Business Rescue Procedures
As an attorney who dealt with liquidations and insolvencies for some 20 years in Johannesburg, I acquired an understanding of how liquidations work.
The first critical lesson was that creditors could, if they were lucky, receive up to 10c in the Rand, but normally after some years, all going well, about 1c. This situation was exemplified by a classic retort of Lord Birkenhead who when asked by a Judge why he was wasting so much time arguing a complicated liquidation, responded that the alternative would be “squandering money on creditors”.
Secondly, once a Winding up Application has been launched, that is the end of a Company’s trading prospects.
Thirdly, the liquidation process is often a carefully devised plan by a grouping of creditors to snatch prized jewels from the Company at knock-down values and followed by an offer of compromise. The business then flourishes with few creditors, a healthy assessed loss, and with ceded creditor’s claims of up to 99c in the Rand equating to loans. It was a game on a grand scale.
Finally, Liquidator’s fees together with other related costs account for up to 15% of the value of the assets of the Company or its continuing business operations. Where the business of the insolvent Company is continued, a fee of some 6% is charged on turnover. Some liquidations thus continue forever!
The only alternative at present to liquidation where a Company is temporarily unable to pay its debts, is Judicial Management. I do not know of any such order ever taken; it doesn’t work! The conundrum however was constantly posed by banks and other categories of secured and preferent creditors, as to how, where because of the peculiar circumstances of the economy, a Company was under temporary trading difficulty, some form of a business recovery process could not be introduced. To this end, banks and firms of attorneys changed the names of their Insolvency/Liquidation Departments to Business Recovery or Financial Reorganisation, but all to no avail. Once a provisional winding up order has been applied for, no one lends a cent, or assists in delaying the inevitable. Indeed most creditors write off whatever is otherwise due, knowing it would only cost them more money to become involved.
Thus when the Business Rescue provisions were promulgated, it was readily apparent that this was the attempt to create exactly the middle ground whereby financially distressed Companies i.e. unable to pay their debts within the next 6 months, could by the mere passing of a Director’s Resolution prevent creditor’s claims of whatever nature being proceeded with against them for a period of time, being until a Business Rescue Plan was either completed or terminated. “Business Rescue” is defined as being:
“Proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for-
(i) the temporary supervision of the company, and of the management of its affairs, business and property;
(ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
(iii) the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities…”
Reading the new legislation I sensed that the hard lessons I had learnt over the years were intended to be shelved in a type of triumph of hope over experience and that creditors would now indeed receive substantial re-payment, given a reasonable period of recovery time. It is also easy to be cynical, but I quote from a Google excerpt when I put in the words “Chapter 11” (i.e. the US counterpart from which I suspect our legislation is borrowed):
“The plans usually contemplate the sale of some assets, forgiveness of some debt, and a generous re-payment schedule over time. Things rarely work out well for the debtor and the vast majority of Chapter 11 cases either result in the largest lender owning the Company at the end, or the Company changing its plan to one of liquidation…”
I think the reason for my pessimism in principle, is that if the Company previously under presumably reasonably competent management was unable to return a profit, how will it do so under management of a different set of Managers charging an additional 6% on the turnover (not nett profits) of the Company, who may have no industry experience? So, you ask, what is the provision for remuneration of Business Practitioners? Well, I hasten to comfort you that it is not on a tariff scale, but merely at a rate not to exceed R2,000 per hour, or R25,000 per day! Plus such added contingency fee as may be agreed with the creditors.
What is sought by the new Act is to allow a Company without bureaucratic hindrance, an ability to stay creditor’s claims of whatever nature by its own volition. Thus once a Resolution of Directors is filed with the Commission and various notices given, Section 133 provides:
“133 General moratorium on legal proceedings against company
(1) During business rescue proceedings, no legal proceeding, including enforcement action, against the company, or in relation to any property belonging to the company, or lawfully in its possession, may be commenced or proceeded with in any forum, except-
(a) with the written consent of the practitioner;
(b) with the leave of the court and in accordance with any terms the court considers suitable;
(2) During business rescue proceedings, a guarantee or surety by a company in favour of any other person may not be enforced by any person against the company except with leave of the court and in accordance with any terms the court considers just and equitable in the circumstances.
(3) If any right to commence proceedings or otherwise assert a claim against a company is subject to a time limit, the measurement of that time must be suspended during the company's business rescue proceedings.”
