Business rescue is a relatively new phenomenon in SA, a result of amendments to the Companies Act in 2008.
Before that, liquidation was virtually the only route available to creditors. Under the old 1973 Companies Act, provision was made for putting a company under “judicial management” but this was seldom used due to the high legal burden of proving the company could be saved.
We’ve seen some shocking and criminal liquidations in SA, for obvious financial reasons: liquidators stand to make 10% on any assets sold at auction. The result was that companies that could have been saved were cauterised and scattered to the winds, leaving the remains to be picked by vultures.
Business rescue is now an option for the courts to consider, where there is a reasonable prospect of saving the company.
That sounds well and good in theory. Practice, however, is something else.
Consider the case of the eight Gupta companies placed in business rescue in February last year. The business rescue practitioners (BRPs) had to face down nearly 50 court cases from opportunists seeking to liquidate rather than save the companies for the financial motivation mentioned earlier, or to remove the BRPs standing the way of making a fat profit. If you consider that the primary assets in the Gupta stable – Optimum Coal and Koornfontein Coal mine – are worth about R3 billion, the liquidation fees on this are a juicy R300 million. Plenty enough reason to contrive a case for liquidation.
Fortunately, the BRPs were tough enough to withstand this onslaught. Another business rescue that has descended into a street fight is Vantage Goldfields, which has been in rescue for three years. Vantage owns the Lili and Barbrook gold mines in Mpumalanga and was shuttered when a supporting pillar collapsed in 2016, resulting in the deaths of three employees in a shipping container on the surface. These three bodies remain buried about 60 metres underground. The BRPs in this case have been fighting off any number of opportunists trying to pick up the assets for a song – or, more precisely, for nothing.
Bear that in mind, dear accountants, should you choose to become a business rescue practitioner. You need an excellent legal team at your side and the cojones of a street fighter.
The courts must decide when to implement business rescue, and the first hurdle to overcome is to determine whether the company is “financially distressed”. This is defined as follows:
- it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months; or
- it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.
In an article for the CIPC (Companies and Intellectual Property Commission), Advocate Tina Rabilall writes that business rescue represents a shift from the interests of creditors to balancing a wider range of often competing interests including those of employees and shareholders. For a start, there is a moratorium on legal action against the company and a chance that workers get to retain their jobs. Here are some of the benefits:
i. A liquidation aims to obtain whatever money or value remains from a failed debtor business in order to settle claims against it, business rescue legislation provides for a restructuring of the financial structure of an ailing debtor to save the business as a going concern and to facilitate the settlement of claims against the business in full.
ii. Business rescue is generally attractive to creditors because it aims to achieve a result that is more favourable for them than immediate liquidation.
iii. While business rescue proceedings are in place, the business rescue practitioner may suspend, entirely, partially, or conditionally any agreement or provision of an agreement to which the company was a party at the commencement of the proceedings, other than an employment contract.
iv. The commencement of business rescue proceedings results in a general moratorium on all legal proceedings against the company except with the written consent of the business rescue practitioner or with the leave of the court.
Role of the courts
Rabilall says several matters that have been brought before the High Court where the courts have been called upon to interpret and apply some of the provisions in section 131(4) of the Companies Act that deal with business rescue. In particular, there are conflicting interpretations in determining whether there is a reasonable prospect for rescuing the company.
The use of the terms “reasonable prospect” is unfortunate and poorly defined, but this provides courts with rather wide discretion to implement business rescue. Two court cases in particular support this generous interpretation of “reasonable prospect”: Cape Point Vineyards (Pty) Ltd v Pinnacle Point Group Ltd and Another, and Southern Palace
The courts will not always lean on the side of business rescue, however. Several cases have gone the other way, with judges taking a narrow interpretation of “reasonable prospect” and deciding to issue orders for liquidation – particularly where this is seen to be advantageous to creditors.