Helping companies stay afloat
• Business rescue processes can prevent financially distressed firms in SA file for liquidation
The downturn in world economies has placed business under severe pressure in the past few years. In SA, the knock-on effect has been felt, with several firms going out of business and filing for liquidation, and with many turning to the South African business rescue procedure as a possible lifeline.
Chapter 6 of the Companies Act of 2008 offers intervention mechanisms to rescue companies that are in financial distress. The test set out in the act is that if it appears to the board of a company that it is reasonably unlikely that the company will be able to pay all of its debts as they become due and payable (commercial test) within the immediately ensuing six-month period; or if it appears to be reasonably likely that the company will become insolvent (factual test) within the immediately ensuing six-month period, then such a company would be “financially distressed”. A business rescue practitioner would be appointed to supervise the company on a temporary basis with the aim to develop and implement a rescue plan for such company.
The outcome of such a plan would be to ensure that the company could continue to exist on a solvent basis, or if it is not possible for the company, to result in a better return for the company’s creditors or shareholders, than would result from the immediate liquidation of the company.
When a South African company is in financial trouble but the potential still exists to rescue it, various rescue options can be considered other than a formal liquidation process.
If management recognises the signs of financial distress early enough, it is possible to negotiate with the company’s creditors in an attempt to reach some kind of informal compromise that would assist the company in overcoming its financial difficulties. Such an informal compromise or workout may in certain instances yield a positive outcome, but in others creditors are not willing to co-operate with the company facing a potential liquidation. In such an event, there is a need for a moratorium or stay of liquidation procedures in favour of a formal statutory procedure such as business rescue.
The business rescue process has provided South Africans with the opportunity to move corporate restructuring from a “procreditor” system to one of “prodebtor”. The need for a sustainable recognition of creditors’ claims being compromised and being forced (if in the minority) to take “the restructured deal” has now been generally accepted by creditors.
For many years, SA was left in the doldrums of an archaic judicial management system, with few alternatives other than liquidation. Drawing from the best that international restructuring regimes had to offer, Chapter 6 found its way into the South African Company Law Statute in 2011, bringing SA, belatedly, into line with standards set by global corporate rescue regimes.
There is a recognition that companies that are already insolvent must be placed in liquidation, and those capable of being rescued must be saved. Clearly, if there is no chance of rescuing the company, then there is no need to continue to flog the proverbial dead horse. If liquidation is the only alternative, the practitioner and the creditors must release the company from its rescue proceedings and place it in liquidation.
Modern rescue culture (which started all those years ago in the UK and the US) supports the notion that there is always a need to save debtor companies that are candidates for rescue and have genuine recovery prospects. These companies are entitled to receive the protection of the moratorium and the opportunity to have the business restructured, rationalised and to exit into a solvent trading position.
The fact that the voluntary entry into business rescue occurs by the mere passing of a board resolution reflects the South African legislature’s intention to make rescue and restructuring an easier mechanism to secure a “fresh start”, and supports a shift to a more debtor-friendly (companyfocused) approach. The current shift in mindset was best stated by Judge Claassen in Oakdene Square Properties and Others vs Farm Bothasfontein (Kyalami) and Others; Farm Bothasfontein (Kyalami) vs Kyalami Events and Exhibitions Ltd and others: “The general philosophy permeating the business-rescue provisions is the recognition of the value of the business as a going concern rather than the juristic person itself. Hence the name “business rescue” and not “company rescue”.
This is in line with the modern trend in rescue regimes. It attempts to secure and balance the opposing interests of creditors, shareholders and employees. It encapsulates a shift from creditors’ interests to a broader range of interests. The thinking is that to preserve the business coupled with the experience and skill of its employees, may in the end prove to be a better option for creditors in securing full recovery from the debtor.
This mind-shift remains a work in progress. Most South African companies, directors and bankers need to resist the temptation to “sink the Titanic” and place the financially distressed company into liquidation. Of course, the historical notion of “becoming insolvent” and the sense of failure and shame that goes with it, must be considered by management when it chooses business rescue as an alternative. However, as time goes on and we continue to see significant companies being rescued, confidence in the process will increase and no doubt business rescue will gain traction in the South African distressed marketplace. The banks will play a significant role here.
The successes of business rescue in the cases of Pearl Valley Golf Estate in the Western Cape, Advanced Technologies and Engineering Company in Gauteng , Meltz Success, Moyo Restaurants, ODM, President Stores, Southgold, Ellerines and more recently Optimum Coal Mine, have all contributed to a renewed vigour in the businessrescue space and in renewed confidence in the possibility of successful outcomes.
The ability to achieve a strategic acquisition of a distressed company within a short timeframe by using the business-rescue process, is one that requires an early identification of the distressed asset, the immediate availability of cash to fund an acquisition, as well as a commitment to prop up the company by introducing postcommencing funding to pay continuing expenses and overheads, while the company is undergoing its restructuring and/or its acquisition process in business rescue.
Despite initial reservations, SA has embraced the opportunity to resuscitate companies in distress that, without chapter 6, would have been placed in liquidation with all of the negative outcomes flowing therefrom.
THIS MIND-SHIFT REMAINS A WORK IN PROGRESS. FIRMS, DIRECTORS AND BANKERS NEED TO RESIST THE TEMPTATION TO ‘SINK THE TITANIC’