I am not going into detail as to how the practitioner is thereafter required to consult with various Affected Persons in preparing a Business Rescue Plan being Shareholders, Creditors, any registered Trade Union or any of the employees not represented by a Trade Union, but the rights of each of these parties are extensive, which albeit sensible philosophically may lead to administrative nightmares!
Indeed, as indicated in Wouter’s talk, any unhappy Shareholder can object and be paid out what is then a fair value for his shares before deduction of all the costs that will be involved! I do not know of Shareholders ever having received a re-payment of capital, so this will be a turn-up for the books. The Business Plan has to be approved by 75% of creditor’s voting interests i.e. including employee’s outstanding salary claims. To the extent Shareholders’ rights are affected, they are also required to approve the Plan by a majority vote. The contents of a Plan are comprehensively specified in Section 150.
Presumably a Business Rescue will occur because an industry within which a Company operates is perceived to be or is suffering from a market downturn, or economic circumstance over which they have no control. The critical feature of a Plan would normally be that the industry is going to turn the corner after 6 months, or a year, or whatever, and the Company just needs breathing space to survive such a temporary misfortune. The only other certain knowledge I have is that whatever is forecast by experts, the opposite generally happens or something totally different.
Again, perhaps inappropriate cynicism, but I qualify this by stating that there are two qualities that are going to be critical to this legislation working. The first is the ability of person to be appointed a Business Rescue Practitioner. Draft regulations have been published setting out who such persons are and I am happy to advise you that amongst other persons, it is “an attorney who has been admitted to practice for at least 10 years…”, a practicing Liquidator registered as such for at least 10 years, and likewise an accountant. So all the usual suspects are there.
Secondly and most importantly, what is the position in regard to post commencement finance? It is here perhaps more than anywhere, that the legislation provides some new ammunition, but against a disincentive for creditors that have already advanced monies or allowed credit to the Company. In essence, any creditor at the time of the Plan being filed, takes a back seat and has to await payment of:
1 all employees owed salaries;
2 all costs of the Business Rescue Plan, including the Practitioner’s costs and charges;
3 all secured creditors of any asset not previously secured, but secured against a post commencement advance; and
4 all unsecured creditors who lend money after the commencement of the Plan.
These latter creditors are paid in the order that they advance monies previously. Secured and concurrent creditors can then be paid!
Financiers and trade creditors must be careful of this new legislation and critically know their customers. Otherwise even the 1c in the Rand will become a mirage! A commonly used form of financing provides security of cession of debtors. It will be an interesting question to determine whether Section 133 above prevents a secured creditor from claiming directly from such debtor because it is not a legal proceeding, albeit it may be “an enforcement action”. I suspect that this form of security because of its immediate entitlement, may well become critical to lenders, both pre- and post-commencement. The provisions of Section 136(2) are also draconian whereby a Practitioner is entitled at any time during the Business Rescue proceedings to “cancel or suspend entirely, partially or conditionally, any provision of an Agreement to which the Company is a party at the commencement of the Business Rescue period, other than an Agreement of Employment.” I do not need to ask what this means for say Rental Agreements, Credit Agreements, Banking Agreements, and in fact the whole web of intricate commercial arrangements. The competitive advantage obtained through such a re-structuring would be huge as well!
At present a Provisional Liquidator is appointed by the Master exercising his discretion. In fact, it is often a grouping of creditors who determine this well in advance of the Court Application, by pre-planning creditors’ Letters of Appointment being furnished to the Master simultaneously with the Court Application. The liquidation thereafter proceeds in accord often as not with the wishes of the very same creditors! I fear the same may now occur in that the Practitioner is a person chosen by the Director’s Resolution at the time the decision is made to commence a Rescue Plan. Self-evidently, the Board will rely on its advisors to suggest an appropriate person and the recommendations may not be based on merit, but rather on the usual suspects. The secured creditors will obviously exercise considerable influence on such a decision, particularly if they are also going to be the post-commencement financiers.
The final comment I have in regard to the Practitioner, is that in terms of Section 140, he has “full management control of the Company in substitution for its Board and pre-existing management”. Directors on the other hand must continue under Section 137, to exercise the functions of a Director, subject to the authority of the Practitioner. The Director is therefore still subject to personal liability specified in Section 77 for the debts of the Company, albeit that the Director’s discretion has more or less ceased. Whether the Practitioner can be held liable likewise for any loss, damages or costs sustained by the Company, will be an interesting aspect. A Practitioner is also entitled to remove “from office any person who forms part of the pre-existing management of the Company.” The critical lesson now for Directors and Managers, I suppose, is therefore to “know your Practitioner” well in advance. |
