IS BUSINESS RESCUE THE MOST VIABLE OPTION FOR STRUGGLING BUSINESSES?

There has been a lot of speculation whether business rescue is indeed the way forward for struggling companies and whether it is indeed a viable option which is provided for by the Companies Act No. of 71 of 2008 ("Companies Act"). This speculation surrounding business rescue has occurred as business rescue practitioners believe that business rescue is not working as effectively as previously thought, owing to a success rate of only 10 % (ten percent) to 35% (thirty-five percent).

RECENT BUSINESS RESCUE CASES

The viability of business rescue as a mechanism for struggling businesses recently came under the spotlight again in the cases of South African Airways SOC Limited (In Business Rescue) and Others v National Union of Metalworkers of South Africa obo Members and Others (JA32/2020) [2020] ZALAC 34 ("SAA Case") and Ziegler South Africa Proprietary Limited v South African Express SOC Limited and others 2020 (4) SA 626 (GJ) ("SA Express Case").

In the SAA Case the Labour Appeal Court handed down a key ruling impacting business rescue proceedings where the rescue practitioners of South African Airways SOC Limited ("SAA") appealed an earlier finding by the Labour Court that ruled that the business rescue practitioners could not start retrenchments at SAA without first submitting a business rescue proposal, such application for appeal was dismissed. The effect of this judgment means that business rescue practitioners may not be used by employers to cut jobs and the fundamental challenges threatening the company's survival must be addressed in the business rescue plan.

In the SA Express Case, Ziegler South Africa Proprietary Limited ("Ziegler"), an unpaid creditor of South African Express SOC Limited ("SA Express"), brought an urgent application in the Johannesburg High Court, to place SA Express in business rescue. The court accepted Ziegler's argument and agreed that SAA would become profitable if properly managed and that business rescue would yield a better return for creditors than immediate liquidation. The court was of the opinion that the effects of liquidation would lead to disastrous effects including, amongst other things, that South Africa would lose an asset that could, if properly managed, contribute significantly to the economy, the South African government would be burdened by calling up government guarantees and a significant amount of jobs would be lost if liquidation had to proceed. The court therefore decided to pursue business rescue in order to provide SA Express with a chance of recovery. The court accordingly made an order to place SA Express under supervision pending the commencement of business rescue proceedings.

THE BUSINESS RESCUE PROCEDURE

Chapter 6 of the Companies Act provides for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and the interest of all relevant stakeholders. It provides financially distressed companies an opportunity to reorganise and restructure their financial affairs through the business rescue process. A company is considered as being financially distressed if within the first 6 (six) month -

• it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable; or
• it appears to be reasonably likely that the company will become insolvent.

Business rescue provides for, inter alia, the following -

• the temporary supervision and management of the company's affairs by a business rescue practitioner;
• a temporary moratorium on the rights of claimants against the company or in respect of property in its possession;
• the ability for the company to obtain post-commencement financing; and
• the development and, if approved, implementation of a business rescue plan to restructure its business, debt, property, equity, affairs and other liabilities.

Business rescue can be initiated by either the board of directors, by an application to court when the business is financially distressed and through an application to court by any affected party, including shareholders, creditors, registered trade unions and employees.

WHY IS THE SUCCESS RATE FOR BUSINESS RESCUE SO LOW?

The success rate is low for business rescue as it is often inappropriately utilised by companies. Many companies utilise business rescue with the intention of avoiding liability with creditors and with the intention of pruning the business by cutting jobs, rather than attempting to rectify and restructure the business.

Many businesses only enter into business rescue operations once it is too late. Companies often choose to go into business rescue once the damage is already done, as the directors of the companies deny the commercial reality and once the directors are ready to face the music, it is already too late for the business to be rescued.

Business rescue can become expensive and often when it is too late for the business to be rescued the costs related thereto are excessive and the option of business rescue becomes unviable.

As business rescue is still a fairly new process, many business rescue practitioners are often not adequately skilled and equipped to understand the complexity and unique nature of business rescue, which often leads to a further downfall in business operations before it is ultimately liquidated.

BUSINESS RESCUE REMAINS A VIABLE OPTION FOR STRUGGLING BUSINESSES

Even though the success rate is low, the business rescue process should still be viewed as a viable option provided that the business rescue process is followed correctly and is implemented timeously, as it is the last resort before liquidation, which terminates the business without any attempt to recover the business.

Business rescue practitioners should ensure they accept a business rescue appointment only if they are equipped and skilled to do so and directors of companies should appoint business rescue practitioners with the intention to rescue the business and not on the view that they can potentially manipulate the business rescue practitioner into escaping creditors liability.

It is important to note that the business rescue process was not established for unforeseen crisis situations like the Covid-19 pandemic, it was created as an interim step and an alternative to liquidation.

It is therefore advisable that distressed companies act proactively. If there are any indications that the business might not survive, it would be prudent to consider business rescue sooner rather than later. All businesses that are financially distressed and want to take the decision to start business rescue proceeding can file a notice to start business rescue proceedings with the Companies and Intellectual Property Commission, however it is important to note that no liquidation proceedings must have commenced against the company when a decision is taken to start business rescue proceedings.

VDMA's team of experts are available to assist your business with all of your business rescue proceedings and the restructuring of the company, including reviewing your business affairs as well as drafting and implementing an appropriate business rescue plan.

Source: VDMA