South Africa: Sink Or Swim – Business Rescue… The Art Of Treading Water?

Last Updated: 6 March 2012
Article by Eric Levenstein

Chapter 6 of the new Companies Act introduced business rescue as an opportunity for financially distressed companies to file for a formal restructuring process aimed at rehabilitating them and enabling them to continue trading successfully.

The new Companies Act No. 71 of 2008, as amended (new Companies Act) provides an opportunity for companies that are trading under financially distressed circumstances, to apply for the temporary supervision of the company by a trained Business Rescue Practitioner, who would take over the management of the company's affairs, business and property for an interim period.

If a company is financially distressed: it appears reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable in the immediately ensuing six months; or it appears reasonably likely that the company will become insolvent within the immediately ensuing six months.

Business rescue or liquidation

In the past, companies in financial distress in South Africa have had no alternative but to launch proceedings for liquidation. Unfortunately, once liquidated, a company's assets are generally sold at fire sale values. From time to time, businesses are sold as going concerns by liquidators, but these instances are few and far between. Thus liquidation proceedings have historically resulted in very small or marginal dividends for creditors.

Under the new legislative framework, directors have a very difficult choice to make – to file for business rescue or for liquidation. If the board of a company has reasonable grounds to believe that the company is financially distressed, but the board decides not to adopt a resolution for business rescue, a written notice must be delivered to all creditors setting out the basis upon which the company is financially distressed and why it is not proceeding with an application for business rescue. This is a section 129(7) notice, the purpose of which is to warn all creditors that if they deal with a company that is financially distressed, they do so at their own risk, particularly when goods are supplied on credit.

The aim of business rescue

The introduction of business rescue brings South Africa into line with overseas jurisdictions, such as the existing Chapter 11 judicial processes in the United States and the Administration processes in both Australia and the United Kingdom.

The aim is to provide a temporary moratorium on the rights of all creditors to proceed against the company during the business rescue period. Ultimately, the Business Rescue Practitioner (who has to be licensed by the Companies and Intellectual Property Commission (CIPC)) is tasked with the development and implementation, if approved by creditors and other stakeholders, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis.

If this cannot be achieved, the aim would be to provide a plan which would result in a better return for the company's creditors or shareholders than would result from the immediate liquidation of the company.

The main aim for efficient rescue and recovery of financially distressed companies is one which seeks to achieve the objective of balancing the rights and interests of all relevant stakeholders, particularly those of the creditors, employees, shareholders and the company itself.

Business rescue filings

Business Rescue has been available to financially distressed companies since 1 May 2011.

Since the date of implementation of the new provisions, there have already been a significant number of filings for business rescue. According to the CIPC, as at December 2011, there have been 280 notices to commence Business Rescue.

The procedure is open to all companies, namely private companies, public companies and close corporations. So far, private companies have been the majority in respect of business rescue filings.

The CIPC have indicated that the number of companies that have taken the decision, either through resolution or through a court application, to apply for the commencement of business rescue proceedings remains an ongoing process and one which demonstrates that business rescue could possibly offer an alternative to liquidation. Recent liquidation statistics (as at December 2011), indicate that the number of liquidations for 2011, fell by 10.8% year on year and when compared to the same period in 2010.

According to the CIPC, the sectors which have filed for business rescue are mining, property and real estate, quarrying, electricity, gas and water, transport, storage and communication.

From an analysis of the above, it is clear that the property and real estate industries have been at the forefront in respect of business rescue filings. This is as a direct result of a decrease in property prices and general depression in the real estate market.

Many of the companies that have opted for business rescue in the real estate industry have been limited to groups of investment schemes that were administered as property syndications which ultimately ended up in a financially distressed situation.

There have also been business rescue filings in the services sector which includes transport and logistics, tourism, hotel services and general services.

In the manufacturing industry various companies and close corporations have also filed for business rescue and which are evenly spread out amongst the various sectors.

Conclusion

It has certainly become evident that business rescue is an alternative option for companies that are facing insolvency.

Rather than being placed in liquidation, business rescue does provide an alternative scheme for creditors to be settled within a reasonable period and in terms of the business rescue plan. Often, the dividend offered in a business rescue scenario is far greater than that which would be received in a liquidation.

Rather than sink, a company often needs to have the alternative of a moratorium period within which to restructure burdensome debt which threatens the solvency of the company. "Treading water" for the period of the business rescue proceedings would often allow a company to be saved.

Just as the National Credit Act assisted in keeping individuals from being sequestrated, business rescue proceedings should ultimately reduce the number of liquidations in the South African economy.

It has become evident that many businesses are filing for business rescue purely as a delaying tactic and in order to avoid having to make payment to creditors. Business rescue allows a temporary moratorium on debt repayment. Obviously the courts are dealing with those applications which are deemed to be an abuse of the process and which do not have the true objectives envisaged by the business rescue procedure.

What is critical is the ability of the Business Rescue Practitioner to devise a coherent plan that creditors can properly understand and vote upon to finality.

Already a body of case law is being developed by our High Courts throughout South Africa in respect of providing rulings and guidelines to enable all stakeholders to understand the mechanics of the new provisions and the manner in which business rescue should operate.

One of the ultimate objectives is to save jobs and to reduce unemployment. Although to date only six business rescue plans have been accepted by creditors, we remain in the system's infancy and over time, particularly in 2012, should the need arise, business rescue might very well become the norm rather than the resultant negative impact of liquidation.

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.

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