Search and res­cue

Con­trol­ling SA’s high busi­ness fail­ure rate

Finweek English Edition - - Economic trends & analysis - TROYE LUND

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

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