“Business Rescue is not a team sport and it is not a game played around boardroom tables using PowerPoint Presentations or Excel Projections. It is a war being fought on ground level where instructions need to be followed by those being held accountable.” Pat Pattinson

BUSINESS RESCUE AND TURNAROUNDS

Let’s start at the beginning and look at judicial management which was the first attempt in the South African Companies Act way back in 1926.

What was the intention of this piece of law?

The legislature continued with the concept of Judicial Management in the Companies Act, Nr 61 of 1973, in an attempt to afford struggling companies an opportunity to be saved. The intention was to relieve the management of the company of their duties and introduce a judicial manager to run the company.

Why did Judicial Management then fail in our business environment? Judicial Management failed due to a variety of reasons. The most obvious reasons are that:

  • The company must be rescued in its entirety and not a part or parts of it. This means that the entire operation of the company needed to continue,
  • The courts were involved with each step which was a costly exercise,
  • There was no automatic moratorium on legal proceedings against the company in place. The judicial manager had to apply to court to stave off actions from creditors,
  • It was only applicable to companies and not to close corporations,
  • The directors were immediately dismissed from their positions and had no involvement further,
  • No involvement from the important stakeholders namely the shareholders, employees nor creditors,
  • No need for a formal rescue plan to be drafted,

Because this part of legislation was largely unsuccessful, informal turnarounds was preferred by business owners/directors and shareholders. Unfortunately, this process had no automatic legislative protections.

In an attempt to follow trend with the rest of the world it was decided to move away from judicial management and replace it with the international concept of Business Rescue or “Chapter 6” in South Africa. This piece of legislation is largely based on other first world business rescue laws that have proven to be hugely successful in achieving its goals.

Speaking of goals let’s look at the actual goal of this chapter of the companies act:

“The aim of business rescue is to restructure the affairs of a company in such a way that either maximises the likelihood of the company continuing in existence on a solvent basis or results in a better return for the creditors of the company than would ordinarily result from the liquidation of the company (section 128(1)(b)(iii)).”

This is of course a direct quote from the companies act and as self-explanatory as it may be I would like to just add the following points:

The act is largely written in an attempt to save jobs which is why section 136 of the Companies Act is dedicated to the effect of business rescue on employees and contracts. In short, employees and employee contracts must be handled in the same manner as outside business rescue. This would include but not be limited to retrenchments.

It is also a fact that this process is aimed at saving the business and not necessarily the company itself. It could be necessary to dissolve the company in order to save the business. This could be done by means of mergers or acquisitions or the complete buyout of the business.

Preventing liquidations is a seemingly obvious goal, but taking from the definition in the act it could be said that once you have achieved a better outcome, i.e. better repayment of debt to creditors, than would have been achieved via traditional and immediate liquidation, the company could still end up being liquidated and jobs lost.

 

TOOLS OF A BRP

Chapter 6 allows for several tools that the Business Rescue Practitioner or BRP can use to achieve a rescue of the company. These tools are as follows:

Moratorium on all legal proceedings

Section 133 of the Companies Act makes provision for a general moratorium on legal proceedings against the company. This means that during business rescue proceedings, no legal proceedings may be commenced or proceeded with against the company. This protection afforded to a business under business rescue, provides for much needed breathing space to assess the business holistically and to focus the attention of the management on that what is needed to ensure a successful business rescue.

Release of debt

Section 151 of the Companies Act makes provision for a business rescue practitioner to include in the business rescue plan an offer as full and final settlement to creditors. This entails that if a creditor is owed R 10.00 and the business rescue plan makes provision for a settlement amount of R 0.50 to every R 1 of debt and the plan is voted in, the concurrent creditors would have to accept this payment whether they voted for the plan or not.

Suspension of contracts

The Companies Act makes provision in section 136 that the BRP may suspend contracts that the business is a party to either partially or fully. This is done only for the duration of the business rescue proceedings. This section was included to assist the business to suspend contracts that negatively affect the business and which would not be able to be suspended under normal trading conditions. However, to have a contract completely cancelled, the BRP must apply to court for an order to cancel the contract proving that it is not beneficial to the company. The only exception to this section is employment contracts which may not be cancelled except in terms of the Labour Relations Act section 189 and 189A.

Payment period

The Companies Act makes a provision that business rescue should be instituted for a period of 3 months as per section 132 (3). This time period sets extremely high expectations and it is highly unlikely that a business rescue process will be concluded in 3 months. If the rescue process cannot be finalised within this short period of time, the BRP has the opportunity to extend this period in the business rescue plan. Some plans have gone as far as keeping the business in business rescue for a period of 3 to 4 years.

