Business Rescue: A Guideline For The South African Banking Sector - Corporate and Company Law

Chapter 6 of the new Companies Act introduces proceedings to rehabilitate companies that are financially distressed. The aim is to maximise the chances of these companies' continued existence.

The long anticipated new Companies Act No. 71 of 2008 (the Act) was promulgated in April 2009 and is expected to become effective this year. The Act fundamentally re-writes South African company law and accordingly will have far reaching effects.

Chapter 6 of the Act, which deals with business rescue and compromises with creditors, effectively replaces the existing judicial management provisions of the old Companies Act No. 61 of 1973 (the old Act), with a modern business rescue regime.

"Business rescue" means proceedings to facilitate the rehabilitation of a company that is financially distressed¹ by providing for the temporary supervision of the company and of the management of its affairs, business and property, as well as a temporary moratorium on the rights of claimants against the company or in respect of property in its possession.

The business rescue process culminates in the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity. The business rescue plan's objective is to maximise the likelihood of the company continuing in existence on a solvent basis. In the event that this is not possible, the implementation of a business rescue plan should result in a better return for the company's creditors or shareholders than would result from the immediate liquidation of the company.

In terms of Chapter 6 of the Act, business rescue proceedings (BRP) are largely self administered by the company under the independent supervision of an appointed business rescue practitioner (practitioner).The entire process is also subject to court intervention by way of application by any affected person (i.e. creditor, shareholder, employee or trade union).

The interests of these affected persons are recognised and their participation in the development and approval of a business rescue plan is extensively provided for.

This brief identifies and elucidates upon specific sections of Chapter 6 which are applicable to banking institutions as "affected persons"² during BRP³.

SUMMARY OF RELEVANT SECTIONS

ss 129 and 130 Company resolution to begin BRP:

If a company is financially distressed and there appears to be a reasonable prospect of rescuing the company, the board may pass a resolution to voluntarily begin BRP and appoint a practitioner. Notice of such a resolution and appointment must be sent to all affected persons.
It is important to note that a company which has adopted a resolution to begin BRP is prohibited from thereafter adopting a resolution to begin liquidation proceedings.
After the adoption of such a resolution, but before the adoption of a business rescue plan, an affected person may apply to a court with the requisite jurisdiction for an order setting aside the resolution; setting aside the appointment of the practitioner; or requiring the practitioner to provide security to secure the interests of the company and any affected persons.
The resolution may be set aside in the event that there is no reasonable basis for believing that the company is financially distressed; there is no reasonable prospect for rescuing the company; or the company failed to satisfy the procedural requirements in relation to the adoption of such resolution.
The appointment of a practitioner may be set aside on the following grounds:
- the practitioner is not suitably qualified to hold such a position;
- the practitioner is not independent of the company / management; or
- the practitioner lacks the necessary skills.
In terms of an application brought by an affected person - a copy of such application must be served on the company and the Companies and Intellectual Property Commission (Commission), and each affected person must be duly notified. It is important to note that each and every affected person has the right to participate in the hearing of such application.

s 131 Court order to begin BRP:

In the absence of a resolution to voluntarily begin BRP, an affected person may apply to the court at any time for an order placing a company under supervision and thereby commencing BRP.
A copy of such an application must be served on the company and the Commission and each affected person must be duly notified.
At the hearing of the application, the court may make an order placing the company under supervision and commencing BRP. This order may only be granted if the court is satisfied that the company is financially distressed; or has failed to pay any amount in terms of an obligation in relation to employment matters; or it is otherwise just and equitable to do so for financial reasons; and there is a reasonable prospect of rescuing the company.
In terms of such court order, an affected person would appoint a practitioner to supervise the BRP.
The court may dismiss the application and place the company under liquidation.
If the court grants an order placing the company under supervision and commencing BRP, the court may appoint an interim practitioner nominated by the affected person who brought the application. However, such nomination is subject to the approval of the holders of a majority of the independent creditors' voting interests at the first meeting of creditors.
If liquidation proceedings have already commenced at the time an application for BRP is brought, such application will suspend those liquidation proceedings until the court has adjudicated upon the application or until the BRP ends. In addition, the court may make any of the above-mentioned orders at any time during the course of any liquidation proceedings or proceedings to enforce any security against the company.

s 133 General moratorium on legal proceedings against a company:

Subject to certain exceptions (listed below), during BRP, no legal proceeding, including enforcement action, against a company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with.

