The Covid-19 Pandemic is one of those once in a generation events that has the potential to significantly impede the economic growth of any country if its Government does not intervene and offer financial assistance.
Both developed and emerging economies rely on a delicate balance of economic drivers that contribute to the economic growth of a country. Some economies are more diversified than others. However, the simple fact remains, the absence of one economic driver can completely derail economic growth.
The Pandemic has placed a lot of companies in distress. In response to the sensitivity of economic drivers, Governments around the world have responded to the Pandemic in a very specific way when it comes to these companies. Insol International, a world-wide federation of national associations for accountants and lawyers who specialise in turnaround and insolvency, recently published an infographic that details these responses. We will focus on select economies in a series of articles though the lenses of: legislative reforms impacting on stakeholders dealing with companies in financial distress, and, legislative reforms for companies in financial distress.
We will start with the South African response in this article. And deal with the legislative reforms impacting on stakeholders dealing with companies in financial distress first.
Employees
According to the Insol International infographic, there are a number of pertinent responses that Government implemented when it comes to this stakeholder.
- Temporary Employee / Employer Relief Scheme (TERS). TERS was established under the UIF to aid employers, facing distress due to the national lockdown, with paying salaries and wages to employees.20 Employers had to apply for financing on their employees’ behalf, or alternatively, in appropriate circumstances, employees could apply directly for financial assistance. Benefits under the Temporary Employee / Employer Relief Scheme only extended to salary costs for employees during the temporary closure of business operations and are capped to a maximum amount of R17,712.00 per month, per employee. TERS has ended;
- Employment Tax Incentive (ETI). On 29 March 2020, the Minister of Finance announced the first Covid-19 tax relief measures that would apply for a limited period of four months. These relief measures stemmed from the fact that the Covid-19 outbreak significantly impacted the cash flows of a large number of businesses within the Republic. One such relief measure related to the ETI, which lasted from 1 April 2020 to 31 July 2020. In terms of this relief measure, SARS provided an increased tax subsidy to all employers, for every qualifying employee in their employ, irrespective of whether they qualify as SMEs.21 The ETI incentive was aimed at encouraging employers to hire young and less experienced work seekers. SARS would also make accelerated payments of ETI reimbursements on a monthly basis;
- Compensation for Occupationally-Acquired Novel Corona Virus Disease (Covid-19). On 23 March 2020, the Compensation Commissioner published a ‘Notice on Compensation for Occupational-Acquired Novel Corona Virus Diseases (Covid-19)’. According to this Notice, if an employee contracts Covid-19 in the course of his or her employment, the following benefits may be payable:
– temporary total disablement benefits if the disablement does not exceed 30 days. Where the employee is quarantined by a medical practitioner in accordance with stipulated guidelines, where it is suspected the employee has Covid-19 or it otherwise cannot be confirmed, the employer will be liable for the employee’s remuneration during this period. In cases where the employee is confirmed as having Covid-19, and where the Compensation Fund has accepted liability, the Compensation Fund will make payment to the employee;
– permanent disability linked to Covid-19 where an assessment has been made by the Compensation Fund;
– medical aid for a period of no more than 30 days where an employee has tested positive for Covid-19. The Director General has the ability to consider further medical aid if it will reduce the extent of disablement; and / or
– death benefits which include reasonable burial expenses and widow’s and dependent’s pensions if an employee dies as a result of Covid-19 complications.
The Insol International article added that on 21 April 2020, President Ramaphosa announced that R40 billion has been allocated for income support payments for workers whose employers are not able to pay their wages.
Lenders
The infographic added that, as part of the measures employed to address the impact of Covid-19, the South African Government, as well as businesses, have called on the banking industry to continue to extend credit to sectors in need, particularly households and small businesses, and to provide relief measures to reduce the liquidity strain on these sectors and sustain the local economy and financial stability in the face of destabilisation caused by Covid-19.
To that end, certain banks extended several lifelines to households and SMEs, which included three-month payment holidays for debt repayments, extended loan periods, short-term credit extensions, preferential interest rates, and bridge facilities.24 These lifelines provided some respite to households and businesses in the short-term.
