Business Rescue - Possible after the granting of a final Liquidation Order

An important judgment for Business Rescue was handed down in the North Gauteng High Court by his Honorable Justice Legodi in the matter of P T van Staden v Angel Ozone Products CC (In Liquidation) & others on the 12^th of October 2012.

The Applicant (member) of a Close Corporation named Angel Ozone Products CC (First Respondent) brought an application in terms of Section 131 of the Companies Act, Act 71 of 2008 (“new Act”) more than a year after the Magistrates Court of Pretoria had granted a final liquidation order.

Three intervening parties as creditors opposed the application mainly on the basis that the Applicant was not entitled to the relief sought. Their argument was based on fact that liquidation proceedings end when the Court grants a final liquidation order as in this instance and, where after winding-up proceedings follow as directed by the Master’s office.

It was not disputed that liquidation proceedings can be converted into business rescue proceedings. The intervening parties however suggested that a distinction should be drawn between liquidation proceedings and winding-up proceedings, and that a Section 131 application can only be brought by an effected party while liquidation proceedings are pending and winding-up proceedings commence. The intervening parties argued that the new Act does not have retrospective working on orders granted prior to its commencement date, being the 1^st of May 2011.

Judge Legodi shared the views of Henochsberg on the Companies Act 71 of 2008 that liquidation proceedings or winding-up proceedings can be converted into business rescue proceedings no matter how far these proceedings might have progressed. Such contemplated business rescue proceedings being a better option than the current liquidation/winding-up proceedings.

The Judge was furthermore of the view that liquidation proceedings do not end when a final liquidation order is granted, but only once a final Liquidation and Distribution Account has been confirmed by the Master of the High Court as it was originally the case in Section 408  of the old Companies Act, Act 61 of 1973 (“old Act”).

The Judge concluded that Item 10(2) of Schedule 5 to the new Act makes it clear that an order granted in terms of the old Act is subject to any further order that could be made under the new Act. In the present matter the Judge found that the contemplated business rescue proceedings do not purport to extinguish the existing rights and obligations in terms of the old Act.

In conclusion Companies and/or Close Corporations subject to final liquidation orders will still be able to apply to convert such proceedings into business rescue proceedings if the proposed business rescue constitutes a better option than the liquidation of such an entity.

Business Rescue in SA - One step at a time

There have been a lot of statistical reports the past couple of months on the success rate of the business rescue process, its shortcomings and its abuse.  With South Africa still in its infant phase of business rescue, it is time to look at different aspects of the process in order to establish the actual progress business rescue has ensured.

When business rescue commenced on the 1^st of May 2011 no business rescue practitioners were licensed by the Companies and Intellectual Property Commission (CIPC), being the office tasked with such licensing as well as the administration and regulation of the process. With ClPC at that stage only sitting with less than a hand full of staff, the very existence of the process seemed to be an unlikelihood.  Once the licensing issues were sorted out and the process commenced, none of the major role-players consisting of the financial institutions and Statutory Regulatory authorities had dedicated business rescue departments, and were they utilizing their existing enforcement or legal departments to cope with business rescue. 

Moreover, Licensed business rescue practitioners were not properly equipped to deal with the various technicalities in the process, the time each project required as well as the strenuous duties and obligations placed on the business rescue practitioner.

Meanwhile, the Courts were quickly overrun trying to deal with completely new and complex business rescue matters. 

Now, approximately two years down the road, as a result of the clear demand for business rescue in South Africa, all the role-players in the industry has substantially grown in infrastructure, skill and knowledge gained by experience in the process.

The CIPC now has a dedicated department growing daily in numbers and infrastructure dealing with these matters. They have joined hands with various tertiary institutions, professional organizations and regulatory bodies that have developed practice driven business rescue courses and seminars throughout the year for anyone interested in the process. Professional bodies have become part of the process and are motivating their members to become part of this exciting and dynamic industry.

The major financial institutions and Statutory regulatory authorities have created dedicated business rescue departments with individuals skilled to sensibly deal with these matters.

The responsibility, duties, obligations and liability that a conditionally licensed business rescue practitioner faces each day, has made practitioners more cautious in taking on new projects. Surely separating the individuals that are in it for the long run from those simply not equipped to handle the process. As a further result of the involved nature of business rescue, practitioners are naturally forming teams of specialist to cater for the demand.

The Courts have made numerous decisions pertaining to the interpretation of the Act, the applicability and enforcement of the business rescue process that provides guidance and legal surety to everyone in the industry.

The liquidation statistics in South Africa is furthermore constantly dropping as more and more individuals are learning the benefits of the process. Yes, at this stage more than 800 business rescue applications have been lodged of which it is recorded that approximately 100 have been successfully implemented according to the Cipc. But have regard to the fact that each month the number of business rescue matters increase and therefore, of the more than 800 matters lodged to date, hundreds are still pending and in the process of finalization. This clearly renders any statistic in this regard inaccurate, especially at such an early stage.            

The fact of the matter is that business rescue is here to stay, and like it or not, even the smallest percentage success rate results in the retention of jobs and livelihoods. With millions of people unemployed, and with South African businesses facing a hostile environment due to various economic factors, every single business that is saved counts. 

Protection provided by Business Rescue

When Business Rescue for a Company or Close Corporation commences (“the company”), either in terms of a resolution by directors filed at the Companies and Intellectual Property Commission in terms of section 129 of the Companies Act, Act 71 of 2008 (“the Act), or in terms of a Court application launched in terms of section 131 of the Act, Section 133 of the Act places a general moratorium on any legal proceedings or execution steps by or against the company.