RIGHTS OF CERTAIN AFFECTED PERSONS

Now we have mentioned creditors and shareholders as being affected persons and that during business rescue proceedings they have the most clout. Now let’s look at what their rights during this process really are.

EMPLOYEES

The rights of employees of the company are contained mostly in section 144 of the Companies Act. In terms of this section and other sections, employees are entitled to:

  • Be represented by a trade union, individually, through an employee organisation or a representative,
  • Be invited to attend meetings of employees at which the BRP must indicate the reasonable prospect of a rescue,
  • Receive the proper notices for any court proceedings, meetings or decisions taken during business rescue proceedings,
  • Participate in any court proceedings regarding the business rescue proceedings of the company,
  • Form a employee’s committee which may be consulted by the BRP during business rescue proceedings,
  • Apply to court to have the rescue proceedings or the appointment of the BRP set aside,
  • Making proposals to the BRP to be included in business rescue plan, but not instruct the BRP,
  • To be classified as a preferred creditor if amounts on salaries are outstanding,
  • Vote to accept, amend or reject a business rescue plan presented at the proper meeting if the employees qualify as a creditor,

At the rejection of a plan, propose that the BRP amend it and present it at another meeting or in their capacity as a creditor acquire the interests of any other creditor,

The conditions of employment are not to change during business rescue unless the changes are done in terms of section 189 and 189A of the Labour Relations Act.

It is thus clear that the employees of a company play an integral role in the business rescue proceedings of the company and are properly protected.

CREDITORS

The rights of creditors are contained mostly in section 145 of the Companies Act. In terms of this section and other sections, creditors are entitled to:

  • Be invited to attend meetings of creditors at which the BRP must indicate the reasonable prospect of a rescue,
  • Receive the proper notices for any court proceedings, meetings or decisions taken during business rescue proceedings,
  • Participate in any court proceedings regarding the business rescue proceedings of the company,
  • Form a creditor’s committee which may be consulted by the BRP during business rescue proceedings,
  • Apply to court to review and re-appraise the status of the creditor, i.e. concurrent, secured or preferrent as well as their voting interest,
  • Apply to court to have the rescue proceedings or the appointment of the BRP set aside,
  • Making proposals to the BRP to be included in the business rescue plan, but not instruct the BRP,
  • Vote to accept, amend or reject a business rescue plan presented at the proper meeting,

At the rejection of a plan, propose that the BRP amend it and present it at another meeting or acquire the interests of any other creditor,

It is thus clear that the creditors of a company play an integral role in the business rescue proceedings of the company and have a lot more say as to the future of the company than any other party.

SHAREHOLDERS

The rights of shareholders or the holders of the company’s securities are contained mostly in section 146 of the Companies Act. In terms of this section and other sections, shareholders or the holders of the company’s securities, are entitled to:

  • Receive the proper notices for any court proceedings, meetings or decisions taken during business rescue proceedings,
  • Participate in any court proceedings regarding the business rescue proceedings of the company,
  • Apply to court to have the rescue proceedings or the appointment of the BRP set aside,
  • Making proposals to the BRP to be included in the business rescue plan, but not instruct the BRP,
  • Vote to accept, amend or reject a business rescue plan presented at the proper meeting if the specific class of shareholders’ rights will be affected by the rescue plan,

At the rejection of a plan, propose that the BRP amend it and present it at another meeting or acquire the interests of any other creditor or shareholders or the holders of the company’s securities,

As it can be seen, the shareholders of a company are also an integral part of the business rescue process, but do not have all of the rights afforded to creditors.

THE BUSINESS RESCUE PLAN

Arguably, the most important part of the business rescue proceedings of Chapter 6 is the business rescue plan that the BRP must prepare. The business rescue plan will determine the future of the company and it is extremely important that it is as comprehensive of the possible steps to rescue the company as possible. This business rescue plan must be published within 25 days after the appointment of the BRP or such other time as allowed by the creditors or the court.

So, what is in this plan? Section 150 of the Companies Act describes the three parts and list of items under each section that must at the very least be contained in the rescue plan. The BRP can of course add more information if he/she so wishes. The parts of a rescue plan according to section 150 of the Companies Act are:

Background

The background part of the rescue plan must contain a history of the company and the path the company followed to the situation it finds itself in. This part needs to contain inter alia a list of the company’s assets, a list of the company’s creditors, the probable liquidation dividend if the company were to be liquidated, a list of the company’s shareholders and the agreement of the rates charged by the BRP.

Proposals

The proposal part of the rescue plan contains all of the proposals that the BRP believes need to be implemented to ensure a successful rescue of the company. This part needs to contain inter alia the nature and duration of a moratorium as requested by the BRP, the extent to which the company is to be released from the payment of its debts, the treatment of existing contracts, the order of preference shown to certain creditors if any and the benefits of adopting the business rescue plan.

