Business 101: Business rescue basics and deciding if it is viable

Over the past two years, there have been a handful of high-profile business rescues that have garnered significant media attention. In two of these cases, South African Airways and CNA, serious questions were raised about the viability of the business rescue process. It is no use using a life preserver to save a sinking ship.

In a recent media article, written by Ben Bierman, this issue was raised once again. This article is replicated below.

Legacy issues
Even before the outbreak of the coronavirus, some of South Africa’s biggest corporates and parastatals were struggling to break even.

In a case that continues to make headlines, South African Airways (SAA) went into business rescue last year and was perhaps the most high-profile case to date.

Entertainment company, Ster Kinekor followed closely on the air carrier’s heels. And more recently, stationery franchise, CNA was placed under business rescue. Added to this, the effects of the pandemic as well as the recent unrest have highlighted the shortage of business rescue experts in the country.

No business, whether large or small, is immune to the turbulent economic conditions we find ourselves in.

Business rescue is a legal process that can take months, and even years to conclude – depending on the circumstances, it can be the best option for getting a company back on its feet while saving many jobs, after a significant downturn.

Letter of the law
Under the Companies Act 71 of 2008 (Companies Act), South African companies in financial difficulty have an opportunity to restructure their financial position through the business rescue process.

According to the Act, a company is deemed to be “financially distressed” if:

a) It cannot settle its debts as they become due and payable within the immediately ensuing six months; or

b) It seems reasonably apparent that the company will become insolvent within the immediately ensuing six months.

When deciding whether business rescue is a viable option for your business, there is another important consideration, which is whether it is reasonable to project that the company will once again become solvent or profitable.

This is literally a “make or break” factor, because in the long term, business rescue, unlike the liquidation process, is one that aims to ultimately return a business to a good financial position.

In a sense, business rescue is to companies what debt review is to individuals. Business owners must submit a formal application to a business rescue expert or insolvency team.

The proceedings that follow are governed by South African law and will include a temporary supervision period of the business, its assets and its management.

A temporary moratorium will also be declared on the rights of claimants against the company, which means that the assets or property belonging to a business cannot be seized in lieu of debt repayment for a specified period.

What follows is known as a “rescue plan,” and takes a number of factors into consideration, including the company’s list of creditors and a list of secured and unsecured assets.

Through a process that requires consultation with creditors, legal representatives and company owners, a rescue plan is adopted and becomes binding.

According to Section 132 of the Act, the proceedings should be concluded within three months; unless the practitioner can provide reasonable grounds for why this is not possible.

Important factors to consider
During the proceedings, the business rescue practitioner will have full management control of the company – this is an essential part of what “temporary supervision” means.

There is usually a substantial cost involved – for small companies, business rescue practitioners can charge up to R1250 per hour.

Employees of the company under business rescue will remain employed under the same terms and conditions of their held contracts unless other terms are agreed upon and are in accordance with South African Labour Relations Act and other applicable employment related laws.

Companies who apply for voluntary business rescue proceedings are administered by the Companies and Intellectual Property Commission and do not, unless under extenuating circumstances, directly involve the courts.

The application of principles
While there is a formalised test as to whether a distressed business is deserving of business rescue, there seems to be some room for interpretation. If there wasn’t, there wouldn’t have been questions about whether SAA or CAN should have been put into business rescue in the first place. A decision would be made, and the issue would be put to bed.

If we are in the Golden Age of business rescue, how many rescues in the future will create the same level of debate that SAA and CAN did? Or will it be a case of the rules being applied equally across all companies…no questions asked?

Ben Bierman is a managing director at Business Partners Limited.