Note: Banks which hold general notarial bonds would have to apply to a court to perfect such bonds - to a lawful pledge - prior to the commencement of BRP.
Exceptions:
- with the written consent of the practitioner;
- with the leave of the court;
- as a set-off against any claim made by the company in any legal proceedings;
- criminal proceedings against the company / its directors; or
- proceedings concerning any property / right over which the company exercises the powers of a trustee.
In addition, no person may enforce a guarantee or surety by a company in favour of that person during BRP unless the court grants such person leave to do so.
In terms of any right to commence proceedings / assert a claim against a company, the running of prescription is suspended during the BRP.

s 134 Protection of property interests:

During BRP, notwithstanding any agreement stating otherwise, no person may exercise any right in relation to property lawfully possessed by the company unless the practitioner consents thereto in writing. Ownership of the property is irrelevant.
The practitioner may not unreasonably withhold his consent and must consider the purposes of the business rescue provisions, the circumstances of the company and the nature of the property and the rights claimed in respect of it.
During BRP, before a company may dispose of property over which a third party has any security or title interest, such company must obtain such third party's prior consent (unless the proceeds of the disposal will be sufficient to cover the third party's claim). The company must pay as much of the proceeds to that third party as are owing or provide security to the reasonable satisfaction of the third party.

s 135 Post-commencement finance:

During BRP, a company may obtain financing which may be secured to the lender by utilising any asset of the company to the extent that it is not otherwise encumbered. Such lender's claim will have preference in the order in which it has been incurred over all unsecured claims against the company.

s 136 Effect of business rescue on contracts:

During BRP and despite any provision of an agreement to the contrary, during BRP, the practitioner may:
- entirely, partially or conditionally suspend, for the duration of the BRP, any obligation of the company that:
  1. arises under an agreement to which the company was a party at the commencement of the BRP; and
  2. would otherwise become due during those proceedings; or
- apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any agreement to which the company is a party.
Any party to an agreement that has been suspended or cancelled by the practitioner may only assert a claim against the company for damages.

Note: Loan and overdraft facility agreements will be at risk if the practitioner is of the view that such agreement is prejudicial to the success of the business rescue plan. However, this problem could be curtailed due to the fact that any suggested suspension of such an agreement would first have to be included in the business rescue plan and then put to the vote by creditors. If creditors believe that they are being unfairly dealt with in respect of such suspension of their agreements, they could simply vote against the adoption of the business rescue plan.

s 143 Remuneration of practitioner:

A practitioner is entitled to remuneration payable by the company (in accordance with a tariff).
In addition to such remuneration, a practitioner may propose an agreement in terms of which the company pays further remuneration. This is calculated based upon various contingencies relating to such practitioner's performance of his duties.
An agreement between the company and the practitioner (in terms of which further remuneration is payable to the practitioner) is final and binding on the company following the approval of: the holders of a majority of the creditors' voting interests; and the holders of a majority of the voting rights attached to any shares that entitle the shareholder to a portion of the residual value of the company on winding-up; present and voting at a meeting called to consider the proposed agreement.
Any creditor / shareholder voting against the approval of such an agreement may apply to the court within 10 days after the date of voting, for an order setting aside the agreement. The agreement may be set aside if it is not just and equitable or if the remuneration in terms of such agreement is unreasonable (having regard to the financial circumstances of the company).
Any claims that a practitioner may have (for remuneration and expenses not paid by the company) will rank in priority before the claims of all other secured / unsecured creditors.

s 145 Participation by creditors:

During BRP, each creditor is entitled to notice of, and participation in, each court proceeding, decision or meeting. Participation may be formal or informal.
Each creditor also has the right to vote to amend, approve or reject a proposed business rescue plan and if such business rescue plan is rejected, a further right to either propose an alternative business rescue plan or present an offer to acquire the interests of any / all of the other creditors (who voted against the approval of the business rescue plan).
Creditors may form a creditor's committee and are entitled to consult with the practitioner during the preparation of the business rescue plan.
Voting by creditors in terms of BRP occurs as follows:
- a secured / unsecured creditor has a voting interest equal to the value of the amount owed; and
- a concurrent creditor who would be subordinated in a liquidation has a voting interest equal to the amount that the creditor could reasonably expect to receive (the practitioner will request such amount to be independently and expertly appraised and valued).