The effect of the provision supra is that the company is protected against any legal action taken or about to be taken by creditors. The general moratorium even protects the company in circumstances where creditors have obtained judgment against the company and contemplates proceeding with execution steps against the company.  

The general moratorium on legal proceedings and execution steps remains in place for the duration of the business rescue proceedings, save in instances where the business rescue practitioner consents otherwise or the Court grants an order uplifting the moratorium in certain instances.

The legislature’s intention with the general  moratorium is clearly that creditors are prohibited from taking a run on the company’s assets pending the outcome of the business rescue proceedings and that the company is offered a genuine chance of being rescued.  

Further protection is provided for the company against creditors if the business rescue proceedings are successfully implemented and the company continues to return to a viable concern. Section 154 of the Act clearly provides that, in the event that a business rescue plan is adopted and successfully implemented, no creditor that had notice of the proceedings can continue to enforce any rights that he or she had prior to the commencement of business rescue proceedings, save to the extent provided for in the adopted business rescue plan. 

A business rescue plan can provide that obligations towards creditors are restructured or compromised over extended periods, provided that such restructuring or compromise constitutes a beter return for creditors versus the immediate liquidation of that company.

Where obligations towards creditors are restructured or compromised successfully with the adoption of a business rescue plan, and the business rescue proceedings is substantially implemented in that the company is able to comply with such restructured and/or compromised repayments towards creditors, no creditor will be able to enforce the original obligations towards it prior to the business rescue proceedings, save to the extent provided for in the adopted business rescue plan.

Without the protection afforded by the Act a company is never on equal footing with creditors in negotiating the restructuring or the compromise of its obligations. Business rescue proceedings offer a secure environment for the company to negotiate on equal footing with creditors. 

 

When does Business Rescue proceeding end?

When a proposed business rescue plan has been voted in as contemplated in the Act, the business rescue plan is deemed to be adopted. Business rescue proceedings however does not end with the adoption of the business rescue plan, but with the substantial implementation thereof.

Although the Act is not clear on exactly when the implementation of the adopted business rescue plan should occur, it suggests that the business rescue practitioner should implement the business rescue plan once it is satisfied that the company is able to give effect to its obligations in terms of the adopted business rescue plan. In practice this will most likely be of the the company commences with its first payments towards creditors in terms of the business rescue plan.

The business rescue plan is deemed to be substantially implemented once the business rescue practitioner files a prescribed notice of substantial implementation with the Companies and Intellectual Property Commission.

Creditors voting rights

During business rescue proceedings the Act provides for three formal meetings to be arranged and led by the appointed business rescue practitioner. The main purpose of the first meeting of creditors is for the business rescue practitioner to evaluate and receive proof of claims by the creditors of the company. A meeting of employees also needs to be arranged in order to inform such employees of the rights in these proceedings.

After the business rescue practitioner presents the proposed business rescue plan to all affected parties, a second meeting of creditors takes place entertaining discussions on the proposed business rescue plan, possible amendments and the eventual voting on the proposed business rescue plan. If the proposed business rescue plan also contemplates a restructuring that affects the holders of the company’s securities (shareholders), such holders shall also be entitled to vote on the proposed adoption of the business rescue plan.

Essence of a Business Rescue plan

In business rescue proceedings the appointed business rescue practitioner is obligated to formulate a business rescue plan within 25 days from his appointment, setting out, amongst others:

1. Brief description of the financial distress of the company and manner in which the situation will be rectified;
2. The projected income and expenses of the company in the ensuing three years;
3. The projected balance sheet;
4. The current assets and liabilities of the company;
5. The proposed repayment towards creditors, including any compromise contemplated towards any creditors;

Each creditor’s voting right according to its specific claim and class.

As the proposed business rescue plan constitutes projections of the company in the ensuing three years and an opinion of the appointed business rescue practitioner on exactly how the company will be rescued from its current financial duress, each affected party is entitled to propose amendments to the proposed business rescue plan prior to a vote being taken thereon deciding the fate of the company.

Pros & Cons of Business Rescue

Although business rescue in South Africa went off to a rocky start since inception of the act on 1 May 2011, it seems to have become a recognized process as more and more effected parties as well as major financial institutions familiarize themselves with the process. South Africa has furthermore recently seen major enterprises like One Time Airlines and TOP TV undergo the process.

Currently the single most adverse effect of business rescue proceedings is the negative publicity the company undertaking such proceedings undergoes in the financial world. Financial institutions are reluctant to grant post commencement finance for companies under business rescue and in most instances such financial institutions may elect to suspend its facilities with the company pending a renewal application by the business rescue practitioner appointed.

On the other hand business rescue provides a breathing space for companies experiencing financial duress, where creditors are not allowed to proceed with or execute on any legal proceedings pending the outcome of the business rescue proceedings. Business rescue furthermore has a recognized international model whereby the obligations of the company towards its creditors, cannot only be restructured but also compromised over an extended period of time by the appointed business rescue practitioner. When it comes to the restructuring of an entity, business rescue ensures for a regulated environment in which such restructuring can occur.

Even if a company is found to have passed the point of being successfully rescued, business rescue proceedings enable the appointed business rescue practitioner to endeavor a better return for creditors than would be the case in the liquidation of such an entity. No wonder financial institutions are currently electing to forcefully place companies in financial distress under business rescue instead of proceeding with liquidation steps as was the normal practice.