The South African Reserve Bank (SARB), on 31 March 2020, also introduced additional, but temporary measures, to aid compliance with the liquidity coverage ratio (LCR) during the Covid-19 pandemic stress period.25 In accordance with the provisions of section 6(6) of the Banks Act 94 of 1990, banks only need to satisfy a revised minimum LCR requirement of 80 per cent (meaning that their liquidity requirements are now less stringent, and they have more flexibility to lend to borrowers in distress) from 1 April 2020 until such time as the SARB’s Prudential Authority directs in writing that it is of the view that financial markets have normalised.
As mentioned above, on 21 April 2020, President Ramaphosa announced that the government would introduce a R200 billion Covid-19 Loan Guarantee Scheme in partnership with major banks, the National Treasury and the SARB to assist enterprises to meet their operational costs. This scheme was aimed at assisting enterprises with their operational costs, such as salaries, rent and the payment of suppliers. However, as indicated above, the demand for the scheme has been significantly lower than that which was originally expected. Business owners remain reluctant to incur more debt for a number of reasons, such as uncertain business conditions, the slow pace of economic reform, and weak consumer and business confidence. In addition, companies may also fail to qualify for loans under the scheme, by virtue of the fact that they do not qualify under the scheme’s criteria.26 It has been reported that lenders have rejected 46% of the 48 366 applications received, because the applications did not meet the established eligibility criteria.
Moreover:
- section 4 of the Competition Act 89 of 1998 (Competition Act) prevents firms that are competitors or potential competitors from coordinating their activities where it involves price-fixing, the fixing of other trading conditions or market division and other agreements and practices that involve the sharing of competitively sensitive information or which otherwise result in a substantial lessening of competition in the absence of efficiencies or pro-competitive effects that outweigh the anti-competitive effect;
- section 5(1) of the Competition Act prohibits agreements between customers and suppliers (vertical agreements) that result in a substantial lessening of competition (in the absence of countervailing efficiencies or pro-competitive effects); and
- section 5(2) of the Competition Act prohibits the practice of minimum resale price maintenance.
The Covid-19 Block Exemption for the Banking Section, 2020 exempts the following agreements or practices of banks from the operation of those regulations provided they are pursued with the approval of the Minister of Trade, Industry and Competition or the Minister of Finance:
- agreements or practices with the sole purpose of ensuring essential payment systems continue to operate during the Covid-19 national disaster, which are limited to the
development of industry monitoring, operational policies and contingency plans in respect of:
– the continued availability of bank notes to ATMs, branches and businesses;
– the continued provision of essential ATM, branch and corporate banking services; and
– the continued provision of electronic payment systems; and
– agreements or practices with the sole purpose of ensuring the management of debtors and extension of credit continue during the Covid-19 national disaster, which are limited to the development of industry policies and monitoring concerning:
– payment holidays and debt relief for business and individual debtors subject to financial stress;
– limitations set on asset repossessions of business and individual debtors subject to financial stress; and
– the extension of credit lines to individuals and businesses subject to financial stress.
The exemptions listed above will remain in operation for as long as the national state of disaster persists, or until they are withdrawn by the relevant Minister. These exemptions are aimed at ensuring that essential payments continue to operate during the national state of disaster. In addition, the exemptions seek to facilitate the management of debtors, payment holidays, and the extension of credit.
Third parties
Excessive pricing and competition:
The Insol International infographic pointed out that, on 19 March 2020, two separate regulations were published by the Minister of Trade and Industry. One regulation deals with excessive pricing, while the other regulation deals with healthcare and related service providers in a manner that seeks to exempt the application of competition law, in each case to facilitate public interest objectives in response to Covid-19.29
Under the Consumer and Customer Protection and National Disaster Management Regulations and Directions, 2020 (Consumer DMR Regulations), the Minister has now declared that, during the period that the Covid-19 outbreak is declared to be a national disaster, a material price increase of certain products (including basic foods, emergency products, and medical and hygiene supplies) may be considered excessive or unfair if:
- the price increase does not correspond to, or is not equivalent to, the increase in the cost of providing those goods or services; or
- results in an increase in the net margin or mark-up above the average margin or mark-up for those goods or services in the three-month period prior to March 2020.
