Search and rescue
Controlling SA’s high business failure rate
NEW COMPANY LAWS that will introduce a far-reaching business rescue scheme geared to protect ailing companies from liquidation mark a fundamental departure from the current creditor-weighted system of judicial management.
This regime is likely to be one of the most hotly debated sections of the new Companies Bill currently before Cabinet and Nedlac and is intended to replace and modernise South Africa’s existing 34-year-old company legislation.
While the formalised rescue strategy for companies has largely been welcomed by all, including trade unions, the Bill’s critics – such as the Free Market Foundation – are concerned that a culture of rescuing insolvent companies could overprotect below par companies, encouraging inefficient managers to steer clear of restructuring, allowing unproductive firms to undermine their healthy competitors and thereby promoting unfair competition, even weakening entire sectors.
As the proposed 400-page Companies Bill stands, the turnarounds will be largely self-administered by the company. However, they’ll be implemented under the supervision of an independent supervisor. Shareholders and employees will be very involved in initiating and devising the rescue plan, which may involve a rescheduling of the company’s debts, the conversion of debt to equity and selling certain company assets. Creditors will also have a say, but that will be limited to the amounts that they would have received had the company been liquidated.
Department of Trade & Industry deputy director-general Lionel October says the thinking behind introducing a rescue plan (Chapter six of the Bill) was to bring down SA’s high business failure rate, which is at 70% for businesses in their start-up phase.
“Insolvency and liquidation laws are very old, and obviously the key consideration is the protection of creditors. What happens now is that as soon as liabilities exceed assets, the Master approves liquidation. That’s not good for saving the company, for saving jobs and it’s not good for general economic well-being,” says October, who adds that some chance has to be given to companies in financial trouble.
A supervisor who has to be independent of the company and its directors will oversee the proposed rescue procedure. While it’s unclear what kind of qualification supervisors will require or how they’ll be regulated, they’ll investigate the affairs of the company before providing an opinion on whether or not there’s a reasonable chance for rehabilitation.
If so, a business rescue plan will be hammered out for approval by the majority of the shareholders and independent creditors (including employees). Once approved, the salvage plan is binding and a moratorium is placed on all proceedings against the firm. It may not dispose of any of its property other than during its course of business.
While the Bill draws on international precedent (the United States, Australia and the United Nations guidelines) it has uniquely South African elements. One of those is the right it affords employees. It formalises and gives teeth to the current recognition that workers are creditors. Workers will be paid after all administration costs but before other creditors, including secured creditors.
Cosatu welcomes that in principle but is reserving detailed judgement for now. The trade union is worried that the status workers are given in the proposed process won’t be as meaningful in practice. For example, how realistic will it be for workers to buy out dissenting creditors who vote against the rescue plan, as the Bill provides for? That’s especially true if the creditor is a bank.
While public hearings on the proposed legislation will be held later this year (the Bill is expected to reach Parliament by year-end), the official opposition in Parliament, the Democratic Alliance, says that any effort to support and mentor small to medium businesses and alleviate job loss has to be applauded and constructively engaged with.
Some chance has to be given to companies in trouble. Lionel October