The Companies Act 71 of 2008 (the Companies Act) has brought
about a unique change in business methods. One of the innovations
is the introduction of the concept of business rescue and the
appointment of a business rescue practitioner (the practitioner).
The practical obligations of business rescue have placed a major
responsibility on creditors, directors and shareholders of
distressed companies to compromise and "come to the
rescue" of companies in financial dire straits.
It is in the interests of the company to appoint a practitioner with the necessary skills and expertise. Failure to do so may result in affected parties launching an application to set aside the appointment of the practitioner in terms of section 130 of the Companies Act.
What type of profile would a practitioner need to have in order to fulfil his/her obligations in terms of the Companies Act? Essentially the practitioner would need skills and experience in at least three different sectors, viz: management, law and finance.
From a managerial perspective, a practitioner must have the skills to "manage" a company which already has an existing management team in place. The practitioner needs to work in co-operation with the existing management team in an effort to formulate a rescue plan. The practitioner requires the necessary negotiation and presentation skills when presenting the business plan to creditors and the relevant trade unions where employees are involved. Skills of persuasion are an essential tool in order to convince creditors to agree to the proposed rescue plan. The practitioner might also be tasked with the unfortunate responsibility of cutting costs by retrenching or minimising the work force in the company. This is particularly a difficult task and would require a capable practitioner with experience in human relations and office management.
It is crucial that a practitioner has legal expertise and experience and must meet certain legal qualifications. He/she must have intimate knowledge of Chapter 6 of the Companies Act, as it deals primarily with business rescue proceedings and he/she should also be able to apply the Regulations set forth in relevant legislation. The practitioner also needs to understand the law of insolvency in order to assess each creditor's claim.
A third and certainly not the least important skill that a practitioner must exemplify is that of a financial expert. "Expert" in this context may not necessary entail a qualified chartered accountant, but the practitioner should (at the least) possess a reasonable level of financial acumen. He/she must, in order to rescue a company from financial distress, be able to understand and analyse financial statements, ledgers, management accounts, cash books and so on. The practitioner may need to appoint a consultant to assist in circumstances where the practitioner's knowledge of accounting is lacking. The practitioner should be mindful that this will result in the company incurring more costs to cover the necessary consultancy fees.
Any companies' directors bear a fiduciary duty to act in good faith and in the interests of the company. Similarly, section 140 of the Companies Act stipulates that a practitioner has the duties, responsibilities and liabilities of a director during the business rescue proceedings. In the event that the practitioner fails to perform his/her duties, an affected person is entitled, in terms of Section 130 to apply to court to set aside the Practitioner's appointment. This would prove to be costly and would further delay the business rescue process.
Practitioners have been afforded an unlimited right to resign during the business rescue process. This is a critical pit-fall for companies that are looking to conclude the rescue process as efficiently and effectively as possible. However, the Companies Act does make provision for a resigning practitioner to be replaced by another. If a practitioner does resign during the process, it is unlikely to be in the best interests of the company concerned and will probably prove to be an inconvenience. The distressed company would hope that the reasons for the practitioner resigning are not vexatious or frivolous.
Section 138 of the Companies Act contemplates that the CIPC (formerly known as CIPRO) will accredit legal and accounting professions, whose members will automatically qualify to be licensed as business rescue practitioners. It would be a difficult task for a single professional organisation to argue that its members meet all the necessary skills that a practitioner needs to possess and utilise practically. No professions have yet been accredited. Nevertheless, the CIPC has begun issuing interim licences to appointed practitioners.
Although there are not yet clear legislative guidelines to assess the qualifications and expertise of practitioners, there are at least some practical guidelines. Recently South Africa has been introduced to the concept of a Certified Turnaround Professional (CTP). A CTP is a professional with extensive knowledge and expertise in the fields of "turn around management, accountancy and law". In order to qualify as a CTP, an individual must meet the high standards that have been introduced by the Turnaround Management Association (TMA). The TMA-Southern Africa division (TMA-SA) has been established and one of its "core aims" is to equip all of its members with the necessary expertise required to assist companies in financial distress. If a practitioner meets the TMA's standards s/he would be indispensible to a financially distressed company in business rescue proceedings.
A practitioner is given far-reaching powers to manage the affairs of a company in financial distress. Creditors must be conscious of protecting themselves by ensuring that an appointed practitioner has the requisite skills and experience to carry out this task with a reasonable degree of success.
It is essential that the practitioner possesses or has proper access to all the necessary practical skills and experience to take on the tremendous responsibilities inherent in the position.
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.