Some challenges associated with business rescue proceedings

Some challenges associated with business rescue proceedings
16 Mar 2021

Business rescue endeavours to create a culture of corporate rescue which is appropriate for the modern South African economy, especially in today’s climate. The aim is to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders. This is done by providing for the temporary supervision of the company through the appointment of a business rescue practitioner (“the practitioner”).

The practitioner aims to return the company to solvency or, if it is not possible, to provide the company’s creditors or shareholders with a better return than would result from the immediate liquidation of the company.

Effectively, business rescue is intended to offer the opportunity for the efficient rescue and recovery of financially distressed companies. In practice however, the business rescue process has proven not to be as efficient as the legislature may have intended and certain unforeseen challenges have arisen with the process.

1. Accreditation of the practitioner

Currently, in terms of section 138 of the Companies Act 71 of 2008 (“the Act”) a person may be appointed as a practitioner if that person meets certain criteria such as being a member of good standing of a legal, accounting or business management profession accredited by the Commission (section 138(1)(a)).

The powers and responsibilities afforded to a practitioner by the Act are wide and extensive -practitioners take control of the management of a financially distressed company and work under immense pressure. If the practitioner lacks the competence and/or the qualifications to rescue the business, the success of the rescue process is strained.

2. The costs of the business rescue proceedings

Unlike liquidation proceedings, in which the liquidator can be taxed subject to the approval of the Master of the High Court, practitioners are not subject to any independent party who can scrutinize the costs involved in such proceedings.

Although practitioner’s fees are provided for in section 143 of the Act, the costs involved in the proceedings are often unreasonable, especially considering the company’s financial distress (the practitioners of SAA are said to have charged more than R30 million in fees, before the business rescue plan was even adopted!)

Evidently, there is a clear need for independent scrutiny of the costs associated with the rescue process to ensure that the fees and charges are reasonable and justifiable.

3. Time frames in a business rescue

The Act envisages that the business rescue process should be speedy. Affected persons cannot be left in a state of flux for an indefinite period. Section 132(3) of the Act, is instructive: “If a company’s business rescue proceedings have not ended within three months…”.

The Act prescribes time frames within which to convene the first creditors’ meeting and first meeting of employees’ representatives, publish the business rescue plan and convene a meeting to consider and vote on the business rescue plan. In practice, the 25-day time frame provided for in the Act for the submission of the business rescue plan have become blurred as practitioners tend to request additional time within which to publish the business rescue plans from creditors. Practitioners may often find that financially distressed companies lack proper record-keeping, have disastrous finances, and the management has either resigned or is uncooperative. The time frames prescribed by the Act pose a challenge for a practitioner who needs to acquaint himself with the business, stop the financial bleeding, obtain all the information, consult with stakeholders and secure post commencement finance before being able to determine whether there are reasonable prospects of rescuing the company.

There are certain business rescue proceedings that appear to limp along with no end in sight, for example, Shiva Uranium – which was placed under business rescue in 2018. Notwithstanding the aforesaid, the practitioners have still not published a business rescue plan and blame it on the never-ending litigation which leaves affected persons with no alternatives to recover their funds.

Whilst the legislature expected the business rescue process to be speedy, the practicalities are that it is a time consuming and costly process. This does lead one to question whether in fact business rescue is a better remedy than liquidation.

4. Redundancies and the business rescue process

In terms of section 136(1)(a) of the Act, during business rescue, employees who are employed before the commencement of business rescue proceedings, continue to be employed on the same terms and conditions. This is however subject to: changes occurring in the ordinary course of attrition; or the employees and the company reaching agreement on different terms in compliance with the relevant labour laws.

Section136(1)(b) of the Act goes further to provide that any retrenchments in terms of any business rescue plan, must be conducted in terms of section 189 or 189A of the Labour Relations Act 66 of 1995 (“LRA”), and other applicable labour laws.

Based on a recent Labour Appeal Court (“LAC”) judgment, South African Airways (SOC) Limited (In business rescue) and Others v National Union of Metalworkers of South Africa obo Members and Others, there is now a moratorium on retrenchments when business rescue proceedings have commenced and before the business rescue plan has been drafted. The LAC decision has created challenges for Practitioners going forward insofar as the timing of the business rescue plan is concerned. There is furthermore uncertainty as to whether the business rescue plan can simply be a draft or whether it needs to be adopted by creditors. If the business rescue plan is to be adopted, there is an extended period that needs to lapse before any consultations with affected employees can commence.

Importantly and in addition to the above, section 189 of the LRA requires an employer to issue the section 189(3) notices when it contemplates dismissal. The LC and LAC decision now places an employer in business rescue in contravention of this as the employer now has to wait for the business rescue plan to be presented. That said, the LC held that “the contemplation of dismissal” can only arise once it is provided for in the business rescue plan. This remains a contradiction with the prevailing labour legislation.

Considering the LAC judgment, practitioners need to be more diligent in finalising the business rescue plan for consideration.

Whilst there are many advantages with the business rescue process, the practicalities in the implementation process have come to fore in that what was intended to be a speedy process may exceed two to three years. With that said, the costs of the practitioners and his advisors are, in certain matters, excessive and unreasonable. This acts as a barrier to smaller companies resolving to be placed under business rescue and creditors effectively getting a small dividend. A further consideration is that a practitioner has no master to report to and who oversees the process. There is no regulatory body whose sole focus is on ensuring that licensed practitioners competent. These challenges in the business rescue process need to be investigated and steps taken to remedy them thereby ensuring the success and continuation of business rescue as a viable option for distressed companies.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Helen Westman
Helen Westman

Helen Westman is a Partner, with Right of Appearance in the High Court of South Africa, at Eversheds Sutherland's Melrose Arch office. Helen has served as the Registrar to the... Read more about Helen Westman

Laura Schlebusch
Laura Schlebusch

Laura Schlebusch is a senior associate at Eversheds Sutherland's litigation group. During the course of her experience Laura has been involved in both litigation and employment law matters and has... Read more about Laura Schlebusch

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