Busi­ness res­cue brings hope to cred­i­tors

The Star Early Edition - - OPINION & ANALYSIS - Eric Leven­stein Dr Eric Leven­stein is the head of In­sol­vency, busi­ness res­cue and re­struc­tur­ing prac­tice at Werks­mans At­tor­neys.

THE DOWN­TURN in world economies has placed busi­ness un­der se­vere pres­sure in the last few years. In South Africa, the knock-on ef­fect has been felt, with sev­eral busi­nesses go­ing out of busi­ness, fil­ing for liq­ui­da­tion and with many turn­ing to the South African busi­ness res­cue pro­ce­dure as a pos­si­ble life­line.

Chap­ter 6 of the Com­pa­nies Act No 73 of 2008 (the 2008 Com­pa­nies Act) in­tro­duced in­ter­ven­tion mech­a­nisms to res­cue com­pa­nies that are in fi­nan­cial dis­tress. The test set out in the 2008 Com­pa­nies Act is that if it ap­pears to the board of a com­pany that it may be 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 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 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 so con­tinue in ex­is­tence, re­sults in a bet­ter re­turn for the com­pany’s cred­i­tors or share­hold­ers, then 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.

Gen­er­ally ac­cepted

The busi­ness res­cue process has pro­vided South Africans with the op­por­tu­nity to move cor­po­rate re­struc­tur­ing from a “pro­cre­d­i­tor” sys­tem to one of “pro-debtor”. 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, South Africa 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.

There is a recog­ni­tion that com­pa­nies that are al­ready in­sol­vent must be placed into 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, then the prac­ti­tioner and the cred­i­tors must re­lease the com­pany from its res­cue pro­ceed­ings and place it into liq­ui­da­tion.

Mod­ern res­cue cul­ture sup­ports the no­tion that there is al­ways a need to save debtor com­pa­nies that are can­di­dates for res­cue and which have gen­uine re­cov­ery prospects.

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 (com­pany fo­cused) ap­proach.

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.

The mind shift re­mains work in progress. Most South African com­pa­nies, di­rec­tors and bankers need to re­sist the temp­ta­tion of “sink­ing the Ti­tanic”. How­ever, as time goes on and we con­tinue to see sig­nif­i­cant com­pa­nies be­ing res­cued, con­fi­dence in the process will in­crease. The banks will play a sig­nif­i­cant role here.

South Africa 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.

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