Business Rescue remains a viable option for financially distressed companies in South Africa.
Some 7 years since the introduction of rescue legislation in 2011, (Chapter 6 of the 2008 Companies Act) (“the Act”), the mechanism allows failing companies to effect a business turnaround, and implement a strategic plan to restructure its business. The legislation provides an opportunity to appoint a business rescue practitioner to supervise the rescue process and effect a debt compromise with the company’s creditors.
Prior to 2011, financially distressed companies in South Africa had no alternative but to go into liquidation.
Liquidation terminated the company’s life, and brought an end to the company’s business and the jobs of employees.
With the introduction of the business rescue procedure in 2011, financially distressed companies could now elect to appoint an independent supervisor (the business rescue practitioner) to take control of the company’s affairs. The practitioner would engage with all affected parties (creditors, shareholders, trade unions and employees) to restructure the company’s liabilities, renegotiate prejudicial contracts, and the manner in which the company conducted its business. The mechanism provided the company with a ‘fresh start’ by allowing the entity to be ‘rescued’ and where it is given a second chance to continue trading on a profitable basis into the future.
During business rescue there is an imposed moratorium (stay) on all claims against the company. The moratorium prevents any creditor from pursuing the company, and no creditor can apply to court to wind up the company. This gives the business rescue practitioner time to consult with all affected parties in order to draft a business rescue plan aimed at the restructuring of the company’s debt and its business.
Once the plan is approved by creditors (and if necessary, the company’s shareholders), the plan is implemented by the business rescue practitioner and the company exits from the rescue process, either with new owners or on a restructured basis and where it can continue to trade into the future.
The test for financial distress
Directors of companies that are financially distressed (which means that the company cannot pay its debts in the next 6 month period or where the company is about to become insolvent in the next 6 month period) must resolve by board resolution to place their companies into business rescue.
The 6 month window ensures that the business rescue process commences as early as possible and whilst there is still value in the company. Critically, directors must believe that there is a realistic prospect of the company being rescued.
Importantly, if directors do not place financially distressed companies into business rescue, they face the prospect of becoming personally liable for the debts of the company. There are provisions in the Act which prohibit directors from trading recklessly, negligently and where directors (and management) trade their companies with an intent to defraud creditors.
Levels of co-operation and buy-in from all stakeholders
Creditors must be persuaded that in order for the company to be rescued, they must accept some form of debt haircut (compromise) on their outstanding claims as at the date of commencement of business rescue.
Most business rescue plans would offer a dividend which far exceeds what would be available in liquidation. Customers (debtors) of the company would continue to be obligated to make payment of amounts due to the company. Post-commencement finance (provided by the company’s shareholders, third party funders or from potential acquirers of the company) must be made available to the company in order to enable it to pay its ongoing expenses while the company is going through its restructuring period.
In summary, it is about cooperation between stakeholders and the business rescue practitioner to ensure that the business survives and continues to trade on a solvent basis into the future.
Sectors affected by the rescue process – 2016/2017
There has definitely been an increase in distress in the mining sector. Mines are highly susceptible to fluctuations in commodity prices and with ever increasing costs of mining, more resource companies are filing for rescue. The uncertainty around the draft South African Mining Charter has also not assisted.
In the retail space, the restructuring of Edcon, a long established South African clothing and textile company, came to its conclusion earlier this year with a complex restructuring of that company’s debt – effected through a section 155 Compromise Procedure – sanctioned by the courts.
Stuttafords Stores is an example of a business rescue process that has failed. The company struggled with protracted shareholder disputes, a lack of funding, a retail model that was open to question and where suppliers had lost faith after having their historical debt compromised. Although there was an initial hope that shareholders would make an offer for the business, these efforts came to nought and the company will soon be placed into liquidation.
The construction sector is also under strain and we are seeing informal restructuring take place in this sector at the moment. We have also seen certain renewable energy companies being placed into liquidation.
Successful business rescues?
In the mining sector, Southgold Exploration Gold Mine went into rescue and was ultimately bought out by Witsgold through a hard negotiation with various stakeholders. The deal was sanctioned in a business rescue plan approved by creditors. Optimum Coal Mine went through and exited from a business rescue process.
Top Tv (ODM), Pearl Valley Golf Estates, Advance Technologies Engineering (Aeronautical), Meltz Success (retail) and Ellerines – are all examples of companies that have exited successfully from the business rescue process.
Many of these companies (or certain of its divisions) were acquired by third parties, with business rescue dividends being paid to creditors in excess of what they would have received in liquidation. Most importantly, in almost all of these instances, scores of jobs were retained – all of which would have been terminated in the event of liquidation.
Unfortunately, many companies that enter into business rescue end up in liquidation. In certain instances, companies should not have entered into the business rescue process in the first place.
Certain business rescue practitioners take advantage of a lack of legal knowledge on the part of directors and persuade them to consider business rescue, mainly driven by the imposed moratorium (stay) on creditors’ claims. Again, little consideration is given to whether in fact there is a realistic turnaround plan.
The South African business rescue process is robust and sophisticated.
It is aligned (in many respects) with similar restructuring systems in the United States (Chapter 11), Australia (voluntary administration), Canada (the CCAA process) and the UK (administration process).
When directors of South African companies reach a required level of understanding of how business rescue works and where they recognise the potential upside of the process, we are going to see more and more directors of companies filing for business rescue as an alternative option, rather than just allowing their companies to end up in liquidation.
Generally, the South African business rescue process is positive in the sense that a successful business rescue delivers a restructured and viable company back into the South African economy and where jobs are retained in the process.
It really comes down to the competence of the business rescue practitioner and his peculiar ability to persuade creditors that the business rescue process will deliver a better dividend then creditors would get in a liquidation.