Even before the coronavirus pandemic broke out, arguably the most prominent business rescue in the country had already made headlines: that of South African Airways (SAA), which after more than a year is still not finalised. More recently, Ster-Kinekor became the latest high-profile company to announce it has gone into voluntary business rescue.
South Africa has seen a large number of prominent – and less prominent – business rescues in recent months, particularly as the impact of the Covid-19 hits home. And as the effects of lockdowns since April 2020, and the threat of third and fourth waves looms large this year, many companies and businesses in distress may find themselves opting for business rescue in a bid to survive.
BUT IS IT ALWAYS THE ANSWER?
Business rescue is done in terms of the Companies Act. A business rescue practitioner is appointed and steps into the shoes of the directors or management of a company or business in managing the day-to-day operations.
The business rescue practitioner has to investigate the company’s financial situation, and consider whether there is any reasonable prospect of “rescuing” the company.
Between April and October last year, 233 filings for business rescue were recorded, according to recent figures released by the Companies and Intellectual Property Commission (CIPC). The majority of filings in the last year have been in Gauteng at 54%.
Tobie Jordaan, a director and sector head of business rescue, restructuring and insolvency at Cliffe Dekker Hofmeyr, is surprised by the numbers as he expected that there would have been more companies seeking protection in the form of business rescue.
“The boards of companies and management of small businesses are facing many uncertainties in the current economic climate. Furthermore, their hopes for an uptick when lockdown regulations were relaxed after a few months of hard lockdown, were tempered once stricter regulations were imposed once the second wave hit,” says Jordaan.
“No actual temporary insolvency relief measures have been put in place to address the economic devastation brought on by the extensive national lockdown that has left the South African private sector in need of desperate rescue.”
He also cautions that a company can be seen to be trading recklessly where the business has carried on trading despite its directors knowing that it is financial distress or insolvent. Directors have a duty to pass a resolution for a company’s business rescue or liquidation as soon as they become aware that the company is either financially distressed or trading in insolvent circumstances.
Directors could even end up being held personally responsible if they do not act according to this duty. If they decide not to opt for business rescue, they have to make it clear to creditors why not.
“Many companies might now even be at a point where it is too late to still try to opt for business rescue. The business rescue process is only an effective tool to turn around an entity provided it is done timeously,” says Jordaan.
“If you wait too long, then it will probably become too late and then you should consider liquidation. If opted for timeously, however, business rescue can return a company to a solvent position and get it back into the market for a fresh start.”
Jordaan says each business rescue comes with its own set of problems and each case should be judged on its own merits. At the same time, he says there are many cases where business rescue was done successfully.
Business rescues are often complex and due to the spotlight that has been placed on the process, as a result of high-profile cases such as SAA, appropriate experience is required. The rescue process of SAA, for example, also involves challenges because it is a state-owned company.
As a result of the immense financial pressure that the lockdown has put on companies, Jordaan suspects that, in the next couple of years, South African courts may be more considerate of the effect that the Covid-19 pandemic has had on businesses in general.
“In the past eight months, we have seen our courts bending over backwards to assist the affected parties involved in a business rescue as a result of the national lockdown and devastating effects of the Covid-19 pandemic,” says Jordaan.
For him, the most noteworthy judgment in this regard was that of the Labour Court and Labour Appeals Court in the Numsa vs SAA matter, which was heard in 2020. The dispute arose out of the SAA business rescue and the order had the effect of creating a moratorium on retrenchments of employees before the adoption of a business rescue plan.
“This judgment has caused for an evolution of the business rescue process going forward as the court in this instance sought to balance the rights of all stakeholders, especially that of the employees involved in a business in rescue,” says Jordaan.
“As a result of this judgment, we may now see that business rescue practitioners may be forced to formulate and adopt ‘vanilla plans’ in an attempt to fast forward the adoption of a business rescue plan process.”
Another interesting development for Jordaan, as a result of the greater business rescue uptake, is an increase in local and foreign investors taking over assets or businesses for much less than what they were once worth.
“This outcome has grown the distressed asset-based market in South Africa for local and foreign investors, as there is an opportunity to do a ‘pre-packaged’ buy-out. This is where a deal is concluded with a buyer in respect of the company’s assets or shares at the outset, and then expeditiously approved in the business rescue process,” explains Jordaan.
“Creditors are very amenable to approving a business rescue plan providing for such a buy-out as it results in them receiving more than they otherwise would have had the company simply been liquidated.”
There are a few options available to distressed companies apart from that of a business rescue. These include a voluntary or informal restructure, which entails negotiations between the debtor and its major stakeholders, such as its major creditors.
“In certain circumstances where there is a good relationship between creditors and other stakeholders and the business in distress, it may be the best way to proceed and should never be overlooked as a potential debt restructuring option,” says Jordaan. “The advantage is that it is the most informal way to restructure a company’s affairs, and therefore theoretically the cheapest and fastest. Further, as informal restructurings are usually confidential, the company’s reputation remains intact, and its market value and relationships with employees, customers and supplier are preserved.”
Another option could be a “compromise” in terms of section 155 of the Companies Act. This is a more formal legal alternative to business rescue. It involves an arrangement entered into with creditors which makes provision for the restructuring of the company’s affairs without the appointment of a business rescue practitioner.
Last, but not least, liquidation remains where restructuring opportunities have been exhausted, or business rescue is not recommended as there is no prospect of rescue or it is sought but is unsuccessful.