Business rescue myths

The emergency landing of South African Airways (SAA) in the airport of business rescue garnered much interest and, unfortunately, speculation and myth around theprocess. Enslin Nel, an attorney experienced in business rescue from VDT Attorneys, debunks some of these myths and explains the advantages and disadvantages of using the procedure for your own business.

The much-publicized business rescue of SAA may have been the first time a state-owned company followed this route, but according to latest statistics of the Companies and Intellectual Property Commission (CIPC), a total of 3 298 businesses have followed taken this approach since the inception of the process in 2011.

Business rescue was introduced by the Companies Act of 2008 to provide for an alternative remedy to immediate liquidation, Enslin Nel says.

“In layman’s terms, it means a company is placed under the supervision of a business rescue practitioner (BRP) to try and restructure the business’ affairs in attempting to save it. A big motivation is the breathing space it offers a business. Creditors may not litigate against the business while it is in business rescue and the BRP also has wide powers to review and renegotiate agreements that may have contributed to the financial woes of the business.”

Business rescue is a temporary measure which generally ends in a successful completion of the process, meaning the business is not financially distressed anymore, or the liquidation of a business if it couldn’t be saved.

It is not a quick fix. According to the CIPC statistics, the average period since commencement of business rescue to termination for whatever reason, is 12,86 months. For successful implementation of a business plan, the average period is 16,18 months.

With SAA being a complex and massive operation, any successful business rescue could take substantially longer.

Myth #1 – The owner can still call the shots

The most common misconception, exasperated by the unique SAA case, is that the government as the sole shareholder, still calls the shots.

“Using the analogy of an airplane, business rescue means the BRP moves into the cockpit, creditors and employees sit in business class with a few extra perks and the owner gets a seat in couch class, or ‘lala class’ as former Minister Lulu Xingwana infamously referred to it in Parliament,” Nel says.

Another apt example is the business rescue of the Optimum Coal Mine which still technically belongs to the Gupta family, but they currently have no say in the day-to-day operations of the mine.

The directors remain the directors of a company in business rescue and the shareholder or owner remains the owner(s) of the business, Nel explains, but their powers and freedoms are severely curtailed in a business rescue process.

In terms of s137(2) and s 137(3), directors continue to work, but “subject to the authority of the business rescue practitioner”. In fact, the directors are to act “in accordance with the express instructions or directions of the practitioner” and “must attend to the requests of the practitioner at all times”.

Myth #2 – Business rescue will save a business

Not all business can, and in fact, should be saved. The CIPC statistics show that of the 3 298 cases, 400 (12%) ended up directly in liquidation, vast numbers were terminated as unsuccessful for various reasons and only 571 (17%) of business rescue cases were finalised through substantial implementation of a business rescue plan.

“The Companies Act requires the BRP to ascertain whether there are reasonable prospects to save the business. If there are none, he or she has to opt for liquidation,” Nel says.

Business rescue is arguably most effective when an unexpected event or series or events caused the financial distress and not when a company is in the so-called twilight zone to insolvency.

“Business rescue cannot cure a fundamentally bad business model. If, however, the business is in trouble because a major client defaulted on payments, destroying its cashflow, or a few bad decisions caused the financial distress, it can be an excellent option.”

Myth #3 – I can save my insolvent business without the formalities

If the SAA example has taught us anything, it is that postponement of the inevitable will not make the problems disappear.

In fact, says Nel, directors of a company may attract personal liability for reckless trading if a business continues to trade under insolvent circumstances.

“Insolvency legislation could cause you massive civil and even criminal liability if you hide the fact that your business is insolvent while you try to fix it yourself. The entire premise of business rescue is to allow for an exception to insolvency rules to make provision for continued trade under circumstances that would ordinarily be prohibited by law. However, to use that, you have to consult with experts and follow due process at the earliest sign of financial distress,” Nel says.

The Act defines a business that is “financially distressed” when “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 if it appears likely that a company will become insolvent.

Business rescue proceedings cannot be started after liquidation proceedings commenced, so it is advisable to act soonest. 

Myth #4 – That business rescue is the perfect loophole for evading creditors

Some could be tempted to abuse the protection afforded by business rescue for the sole purpose to thwart creditors who are about to sue the business.

However, such an approach is likely to backfire. Apart from the risks of giving up control of your business, our courts have taken a dim view on such abuses of the process.

In Swart v Beagles Run Investments 25 (Pty) Ltd, the court confirmed a creditor-centric approach to business rescue, saying there must be a reasonable prospect to save the business and that business rescue has to place creditors in a better position than what they would be in a liquidation.

On various grounds, the court held that the applicant didn’t act in good faith and refused to place the company under business rescue.

In another case (ABSA Bank Ltd v Newcity Group (Pty) Ltd), a business rescue application was described as a “time-buying ruse” that shouldn’t be allowed.

“Business rescue should be a bona fide attempt to save a business with full honesty to creditors and employees. If done correctly and with sound legal advice, it is in the best interest of the owners, employees and creditors,” Nel says.

Enslin Nel is a Director in the Litigation and Dispute Resolution department of VDT Attorneys Inc.  Contact him on 012 – 452 1300.

Copyright @ VDT Attorneys Inc

February 6, 2020
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