated. “Business rescue is a significant step in the right direction to decrease the number of liquidations taking place,” he says.

For many years, legal practitioners and liquidators have accepted the fact that judicial management has not worked in South Africa. Levenstein explains that, once a judicial manager has been appointed, any creditor will be entitled to place the company into liquidation.

“Chapter 6 of the new Companies Act provides South Africa with a mechanism in which companies can recover from a financially distressed situation and allows such companies a second chance,” he notes.

Business rescue will enable the rehabili- tation of financially distressed companies that appear unlikely to pay all their debts and likely to become insolvent within the immediately ensuing six months by providing for the temporary supervision of the com- pany and of the management of its affairs, business and property.

Shareholders, creditors, registered trade unions or employees of the company can initiate business rescue proceedings in terms of the provisions of the new Companies Act. Once applied for and obtained from a court, the rescue process would be driven by the appointment of a business rescue practitioner.

“The practitioner is obligated to investi- gate the company’s affairs, business, property and financial situation and, after consulting creditors and other affected persons and the management of the company, consider whether there is any reasonable prospect of the company being rescued,” Levenstein explains.

In December 2009, the Department of Trade and Industry published the regulations accompanying the new Companies Act, which suggest that a business rescue practice regulatory board be established to oversee the manner in which business rescue will be implemented once the new Act becomes operational.