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BUSINESS RESCUE SAIPA webinar by Div de Villiers
30 June 2017
SME IN DISTRESS Companies Act Section 129 (7) requires a director to explain the reasons to stakeholders why a company should not enter Business Rescue, when a company becomes distressed
SME’s SUPPLIER ENTER BUSINESS RESCUE – what now?
SME’s CLIENT ENTER BUSINESS RESCUE – what now?
WHY RELEVANT FOR SMEs
WHO
WHAT
WHY
WHEN
WHERE
BUSINESS RESCUE
HOW
Business models not feasible (designed for failure)
Business cannot sustain the owner’s lifestyle
Respond to changing market too slowly (opportunities / threats)
Technically competent, but financially illiterate
Insufficient back-office (record-keeping)
Cash flow management
WHY SMEs FAIL
Facilitate the rehabilitation of a business that is financially distressed
Maximise the likelihood of the company continuing in existence on a solvent basis
or if it is not possible
Result in a better return for the company’s creditors or shareholders than the immediate liquidation of the company
WHY BUSINESS RESCUE
Facilitation of the Rehabilitation of a Company:
Temporary supervision and management
Temporary moratorium
Development and implementation of a Business Rescue Plan
• Restructuring affairs, debts, business property and other liabilities with a view to:
– Continue existence on a solvent basis, or if this is not possible anymore
– Provide a higher return for creditors
WHAT IS BUSINESS RESCUE
When should a business file for rescue? At the earliest possible moment of financial distress (when a business is showing signs of pending insolvency, but where it has not yet reached the stage of actual insolvency)
When is a business in financial distress? Unlikely to pay all of its debts as they become due and
payable within the immediately ensuing six months (commercial insolvent); or / and
Likely to become insolvent within the immediately ensuing six months: liabilities ˃ assets
(factual insolvent)
WHEN IS A BUSINESS IN RESCUE
1
2
Who can place a business in rescue? Voluntary: The board of a company may file for rescue
Compulsory: An affected person may apply to a court to place a business in rescue
Rescue v/s Liquidation A business in rescue may not adopt a resolution placing itself in
liquidation until the business rescue proceedings have ended
The board of a company may not resolve that the company voluntarily begin business rescue proceedings if liquidation proceedings have been initiated by or against the company
However, during liquidation proceedings by or against a business, an affected person may apply to a court for an order placing a business in business rescue. In this case the liquidation proceedings are suspended until the court has adjudicated upon the application
3
4
When does business rescue start? A business files a resolution with the CIPC to place itself under rescue
An affected person applies to the court for an order, placing the business under rescue
A court makes an order placing a business under rescue during the course of liquidation
When does business rescue end? The practitioner files a notice with CIPC of substantial implementation
Business rescue plan has been rejected
A business rescue plan is not published within the 25 day period
The practitioner files a notice with the CIPC of termination
A court sets aside the order that began business rescue proceedings
A court converts the business rescue proceedings to liquidation proceedings
5
6
The business
Directors
Creditors
Financial institutions
Employees
WHO ARE AFFECTED
1
2
3
4
5
Central to the whole process
Intense scrutiny of the financial and managerial health of the business and the prospect of future viability
Moratorium protects the company against the execution of legal action by the creditors
THE BUSINESS 1
Still have to complete day-to-day operational duties
The BRP has complete executive authority
The directors are required to give full co-operation to the BRP
The directors are still liable in terms of the normal Companies Act regulations
DIRECTORS 2
Creditors are one of the main role players in the success or failure of any business rescue
Their vote would determine the implementation or rejection of the business rescue plan
Creditors have some of their rights suspended or influenced by the business rescue process
CREDITORS 3
Financiers have been wary of the business rescue process
They are most comfortable with a proposal that entails a fast and aggressive payback scheme where they can also recover most of the property held as security
This approach makes it difficult for the business rescue plan to take a staggered approach
FINANCIAL INSTITUTIONS 4
A key aim of business rescue is to protect employment
Needs to be informed and consulted in developing a business recue plan
Is a preferent creditor for all outstanding dues up to the day of commencement of business rescue
EMPLOYEES 5
Affected person(s) suspects the business is financially distressed
Directors file for Rescue Others apply to Court
Business Rescue Practitioner is appointed
Investigation into the affairs of the company
Financial = distress Financial ≠ distress
Rescue Prospect?
Yes No
Rescue return ˃ Liquidation?
Yes No
Draft Business Rescue Plan
Affected Persons consider Rescue Plan
Plan approved Plan rejected
Implement Plan
Upon substantial implementation
Terminate
HO
W: Th
e pro
cess
TIMELINE TO DO
Within 5 days from filing for business rescue Publish a notice of the resolution + Appoint a business rescue practitioner
Within 2 days after appointing the practitioner
File a notice of the appointment with CIPC
Within 5 days after filing the notice of appointing the practitioner
Publish a copy of the notice of appointment to all affected persons
Within 10 days after appointing the practitioner
1st meeting of creditors 1st meeting of employees
ASAP Investigate the affairs of the business
Within 25 days after appointing the practitioner
Publish the business rescue plan
Within 10 days after publishing a business rescue plan
2nd meeting of creditors to accept or reject the Plan
Immediately upon approval of the Plan Implementation of the Plan
The time line
Ranking of claim against the business VOTE
1 The practitioner (remuneration and reimbursement of expenses) No vote
Employees (remuneration due and payable after business rescue commenced) No vote
Secured post-commencement financiers / creditors (e.g. suppliers)
Vote = equal to the value of
the amount owed to the
creditor / financier
Unsecured post-commencement financiers / creditors (e.g. suppliers)
2 Secured lenders / creditors (pre-commencement)
Unsecured lenders / -creditors / statutory bodies (to the value of attachment orders)
3 Employees (remuneration due and payable before business rescue commenced)
Statutory creditors (e.g. SARS / WCF and other authorities) and
Unsecured lenders / -creditors
RANKING OF CLAIMS AND VOTING
Holders of more than 75% of the creditors’ voting interests approves the Plan
Creditors’ vote = The value of the amount owed to the creditor / financier
Approving votes includes at least 50 % of the independent creditors’ voting interests
APPROVAL OF THE PLAN
An approved Plan Binding on the business (as if it is an order of the Court), and on each of the creditors and every holder of the company’s securities
An approved plan must be implemented under the direction of the business rescue practitioner
IMPLEMENTATION OF THE PLAN
Poorly qualified business rescue practitioners: Legal professionals neither understanding business nor finance
Accounting professionals neither understanding the law nor business
Business managers neither understanding the law nor finance
Business rescue commences too late: The directors believe that they can “trade out” of the distress
Informal negotiations fail and the entity becomes bogged down in arrangements with creditors
“Supplier hopping” to find lines of credit (creating a multitude of creditors)
VAT and PAYE is not paid as a means to finance the operational expenses of the business
PITFALLS
Legal uncertainty:
Affordability: Process too expensive for micro- & small businesses
PITFALLS (CONTINUED)
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