Business Rescue under new act not that simple

Gideon Bochedi and John Thornton

The new Company Act is up and running, and the first 60 or so applications for “Business Rescue” (BR) under Chapter 6 of the Act have been processed.

Recent times have been tough; strikes coupled with unparalleled violence and intimidation have made business owners and managers reconsider why they are actually in business.Some may be considering filing for Chapter 6 protection from their creditors due to the disastrous effect on production, cash flow and, of course, increased outflows, among others.

But do you know enough? If you should find yourself sitting quietly and doing some ‘navel gazing’, the benefits of keeping a company afloat instead of liquidating it must be quite self-evident – at least, on the face of it.
Preservation of jobs must be the highest priority, taking account of the desperate need to reduce levels of unemployment in the country.
Then there is the “circle of life”: by maintaining supply chains, albeit under trying circumstances, rationally suggests that business
continuity is preferable to sourcing new trade relationships, etc.

But one needs to be aware of the pitfalls that could lie in wait for the unwary or uninitiated, before commencing with the process of BR:
In the event of disputes arising from or as a result of the business rescue process, these will have to be resolved in a court of law, with all associated costs and time considerations which, as we know, are not inconsequential and will pose problems for all parties to therescue. There is the likelihood that the better or best employees of the company may, or are even likely, to seek greener pastures due to their own marketability, leaving the proverbial ‘sinking ship’ with inexperienced or less desirable employees left to run the business.

On the flip side, natural attrition may not be sufficient to save the company where the employee-cost ratio is a significant factor already. The Labour Relations Act cannot be trampled on in order to restructure the company. BR does not override other legislation.
The board of the company may be very quickly faced with potential conflicts where the appointed BR practitioner and management do not see eye to eye – as is likely to be the case – and dirty washing needs to be aired in order to get the process moving toward rectifying problems. Unfortunately, it is likely that certain members of management will be required to seek other career options, bearing in mind that this could be an expensive severance.

At this early stage of the game, the BR practitioner may not be sufficiently experienced at BR or the particular industry, and may not necessarily properly understand problems inherent in the business, leading to incorrect remedies being implemented – creating
further frictions.Let us not ignore the potentially huge costs associated with the BR process, which the already ailing company will be required to provide for. With creditors already clamouring for payment, this may be an unpleasant pill to swallow.

A future unpleasant consideration to take into account in the South African landscape is that unscrupulous BR practitioners may draft recovery plans with absolutely no hope of success, simply because they will ensure their payment irrespective of success.The BR plan must provide for relief to creditors, which would ultimately be a better prospect than outright liquidation, or any adoption of the ‘plan’ would not be a readily workable solution.Again, at this early stage of the game there are clearly administrative challenges at the Commission arising from the skills necessary to deal with a flood of BR applications – not only from a volume point of view, but also from the complexity of many of these.

Uncertainty exists as far as the obvious necessity to provide additional working capital is concerned – and not only how this will be derived, but under which safety conditions.Abrogation of Contract (Section 136) makes provision for the BR practitioner to suspend the obligations of the company in the BRP – inter alia, payments to creditors – but the supplier could be called upon to remain bound and to continue maintaining the supply chain, albeit on different terms as could be decided by the BR practitioner.Existing personal suretyships may have to be reworded in order for those to be converted into guarantees.Suffice it to say, this ‘process’ is still in its infancy and there are likely to be many twists and turns before anyone can say, with certainty, that BR has made a significant difference on the business landscape.

Gideon Bochedi is general manager of the salvages department, while John Thornton is senior manager of research and development, both at trade debtors insurer, Credit Guarantee.