Text: Juan Engelbrecht. This article appeared in the June/July 2012 issue of Your Business Magazine
If your business is failing, there are still ways to manage your risk and rescue your firm before it hits rock bottom.
Donald Trump described his second Chapter 11 reorganisation as a sign of success, not a failure. More recently the chief executive of Chrysler stated that a Chapter 11 reorganisation of the company did not signify that he or Chrysler had failed. The cup was half full, not half empty, he said.
In South Africa, on the other hand, insolvency is generally regarded as a sign of failure. There is a significant stigma attached to it and insolvent debtors are usually suspected of being either reckless or dishonest or both. I believe that this view has been a major contributing factor to the failure of judicial management in South Africa (Under our Old Companies Act of 1973). Court decisions in judicial management applications generally displayed mistrust of this procedure, which was viewed as an infringement of the rights of creditors because it prevented them from exercising their right to liquidate a company to obtain payment on their claims.
Our new South African model (Companies Act 73 of 2008) defines “business rescue” as the process necessary to rehabilitate a company that is financially distressed by providing for:
- The temporary supervision and management of the company by a business rescue practitioner;
- A temporary moratorium on the rights of claimants against the company or property in its possession; and
- The development and implementation (if approved) of a plan to rescue the company by restructuring its affairs, business, property, debt, other liabilities, and equity in a manner that maximises the likelihood of the company continuing its existence on a solvent basis, or provides a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
- A company is “financially distressed” when it appears reasonably likely that it will not be able to pay all of its debts as they fall due within the immediately ensuing six months, or it appears likely that the company will become insolvent within the immediately ensuing six months.
An affected person is:
- A shareholder or creditor of the company;
- Any registered trade union representing employees of the company; and
- All employees of the company or their representatives, if they’re not represented by a registered trade union.
How does the model work?
There are two ways of initiating business rescue proceedings:
1. Proceedings can get underway if the company’s board resolves to start the rescue process. They would choose to go this route if they believe that the business can be rehabilitated, despite the problems it is experiencing. The company can’t enter the business rescue process if liquidation proceedings have already been initiated by or against the company. The plan will only come into effect once the resolution is filed with the Companies and Intellectual Property Commission.
Once the resolution has been adopted, the company must publish a notice of the resolution, appoint a business rescue practitioner and notify the Commission and all affected parties (shareholders, creditors and all employees, whether represented by a registered trade union or not).
2. Business rescue proceedings can also be initiated by our courts. In a situation where the board or owner does not opt for rescue proceedings, affected people can ask the courts to place the company under supervision and start the process. A copy of the application must be served on the company and the Commission, and all affected people must be duly notified.
What you should know
All affected people have the right to participate in the hearing of an application to begin rescue proceedings.
After considering an application by an affected person, the court will either place the company under supervision or dismiss the application. If the court places the company under supervision, an interim practitioner must be appointed, subject to ratification by the holders of a majority of the independent creditors’ voting interest at the first meeting of creditors.
Affected parties can also apply to the courts for an order to set aside the resolution; to remove the appointed practitioner, or to request the practitioner to provide security against the interests of the company and any affected persons. They can only apply for these changes prior to the drawing up of the rescue plan.
Know your rights
For the purpose of business rescue proceedings, employees will, in certain circumstances, be preferred unsecured creditors of the company.
Creditors are entitled to notice of, and participation in, all court proceedings, decisions or meetings. Each creditor also has the right to vote to amend, approve or reject a proposed business rescue plan. If the rescue plan is rejected, all creditors can either propose an alternative plan or present an offer to acquire the interests of any or all of the other creditors who voted against the approval of the plan.
Creditors can form a creditors’ committee and are entitled to consult with the practitioner during the preparation of the business rescue plan.
Voting by creditors occurs as follows:
- A secured or unsecured creditor has a voting interest equal to the value of the amount owed; and
- A concurrent creditor who would be subordinated in liquidation has a voting interest equal to the amount that the creditor could reasonably expect to receive (the practitioner will request such amount to be independently and expertly appraised and valued).
All shareholders of the company must receive notice of, and participate in, all court proceedings, decisions or meetings. If a proposed business rescue plan alters the rights of any shareholders; the impacted shareholders are entitled to vote to approve or reject the plan.
If the plan is rejected, shareholders can either propose that a new plan be prepared or offer to acquire the interests of any or all of the creditors or other holders, who voted against the original plan.
More to know
Creditors and employees and their recognised trade unions can form committees and are entitled to consult with the practitioner during the preparation of the business rescue plan.
In our next issue, we will handle the business rescue plan, various time periods that must be adhered to, and the court’s view and rulings on business rescue.
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