Sink or Swim – Business Rescue – The Art of Staying Afloat?
The new Companies Law No. 71 of 2008 (new Companies Law) provides an opportunity for companies that are operating in difficult financial circumstances, to apply for temporary supervision of the company by a trained Business Rescue Practitioner, who he would take over the management of the company’s affairs, business and property for an interim period.
If a business is in financial difficulty:
• it appears reasonably unlikely that the business will be able to pay all of its debts as they become due and are due within six months immediately; Prayed
• it seems reasonably likely that the company will become insolvent within the next six months.
Rescue or liquidation of companies
In the past, companies in financial difficulty in South Africa have had no choice but to initiate liquidation proceedings. Unfortunately, once liquidated, a company’s assets are usually sold at liquidation values. From time to time, companies are sold as going concern by liquidators, but these cases are few and far between. Therefore, liquidation proceedings have historically resulted in very small or marginal dividends for creditors.
Under the new legislative framework, the directors have to make a very difficult decision: request the rescue of the company or liquidation. If a company’s board of directors has reasonable grounds to believe that the company is in financial difficulty, but the board decides not to make a rescue resolution, written notice must be given to all creditors setting out the basis on which the company is in financial difficulties. and why a corporate bailout request is not proceeded with.
This is a section 129(7) notice, the purpose of which is to advise all creditors that if they deal with a company that is in financial difficulty, they do so at their own risk, particularly when the property is given on credit.
The introduction of corporate bailout brings South Africa into line with foreign jurisdictions, such as existing Chapter 11 court proceedings in the United States and Administration proceedings in both Australia and the United Kingdom.
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The aim is to provide a temporary moratorium on the rights of all creditors to proceed against the company during the corporate rescue period. Ultimately, the Business Rescue Practitioner (who must be licensed by the Business and Intellectual Property Commission (CIPC)) is tasked with developing and implementing, if approved by creditors and other interested parties, a plan to rescue the company by restructuring its affairs, businesses, property, debts and other liabilities and equity in a manner that maximizes the probability that the company will continue to exist on a solvent basis.
If this cannot be achieved, the goal would be to provide a plan that results in a better return to the company’s creditors or shareholders than would result from immediate liquidation of the company.
The main objective for the rescue and efficient recovery of companies in financial difficulties is the one that seeks to achieve the objective of balancing the rights and interests of all interested parties, in particular those of creditors, employees, shareholders and the company itself.
Business Rescue Presentations
Business Rescue has been available for companies with financial problems since May 1, 2011. Since the date of implementation of the new provisions, there have already been a significant number of submissions. According to the CIPC, since May 1, 2011 there have been 280 notices of the start of Business Rescue. The procedure is open to all companies, both private, public and closed. Until now, private companies have been in the majority with regard to ransom requests.
ICPC has indicated that the number of companies that have made the decision, either by resolution or by court order, to request the initiation of bailout procedures remains an ongoing process and demonstrates that bailout could offer an alternative to liquidation. Recent settlement statistics (as of December 2011) indicate that the number of settlements for 2011 decreased 10.8% year over year compared to the same period in 2010.
According to the CIPC, the sectors that have requested the rescue are mining, real estate and real estate, extractives, electricity, gas and water, transportation, storage and communication.
From the analysis of the above, it is clear that the real estate and real estate industry has been at the forefront with regards to bailout requests. This is a direct result of a decline in property prices and the general depression in the real estate market. Many of the companies that have opted for corporate bailouts in real estate have been limited to groups of investment schemes that were run as property syndications that ultimately ended up in financial distress. There have also been bailout presentations in the services sector which includes transport and logistics, tourism, hotel services and general services.
In the manufacturing industry, various companies and closed corporations that are evenly distributed among the different sectors have also requested the rescue.
conclusion
It has certainly become clear that bailout is an alternative option for companies facing insolvency. Rather than being placed into liquidation, corporate bailout provides an alternative scheme for creditors to be liquidated within a reasonable period and under the terms of the bailout plan.
Often the dividend offered in a corporate bailout scenario is much higher than what would be received in liquidation. Instead of going under, a company often needs to have the alternative of a moratorium period within which to restructure onerous debt that threatens the company’s solvency. “Staying afloat” during the period of rescue procedures would often save a company.
Just as the National Credit Act helped prevent people from being kidnapped, the bailout procedures should ultimately reduce the number of liquidations in the South African economy.
It has become apparent that many companies seek commercial bailout simply as a delaying tactic and to avoid having to pay creditors. It allows a temporary moratorium on the payment of the debt. Obviously, the courts are processing those requests that are considered an abuse of the process and that do not have the true objectives foreseen by the rescue procedure.
What is critical is the Business Rescue Practitioner’s ability to devise a coherent plan that creditors can properly understand and vote on for completion.
Our High Courts across South Africa are already developing a body of case law with regard to providing rulings and guidelines to enable all stakeholders to understand the mechanics of the new provisions and how corporate rescue should operate.
One of the ultimate goals is to save jobs and reduce unemployment. Although only six corporate bailouts have been accepted by creditors to date, we are still in the infancy of the system, and over time, particularly in 2012, should the need arise, bailouts could very well become the norm rather than the negative impact resulting from the liquidation.