Assumptions and Conditions

The assumptions and conditions part of rescue plan contains the assumptions that the BRP made when compiling the rescue plan as not everything in business can be known and predicted. It must also contain the conditions upon which the successful implementation of the plan is dependent. The BRP must further prepare the ensuing three years’ of annual financial statements to accompany the rescue plan so that the creditors can make a more informed decision.

THE VOTING PROCESS

So now we have a BRP in charge of the injured business and we have a business rescue plan prepared to restore the health of the business. How do we get the process going from here? Once business rescue plan has been completed, the creditors of the company need to vote on it. The voting process is relatively easy, fair and appropriate to the situation of business rescue.

The BRP must call a meeting within 10 days of the publication of the business rescue plan so that the creditors can vote on it and determine the future of the company. This meeting is referred to as a section 151 meeting and is probably the most important meeting during the business rescue proceedings. At this meeting the creditors of the company will vote on the plan directly proportional to their voting interest.

Each and every creditor of the company who has debt owing to them has a voting interest. Sections 145 (4) to (6) of the Companies Act indicate how the voting interest of a creditor is valued. A creditor has a vote equal to the amount of money owed to them by the company in proportion to the total debt at the commencement of business rescue.

This entails that if a creditor has debt equaling R 500 000 and the total debt of the company is R 1 million, then that creditor has a voting interest equal to 50%, which would mean that half of the votes are owned by this creditor. This voting interest is calculated at the meeting in proportion to those creditors present or represented by proxy at the meeting. If a creditor is not present at the meeting then their vote cannot be cast nor counted.

Section 152 (2) states that the BRP needs 75% of the voting interests of creditors to vote in favour of the plan to achieve a successful vote. In a perfect world, there should only be two votes during the business rescue process. The first vote would be whether the creditors accept the plan as it is with no amendments. Once this vote is in favour of no amendments, a second vote will be taken on whether to actually accept or reject the proposed business rescue plan. In both these instances the act makes provision for a process to be followed on a negative vote.

So do the shareholders also vote on the plan? A shareholder will only vote after the proposed business rescue plan has been approved by the creditors and his shareholding is affected by the business rescue plan.

IMPLEMENTATION OF THE PLAN

So now we have a successfully voted in rescue plan that the creditors agreed to. The practitioner is very specifically instructed by the Companies Act in section 152 (5) to direct, i.e. oversee, the company’s implementation of the plan. This means that the BRP must oversee the implementation of the plan in conjunction with the current management team prior to filing for substantial implementation of business rescue plan and is not allowed to leave the company to implement the plan on its own accord.

FILING FOR BUSINESS RESCUE

Now that we have a successful business rescue, let’s have a look at how this all started. According to the Companies Act, once a company becomes financially distressed, it has to file for business rescue. The definition of financially distressed is given in section 128 of the Companies Act as follows:

  1. i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months,

or

  1. ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

Very soon it will become the duty of the company’s accountant to assist them in identifying whether or not this definition is applicable to them. This definition does not only refer to technical insolvency, but also to commercial insolvency and poses a greater responsibility on the accountants to quickly and regularly assess whether this definition is applicable to a company.

Now that we have determined that a business is in financial distress, how does it enter business rescue? The Companies Act refers to two possible methods on how a company can enter business rescue. The first method is for an affected person to bring an application to court to have the company placed into business rescue in terms of section 131 of the Companies Act. The second method is for the directors of a company to voluntarily enter business rescue by means of a resolution in terms of section 129 of the Companies Act. It should also be mentioned that a third option exists by means of case law and not mentioned in the act. This is when a liquidation application is heard by the court and the court determines that it is a more viable option to place the company under business rescue.

Now let’s look at the negative side of business rescue. Business rescue is a very public affair in that regulation 123 states that the company must mention the process of business rescue on all of its official documentation, website and premises. This combined with the high cost of the BRP and possible court appearances would mean that some businesses simply cannot afford business rescue as an option to turn the business.

There are a few possible reasons why business rescue will not work. These include:

  • The cost of the BRP,
  • The company waits too long before filing,
  • Trusts and Sole proprietors simply do not qualify for business rescue.

The process of business rescue is still fairly new to South Africa and we have several areas within the act that is not 100% clear. Although there have been some court cases giving us some guidelines, it will still take some time to create a better understanding of the act as the BRP’s improve their knowledge of the proceedings, the courts give more re-portable judgments and creditors gain a deeper understanding of the purpose of business rescue.

© 2017 | Turning A Business | All rights reserved