The Business of (Business) Rescue

Posted on: April 23rd, 2018 by Niel Grundlingh

Source: Published by Business Day’s Business Law and Tax Review on 14 May 2018

By the STBB Insolvency & Business Rescue team

Since the enactment of the Companies Act 71 of 2008 (“the Act”), the statutory procedure for the restructuring of companies in financial distress, as provided for in the Act, has gained in popularity. The good news, according to the CIPC, is that since 2011 more financially distressed companies that went into business rescue have been saved than have failed. This statistic flies in the face of the popular perception that business rescue has a low success rate. Although this perception is unfounded, scepticism abounds due to business rescue statistics being read out of context. To illustrate this point, as a Moneyweb article pointed out, a 10% success rate could mean that 9 out of 10 business rescue attempts failed, however, if the 9 that failed collectively employed 200 people and the 1 that succeeded employed 1 500 people, the success rate of business rescue proceedings would increase to 88% (based purely on job retention).

Chapter 6 of the Act defines business rescue as proceedings initiated to facilitate the rehabilitation of a company that is financially distressed by providing for:

• The temporary supervision of the company, the management of its affairs, business and property;
• A temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
• The development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximizes the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company‘s creditors or shareholders than would result from the immediate liquidation of the company.

Since its inclusion in the Act, business rescue has been the focal point of a fair amount of jurisprudence, which often concerned the interpretation of the provisions of the Act and the finer procedural details that the legislature did not provide for. Most recently, the Supreme Court of Appeal (“SCA”) had to consider the remuneration of the business rescue practitioner (“BRP”) where the business rescue proceedings had failed. A business rescue practitioner is the person appointed, or two or more persons jointly appointed, to oversee a company during business rescue.

In the case of Diener N.O. v Minister of Justice and Others (926/2016) [2017] ZASCA 180, the court had to decide whether a BRP enjoyed a special preference on the liquidation of a corporation when business rescue failed. The court held that a BRP’s claim for remuneration ranked after the costs of liquidation but before those of post-commencement claims for wages by employees and secured and unsecured post-commencement finance, and was payable from the free residue of the insolvent estate. The court also had to decide what the effective date of liquidation is. In this regard, the SCA held that business rescue ends when the application to convert business rescue proceedings into liquidation proceedings is filed. In addition, the SCA held that a BRP is not exempted from proving claims.

The SCA’s verdict came as good news for banks and other secured lenders as the BRP’s fees may only be paid from the free residue, if any, and not from the net proceeds of the sale of any secured asset by a liquidator.

For more information on the above or for any assistance, please contact the STBB Business Rescue and Insolvency team. Whether you are a business rescue practitioner, director, stakeholder, employee or a creditor, we can advise you during all stages of the business rescue process.

Niel Grundlingh
+27 21 934 3800

STBB Meerkats

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