s 146 Participation by holders of company's securities (shareholders):

During BRP, each holder of any issued security of the company is entitled to receive notice of, and to participate in, each court proceeding, decision or meeting.
If a proposed business rescue plan alters the rights of any class of holders of securities in the company, at a meeting of such holders each person is entitled to vote to approve / reject such business rescue plan. If the business rescue plan is rejected, such holders may either propose the preparation of an alternative business rescue plan or present an offer to acquire the interests of any / all of the creditors or other holders of the company's securities (who voted against the approval of the business rescue plan).

s 147 First meeting of creditors:

Should be convened and presided over by the practitioner within 10 days after such practitioner's appointment.

At the meeting, the practitioner must inform the creditors whether he or she believes that there is a reasonable prospect of rescuing the company. The creditors may present proof of claims to the practitioner as well as determine whether or not to form a committee of creditors.
A decision at the meeting is approved if it is supported by the holders of a simple majority of the independent creditors' voting interests. However, it is important to note that this does not apply to a meeting convened for the purpose of considering a proposed business rescue plan.

s 149 Functions, duties and membership of committees of affected persons:

A committee of creditors may consult with the practitioner in relation to any matter relating to the BRP, but may not instruct / direct the practitioner.

Note: this appears to mean that creditors can discuss matters with the practitioner but cannot impose their instructions on such practitioner in the conduct of the BRP.
Such committee may also receive and consider reports relating to the BRP, on behalf of the general body of creditors.
It is important that such committees act independently of the practitioner to ensure proper representation of creditors' interests.

s 150 Proposal of business rescue plan:

After consultation with all creditors, other affected persons and the management, a practitioner must prepare a business rescue plan. Such business rescue plan must contain all the information which affected persons may need in order to reach a decision regarding its adoption.
The business rescue plan must be published within 25 business days after the date on which the practitioner was appointed or such longer time as may be allowed by the court on application by the company or the holders of a majority of the creditors' voting interests.

s151 Meeting to consider business rescue plan:

Within 10 days after the publication of a business rescue plan, a practitioner must convene and preside over a meeting of creditors and any other holders of a voting interest. Such a meeting is convened in order to consider the proposed business rescue plan.

s 152 Consideration of business rescue plan:

A vote supported by the holders of more than 75% of the creditors' voting interests as well as at least 50% of the independent creditors' voting interests will indicate a preliminary approval of the proposed business rescue plan.
In the event that a proposed business rescue plan is not approved on a preliminary basis, the plan is rejected and may only be considered further after the practitioner has sought a vote of approval to prepare and publish a revised plan, or has advised the meeting that the company will apply to court to set aside the result of the vote (on the grounds that it was inappropriate).
If a proposed business rescue plan does not alter the rights of the holders of any class of securities in the company, preliminary approval of such business rescue plan also constitutes the final adoption of that plan (subject to any conditions on which the business rescue plan is contingent).
If a proposed business rescue plan does alter the rights of any class of holders of securities in the company, the practitioner is obliged to immediately hold a meeting of such holders. At the meeting a vote must be called to approve the adoption of the proposed business rescue plan. If a majority of the voting rights are exercised in favour of the business rescue plan, it will be duly adopted.
If a majority of the voting rights are exercised in opposition to the adoption of the plan, the plan is rejected and may only be considered further after the practitioner has sought a vote of approval to prepare and publish a revised plan, or has advised the meeting that the company will apply to court to set aside the result of the vote (on the grounds that it was inappropriate).
An adopted business rescue plan is binding on the company, all of its creditors and every holder of securities (even if a person did not actively participate in the adoption of the business rescue plan).
Except to the extent that an approved business rescue plan provides otherwise, a pre-emptive right of any shareholder (in terms of s 39) does not apply with respect to an issue of shares by the company in terms of the business rescue plan.

s 153 Failure to adopt a business rescue plan:

