Business rescue – companies starting to rise from the dead

April 2014 | LEGAL & REGULATORY | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

South Africa has slowly but surely taken its first steps since its infant phase after incorporation of business rescue legislation in Chapter 6 of the Companies Act, Act 71 of 2008, during May 2011 (‘Business rescue’). Business rescue legislation in South Africa represents a hybrid system derived from a combination of Canadian, Australian, UK and US legislation for the restructuring of companies in financial distress.

Around October 2012, with the reported decision of Van Staden v Angel Ozone Products CC and Others (54009/11) [2012] ZAGPPHC 328; 2013 (4) SA 630 (GNP), the possibility of converting a final liquidation order against a company to business rescue proceedings became a reality. The prospect of reviving a company to a thriving entity, utilising the mechanism of business rescue, was confirmed as a reality in light of the factual resurrection of, for instance, various property developments which were forced into liquidation because of the vacuity that existed in South African company and commercial legislation, prior to the introduction of the process of business rescue. A company can be placed under business rescue at any time prior to the approval by the Master of the High Court of the final liquidation and distribution account in the liquidation proceedings of such a company. The liquidation process, as history has shown us, can take several years in certain instances to reach finalisation. The Courts have therefore, in recent years, come to the aid of companies placed in liquidation by allowing these companies, and the parties involved in these companies, the opportunity to convince the Court or the creditors involved with the company that the prospect of reviving the company to its former glory does exist. This was not possible prior to the incorporation of business rescue by way of the new legislation.

Pre-business rescue as a doctrine in law existed where an unpaid creditor, claiming for the winding up of a commercially insolvent company, was most likely to succeed, regardless of the fact that the company was solvent in that its assets exceeded its liabilities. This has in the past resulted in the demise of, for instance, many property development companies with substantial asset value and potential, but an inability to cover liabilities towards creditors as they become due and payable in terms of the agreements governing the development itself.

Business rescue requires reasonable prospects for returning a financially distressed company back to a viable concern, as well as the existence of circumstances confirming reasonable prospects to obtain a better return for creditors as opposed to the immediate liquidation of a company. This last aspect represents a major leap forward for companies under business rescue, as well as the creditors involved with these companies, for obvious reasons.

When considering the question of whether a company qualifies as a candidate for business rescue, the commercial or factual insolvency of that company should not play a role, as the only consideration (and focus) should be the possible return to creditors, employees or shareholders involved in the process of business rescue, as opposed to their return following the immediate liquidation of that company. If there is in fact a reasonable prospect that the creditors, employees or shareholders stand to obtain a better return in business rescue, as opposed to the immediate liquidation of the company, business rescue should always be preferred. This reasoning was confirmed by the Courts in the recent decision of Absa Bank Ltd v Newcity Group (Pty) Ltd, Cohen v Newcity Group (Pty) Ltd and Another (45670/2011, 28615/2012) [2012] ZAGPJHC 144; [2013] 3 All SA 146 (GSJ).

It is also important to note the fact that any investment in a company after the commencement of business rescue is regarded as post commencement finance. South African Courts now recognise that ‘post commencement finance creditors’ rank above any normal secured (and for that matter unsecured) creditors of the company. This status of preference did not exist prior to the commencement of business rescue. This ‘super preferential’ status awarded to post commencement financiers remains under circumstances where the company cannot be rescued and a conversion to liquidation follows. This state of affairs has opened the door for new post commencement financiers to emerge as a result of the security provided to them under business rescue, which in turn creates various new business opportunities in South Africa. With investors more willing to provide post commencement financing to companies in business rescue, the prospect of restructuring the affairs of financially distressed companies to such an extent that the company, its existing creditors and the employees of the company benefit from such restructuring, increases exponentially.

Business rescue can therefore be regarded as a second chance for many companies that traditionally would have been considered beyond help and doomed to liquidation, with possible losses to be suffered by all parties involved with the entity. The new approach ushered in by legislators can be viewed along the lines of a Court being placed in the position where such a Court should not consider the factual liquidation of a company prior to, at least, considering the prospect of placing such a company under business recue. This involves obtaining a report from an expert, being a rescue practitioner, in order to properly determine the company’s future viability as a business entity. This statement is, however, not made unqualified, as there should be strict enforcement of procedural requirements in business rescue in order to avoid any possible abuse of the process in this regard. To this end, the Act is clear in that the process of business rescue cannot be abused by entities for any ulterior motive but what stands to be in the best interest of the company, its creditors and employees.

South Africa still has a long road ahead in establishing fixed rules and guidelines for business rescue. The progress made in this regard, as far as establishing business rescue as a process that stands to contribute to the economy of South Africa, is clear from the various positive decisions by the Courts since the incorporation of the legislation, some of which has been outlined above. It is clear that the Courts are embracing this innovative piece of new legislation and that the process of establishing a level playing field within the industry is well underway.

Werner Cawood is a partner at Cawood Attorneys. He can be contacted on +27 12 072 0109 or by email: werner@cawoodlaw.co.za.

Werner Cawood

Cawood Attorneys