Business rescue slow to catch on in SA

Big-name failures may deter thousands of companies that could benefit, writes Evan Pickworth

Not only was it a financial success, but from a labour perspective another 180 jobs were created

ELDORADO Fresh Lettuce Producers fell on hard times two years ago, but instead of closing down and letting 150 workers go, directors Ivo Rugani and Steve Langley decided to take the plunge and use SA’s new business rescue law. Their 12-year-old company was at stake, and the directors were loath to see their loyal workforce decimated by a liquidation.

The new Companies Act had just ushered in rules that looked very similar to Chapter 11 proceedings in the US, adding an extra management layer to restructure a company’s affairs and, importantly, to keep the wolf from the door for a while.

When Eldorado first sent out a notice of the start of business rescue proceedings, creditors were surprised as the usual practice in SA was simply to sue for payment and, in many cases, get back a few cents on the rand in the event of a liquidation. But creditors were told to be patient. The company sent them a letter saying there was a good prospect it would succeed as a going concern — but made it clear a moratorium had been placed on their claims. Lawyers who were consulted told creditors to wait it out — this type of procedure had saved many companies in the US, and they stood to get very little money out in a liquidation.

Creditors had a right to be worried, given some high-profile business rescue failures. Casualties included 1time Airlines, where the business rescue process failed after just two months, and Sanyati Holdings, the empowerment construction company that fell out of rescue proceedings after just a few weeks. Another low-cost airline, Velvet Sky, went into liquidation in 2012 after it failed to convince a court it was a candidate for business rescue.

Fast-forward to today and Eldorado’s creditors are smiling — they could lay their full claims against a robust company.

“Not only was it a financial success, but from a labour perspective another 180 jobs were created,” says Ravie Govender, partner and specialist in business restructuring and insolvency at Hogan Lovells (South Africa), the firm that worked on the rescue operation. “If things run smoothly in business rescue, companies come out of the other end better,” he says. “The business rescue practitioner has pumped in skills and resources, if the business rescue practitioner does his job.”

In Eldorado’s case, for instance, the business plan used in the business rescue also encompassed technical work on the planting and cultivation of the lettuce crop.

But companies in SA are not yet realising the full potential of business rescue, especially when it comes to saving jobs, says the director of business rescue and insolvency at law firm Werksmans, Eric Levenstein.

At the moment only 14% of the close to 4,000 companies facing liquidation in SA each year are opting for business rescue. Mr Levenstein says the costs are not prohibitive, as in liquidations the liquidator would claim 10% of the money received whereas tariffs for business rescue start at R1,250 an hour, depending on the size of the company.

Mr Govender also does not think cost is an issue. “If they have a good business model and supply a product or deliver a service, a practitioner will do a pre-assessment and determine whether it is worthwhile from a cost perspective. The practitioner gets paid by the company, but if there is a plan that says the business will survive, there will be cash for costs like the practitioner and other specialists,” he says.

The 55% success rate of business rescues is expected to improve further, with some major successes being chalked up already. Four months after starting business rescue proceedings, the Moyo chain of restaurants was able to select a preferred bidder to take over the company a few weeks ago.

The business rescue of Advanced Technology & Engineering Company became unconditional in June with the financial and strategic support of the Paramount Group, Africa’s largest privately owned aerospace and defence company.

Discount fashion chain Meltz was placed in business rescue in March last year to save more than 250 jobs. After closing some stores, the company is back on its feet, according to a commentator spoken to.

On Digital Media — which owns StarSat, previously known as TopTV — is close to emerging from business rescue this month. The business rescue began in October 2012.

A decision by the South Gauteng High Court last year is expected to bolster the case for business rescue, as it clarified the ranking of creditors. The ruling makes it easier for a business rescue practitioner to approach new investors for the company, as they are given preference over pre-existing creditors.

Mr Govender says the effect on employment of business rescue and liquidation is “chalk and cheese”.

In a liquidation, under section 38(1) of the Insolvency Act, employment contracts are suspended and unless the liquidator agrees to resume the employment contract, they terminate after 45 days.

In business rescue, he says, employment contracts continue, on the same terms and under the same conditions, and labour laws are strictly followed with regards to any planned retrenchments.

Mr Levenstein says trade unions concerned about a company’s viability — and the possibility of job losses as a result — can apply to court for a business rescue to be imposed.

“This opportunity has not, to date, been used by trade unions,” he says, but it “would allow them … to consider the retention of jobs within a business rescue framework.”