In the event that a business rescue plan is rejected and the practitioner does not seek a vote in respect of a revised plan nor does he / she notify the meeting of his / her intention to apply to the court to set aside the result of the vote, any affected person present at such meeting may:
- initiate a vote requiring the practitioner to prepare and publish a revised plan; or
- apply to court to set aside the result of the vote (on the grounds that it was inappropriate); or
- make a binding offer to purchase the voting interests of the persons who opposed the adoption of such business rescue plan (at a fair and reasonable value determinable by an independent expert).
A holder of a voting interest, or a person acquiring such interest in terms of a binding offer, may apply to the court to review, re-appraise and re-value the determination made by an independent expert.

s 154 Discharge of debts and claims:

A business rescue plan may providethat a creditor who has agreed to the discharge / reduction of the debt owing to such creditor, will lose the right to enforce the relevant debt or part of it.
If a business rescue plan is approved and implemented in accordance with the provisions of the Act, a creditor is not entitled to enforce any debt owed by the company immediately before the beginning of BRP, except as provided for in the business rescue plan.

Note: this might result in the discharge of all suretyship obligations if the principal obligation is extinguished.

s 155 Compromise between the company and its creditors:

This section applies to a company, irrespective of whether or not it is financially distressed, unless it is engaged in BRP.

Note: this means that during the period of a s 155 compromise being negotiated with all stakeholders, any creditor could apply either for BRP or the liquidation of the company. A compromise in terms of this section could not occur if BRP are in force.
The board of a company may deliver a proposal regarding an arrangement or compromise of its financial obligations to all of the company's creditors.
A proposal is adopted by the creditors of a company if it is supported by a majority in number, representing at least 75% in value of the creditors present and voting at a meeting called to consider the proposal.
If a proposal regarding an arrangement or compromise of a company's financial obligations to all of the company's creditors is duly adopted, the company may apply to the court for an order approving the proposal.
In terms of such an application, the court may also sanction the compromise as provided in the proposal (if it is just and equitable to do so) after having considered the number of creditors who voted in favour of the proposal, and in the case of a compromise in respect of a company being wound-up, the report of the Master required in terms of Chapter 14 of the old Act.
As of the date on which it is filed, a copy of a court order sanctioning an arrangement or compromise of a company's financial obligations to all of its creditors / members of any class of its creditors, is final and binding on all of the creditors / members of the relevant class of creditors.
Any arrangement / compromise does not affect the liability of any person who is a surety of the company.

CONCLUSION

In terms of the provisions of Chapter 6 of the Act, the general areas of concern for banking institutions include:

post-commencement financing (i.e. will there be a willingness on the part of banks and financial institutions to provide post-commencement finance during BRP? If so, will a company under supervision have the requisite assets to provide security for continued funding? Many of the company's assets might already be encumbered at the time proceedings commence);
the practitioner's discretion to suspend current contracts of the company (i.e. any banking institution which is a party to a loan / overdraft agreement might find that such agreement is suspended by the practitioner. The result for the bank is a concurrent claim against the company for damages);
without being granted the leave of the court, any enforcement of a guarantee or surety by a company in favour of a banking institution during BRP is prohibited;
the development, preparation and proposal of the business rescue plan is driven by the practitioner and not by the creditors of the company. Thus, the practitioner will consult with the creditors, shareholders, employees and trade unions, but, such practitioner is not obliged to follow the instructions of any such group;
the entire BRP process is very court driven and therefore may become cumbersome due to the backlog of matters in our courts (no specialised business recovery courts have been proposed at this stage); and
during the period of a s 155 compromise being negotiated with all stakeholders, any creditor could apply either for BRP or the liquidation of the company, in which event proceeding under s 155 would not be competent.

Footnotes

1. "Financially distressed" means that it appears reasonably unlikely that a company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months or it appears reasonably likely that a company will become insolvent in the immediately ensuing six months.

2. In terms of s 128(1)(a), an "affected person" in relation to a company includes creditors of the company. Thus, a banking institution would fall within the definition of an affected person in terms of the Act.

3. Where a number of days is prescribed, it shall consist only of business days (i.e. days other than Saturday, Sundays and public holidays).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

South Africa: Business Rescue: A Guideline For The South African Banking Sector