A recent survey on restructuring conducted by international auditing firm Deloitte has produced various interesting insights on the South African experience.
“Business Rescue” is clearly defined in Chapter 6 of the Companies Act 2008 (the “act”) as the development and implementation of a plan to rescue a company through the restructuring of its affairs, business, property, debt, liabilities, and equity in a manner that maximises the likelihood of the company continuing to exist on a solvent basis. This is referred to by Deloitte as a “Part A outcome”.
The act further views an outcome that results in a better return for creditors than an immediate liquidation as a successful business rescue. This is referred to by Deloitte as a “Part B outcome.”
The Deloitte 2023 Restructuring Survey has shown that while 71% of lenders (primarily banks) believe a Part A outcome is intended by chapter 6 to be the primary purpose of business rescue, a mere 3% of all companies undergoing business rescue in more than 50% of their portfolios actually qualify as a Part A outcome.
It has been shown over time that the vast majority of business rescues’ fail, resulting in companies going into liquidation in any event, soon after commencing business rescue proceedings or qualifying for a Part B outcome, effectively becoming what has been termed a “soft liquidation”. According to Deloitte, the Part B outcome route has often proved to be quicker than an immediate liquidation due to the fact that any dealings with the Master of the High Court were excluded. Deloitte also found that 39% of lenders experienced a better outcome than an immediate liquidation following the Part B outcome route in respect of more than 50% of their portfolios.
The turnaround mindset required of business rescue stakeholders to achieve a Part A outcome, Deloitte concludes, has sadly retreated in recent times in the face of heightened negative business sentiment in response to an already embattled economy that is facing constant challenges such as relentless Eskom loadshedding, perceived government unwillingness to deal with various structural failures, high levels of unemployment, crime, and corruption.
The contribution of the higher courts
However, all is not gloom and doom, and since the chapter 6 Business Rescue regime took effect, much excellent work has been done by our higher courts in interpreting and reinterpreting the act so as to clarify the extent of the powers of Business Rescue Practitioners (“BRP’s”) and to develop further checks and balances as provided by the act that are necessary to maintain the levels of co-operation required of all stakeholders and affected parties to achieve a successful Part A outcome.
Two such decisions dealt with recently by the Supreme Court of Appeal (SCA) are briefly mentioned below:
The BRP or the creditors. Where does the power to amend a business rescue plan lie?
In terms of section 150(1) of the act a BRP after consulting the creditors, other affected parties’, and the management of the company in question, must prepare a business rescue plan for consideration and possible adoption at a meeting held in terms of section 151. The machinery for adoption of the aforementioned plan is clearly set out in sections 150 to 153; section 152(4) provides that a business rescue plan that is adopted is binding on the company, its creditors, and holders of the company’s securities.
However, there is no provision in the act for the amendment of a business rescue plan, once it is adopted. Many BRPs’ have found that the approved plan could not, for one or other reason, be implemented, often due to unforeseen circumstances, and a practice has developed amongst BRPs of circumventing the prohibition against amendment by including a clause in the approved business plan empowering the BRP to amend the plan where necessary.
In the matter of Vantage Goldfields SA (Pty) Ltd. & Others v Arqomanzi (Pty) Ltd. (1302/2021 and Case No. 1272/2021  ZASCA 185), the SCA had to deal with one such clause. In this instance, the clause permitted the amendment, provided such an amendment was not prejudicial to the affected persons and that the BRP acted reasonably in the circumstances. The joint BRPs argument was that the power to amend was in fact justified as it was conferred upon them by the creditors themselves rather than being appropriated unilaterally by them.
The appeal court held that a clause in a business rescue plan that provides for the unilateral amendment of a plan by a BRP was in fact contrary to the scheme as contemplated in the Act. It was further held that, at most, such a clause in an adopted plan would only allow for amendments of an administrative nature that do not affect the substance of the plan. Thus, it held that a change in funders in an amended plan was no small matter and that the ability and credibility of a funder are everything that the creditors of a distressed company, including affected persons, would want to know and be sure of.
The Court thus, in this instance, inclined towards the protection of creditors against unilateral action by the BRPs and upheld the appeal.
The BRP or the directors. Who has full management control of a company in business rescue proceedings?
In the matter of Ragavan and Others v Optimum Coal Terminal and Others (136/2022)  ZASCA 34) the issue was whether the creditors’ right to cast a vote on a debtor company’s business rescue plan vests in the BRP or the company’s board of directors. In its judgment, the SCA expanded upon what precisely was meant by section 140(1)(a) of the act, which provides that during a company’s business rescue proceedings, the BRP, in addition to other powers and duties set out in chapter 6 of the act, has full management control of the company in substitution for its board and pre-existing management.
The appellants contended that section 66 (1) of the act provided that the business and affairs of the company must be managed by or under the direction of the board, which has the authority to exercise all the powers and perform any of the functions of the company, except to the extent the act or Memorandum of Incorporation provides otherwise, and that therefore the board was intended to play a decisive role in the affairs of the company together with the BRP.
The SCA ruled that chapter 6 was an exception to the normal course, and it installed the BRP as the authority with full management powers and duties in charge of the company who is mandated to run the company for the duration of the business rescue proceedings. Intrinsic to the power to run the company was management of the company’s resources, property, and assets, which included all the company’s book debts. A vote on the business rescue plan of a debtor entailed an informed decision over the company’s property.
In this instance, the SCA inclined towards favouring the protection of the authority of the BRP over the board of directors and dismissed the appeal.
The SARIPA/ AFSA arbitration initiative
On another very positive note, the Arbitration Forum of South Africa NPC (AFSA) and the South African Restructuring and Insolvency Practitioners Association NPC (SARIPA) have jointly launched a new dispute resolution process to enable a much quicker and more effective resolution of disputes arising from business rescue proceedings. A model clause for insertion into business rescue plans and a set of rules (“AFSA-SARIPA Rules”) for the resolution of disputes have been jointly drawn up and developed by the aforesaid entities. This welcome new initiative will be launched on 20 April 2023. The model clause provides that:
Any dispute of whatsoever nature relating to:
- the acceptance or rejection of any claim, whether in whole or in part, or the value or ranking of any claim, or the recognition of any security or preference, lien, or hypothec attaching to such claim; or
- claims that are not reflected in the records of the company in business rescue and are not recognised under the business rescue plan;
- any act or omission by the BRP affecting the rights or legal interests of any affected party (as defined in section 128(1)(a) of the act of the company in business rescue); or
- the proper interpretation or implementation of any provision in the business rescue plan, shall be submitted for final determination in accordance with the AFSA-SARIPA rules.
In conclusion, we believe that the creation of the dedicated new business rescue arbitration forum will make a huge contribution towards restoring the confidence of the business community in business rescue proceedings by facilitating a speedy resolution of the many disputes that arise between stakeholders in the course of such proceedings in a cost-effective manner.