The Minister has specified that, if either factor is met, the price will be considered prima facie excessive. Significantly, however, the excessive pricing regime under the Consumer DMR Regulations is limited to dominant firms only. A firm is dominant in terms of the Competition Act 89 of 1998 if:
- it has at least 45% of the market;
- it has at least 35% of the market, but less than 45% of the market, unless it can show that it does not have market power; or
- it has less than 35%, of the market but has market power.
Under the Covid-19 Block Exemption for the Healthcare Sector, 2020 (Block Exemption), agreements or practices by certain healthcare service providers (i.e. hospitals, healthcare facilities, medical suppliers, medical specialists and radiologists, pathologists and laboratories, pharmacies and healthcare funders) will be exempted from sections 4 and 5 of the Competition Act where they are pursued in response to Covid-19 and promote:
- concerted conduct to prevent an escalation of the national disaster and alleviate, contain and minimise the effects of the national disaster; and
- access to healthcare, preventing exploitation of patients, enabling the sharing of healthcare facilities, management of capacity and reduction of prices.
Unlike the Consumer DMR Regulations, which are time-bound to the period during which Covid-19 is a national disaster, the Block Exemption does not specify a particular sunset period.
Value added tax (VAT) and customs duties:
The infographic added that SARS declared, on 27 March 2020, that, due to the measures put in place under the DM Act, ‘essential goods’ as defined in the Regulations to the DM Act will be subject to a VAT exemption on importation during the Covid-19 pandemic, under Item 412.11/00.00/01.00 of Schedule 1 to the Value Added Tax Act 89 of 1991. A full rebate of customs duty under rebate item 412.11 of Schedule No 4 to the Customs and Excise Act 91 of 1964 will also be available where the International Trade Administration Commission of South Africa (ITAC) has approved the rebate for the goods concerned.
In this respect, on 3 April 2020 SARS published30 that critical supplies, listed on the ITAC website, can be imported free of duty and VAT into South Africa, provided that importers have applied to ITAC for a certificate which would qualify such an importer to import the supplies under rebate item 412.11. The rebate item is only valid for direct importations and no bonded or warehouse clearances will be permitted under this rebate item. Further on 9 April 2020, SARS clarified31 that goods that will not be exempt from VAT on importation, are goods that ITAC has indicated are dutiable, are dutiable but entering South Africa duty free because of a preferential trade agreement or other agreement, the subject of applications for duty support that are currently pending before ITAC, and manufactured by domestic industry and ITAC has determined such industry is being or is likely to be injured by imports.
Legislative reforms for companies in financial distress
The Insol International infographic pointed out that, on 24 March 2020, the Companies and Intellectual Property Commission (CIPC) issued a practice note in terms of paragraph 4(1)(b) of the Companies Regulations (GNR 351 of 26 April 2011), advising that it would not, until the expiry of 60 days after the declaration of a national disaster has been lifted, enforce its powers under section 22 of the Companies Act 71 of 2008 (Companies Act). That section empowers the CIPC to issue compliance notices to companies when it has reasonable grounds to believe they are trading or carrying on business recklessly, with gross negligence or for a fraudulent purpose.
However, this moratorium does not prohibit the company or any third-party creditor who believes that the company’s business was carried on recklessly from prosecuting a director and claiming damages.
Also, on 24 March 2020, the CIPC issued a ‘Notice to Customers’ purporting to extend the applicable time periods in relation to the commencement of business rescue proceedings. However, the CIPC is likely to have acted beyond its regulatory powers and this Notice is therefore likely to be invalid, following the authority in the case of Shiva Uranium Proprietary Limited (in business rescue) & Another v. the CIPC & Others under case number CT012Oct2018.
The full Insol International infographic can be accessed here.
