BUSINESS RESCUE & OPPORTUNITIES FOR DISTRESSED FUNDS IN SOUTH AFRICA
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BUSINESS RESCUE & OPPORTUNITIES FOR DISTRESSED FUNDS IN SOUTH AFRICA

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  • Note in Business Rescue, one requires a business rescue plan to be voted by creditors representing 75% in value (not number), including votes representing at least 50% of independent creditor’s voting interests

BUSINESS RESCUE & OPPORTUNITIES FOR DISTRESSED FUNDS IN SOUTH AFRICA BUSINESS RESCUE & OPPORTUNITIES FOR DISTRESSED FUNDS IN SOUTH AFRICA Presentation Transcript

  • BUSINESS RESCUEAND OPPORTUNITIESFOR DISTRESSEDFUNDS IN SOUTHAFRICASAVCACAPE TOWN / JOHANNESBURG16 & 18 APRIL 2013Eric LevensteinDirector, Werksmans Inc
  • OVERVIEW
  • General Overview Companies Act 71 of 2008 (Act) commenced on 1 May 2011 Introduced an entirely new process of restructuring companies infinancial distress, namely Business Rescue Recognition of distressed debt – early warning signals of loomingfinancial distress or insolvency? Directors Business Rescue andInsolvency Checklist Opportunities for financiers of distressed debt – pre-businessrescue? Which players will be forewarned of looming distress and how dowe make contact with these persons? What considerations necessitate a business rescue as opposed toa liquidation? Positioning oneself to take advantage of companies in distressand the potential of unlocking value Commencement of business rescue3 View slide
  • General Overview Initial steps in business rescue proceedings Appointment of a business rescue practitioner Need for pre-assessment (creditors, employees, post-commencement financiers, suppliers, potential acquirers, allstakeholders) Roll-out of business rescue proceedings Need for post commencement finance Creditors meetings Publication of the business rescue plan Voting on the plan Opportunities for buyout of claims Plan implementation Discharge from business rescue Compromise4 View slide
  • BUSINESS RESCUE
  • Origin of Concept of Business Rescue USA Chapter 11 proceedings and United Kingdomadministration proceedings Principles - Moratorium – moratorium is crucial for the success of a corporate rescue procedure some jurisdictions allow for a general or wide moratorium, some offermore limited protection creates breathing space to allow for the success of the process Cram-down provision - need to bind dissenting creditors (avoids smaller creditors holdinglarger creditors to ransom) without it, minority creditors can hold process to ransom by holding outfor a ―better deal‖ majority of creditors required to make process workable is the sanction of the court needed to ensure equitable treatment ofcreditors or can we proceed with the informal ―private pre-pack‖option?6
  • 7
  • Definitions from the Companies Act “Affected Person” in relation to a company means –a shareholder or creditor of the company;any registered trade union representing employeesof the company; andif any of the employees of the company are notrepresented by a registered trade union, each ofthose employees or their respective representatives8
  • Definitions from the Companies Act „„Business Rescue‟‟ - means proceedings to facilitate therehabilitation of a company that is financially distressed byproviding for— the temporary supervision of the company, and of themanagement of its affairs, business and property; a temporary moratorium on the rights of claimants against thecompany or in respect of property in its possession; and the development and implementation, if approved, of a plan torescue the company by restructuring its affairs, business,property, debt and other liabilities, and equity in a manner thatmaximizes the likelihood of the company continuing in existenceon a solvent basis or, if it is not possible for the company to socontinue in existence, results in a better return for the company‘screditors or shareholders than would result from the immediateliquidation of the company9
  • Definitions from the Companies Act “Business Rescue Practitioner” - means a personappointed or two or more persons appointed jointly, in termsof this Chapter to oversee a company during business rescueproceedings and ‗practitioner‘ has a corresponding meaning ―Financially Distressed‖ - in reference to a particularcompany at any particular time, means that- it appears to be reasonably unlikely that the company will be ableto pay all of its debts as they fall due and payable within theimmediately ensuing six months; or it appears to be reasonably likely that the company will become―insolvent‖ within the immediately ensuing six months What is the position if the company is already insolvent? Is it―financially distressed‖ ―Supervision‖ means the oversight imposed on a companyduring business rescue10
  • Financially Distressed v Insolvent No definition of ―insolvent― ―Insolvent‖ can mean - commercial insolvency: company cannot pay its debts as andwhen they fall due (cash flow test); or factual insolvency: company‘s liabilities exceeds its assets(balance sheet test) Section 4 of Act may assist – company will satisfy the solvency & liquidity test, if, consideringall reasonably foreseeable financial circumstances of the companyat that time -(a)the assets of the company, as fairly valued, equal or exceed theliabilities of the company, as fairly valued (factual insolvency); and(b)it appears that the company will be able to pay its debts as theybecome due in the ordinary course of business for a period of 12months after the date on which the test is considered (commercialinsolvency)11
  • Business Rescue v Liquidation Liquidation Insolvent companies – Old Act – Chapter 14 Voluntary Liquidation Compulsory Liquidation Section 344 - grounds in terms of which an insolvent company can be wound up by the court, inter-alia, - company is unable to pay its debts as described by section 345 it appears that it is just and equitable that the company should be wound up Solvent companies – New Act Voluntary Liquidation – section 80 - resolution Compulsory Liquidation - section 81 – application to court - company resolved by special resolution that court wind-up or applied to court to haveits voluntary wind-up continued by court by business rescue practitioner during business rescue by creditors – just and equitable by directors – deadlock of management or shareholders or just and equitable by shareholders – fraudulent conduct of management or company assets misappliedor wasted by the CIPC or the Panel - fraudulent conduct of management or enforcement actiontaken against the company, directors or prescribed officers12
  • Consideration of Business Rescue Welman v Marcelle Props 193 CC (2012)―business rescue proceedings are not for terminally illclose corporations. Nor are they for chronically ill. They arefor ailing corporations, which given time will be rescuedand become solvent‖ First signs of financial distress - apply for businessrescue More than just ―financially distressed‖ other optionssuch as liquidations or compromises may becomeattractive Not to say that insolvent companies cannot utilisebusiness rescue. Needs to be determined on a case bycase basis13
  • Business Rescue v Liquidation Directors‘ choice - company is ―insolvent‖ - voluntary liquidation compulsory liquidation - ground for winding up as set out insection 344 - should be placed into a winding up/liquidationprocess company is ―financially distressed‖ - business rescue - chapter 6 of the Companies Act Voluntary / compulsory liquidation (Old Act)14
  • Pre-Assessment & Suitability of BusinessRescue for a Particular Company Investigation (at instance of company or creditor/s) into the business,dealings and affairs of the company, while not regulated by the Act,may be necessary Type of company is determinative of suitability of business rescue (ieretail v investment property company) Oakdene Square Properties (Pty) Ltd & Others v Farm Bothasfontein(Kyalami) (Pty) Ltd & Others (17 February 2012) – court considered plausibility of business rescue in an instance whereliquidation was preferable dismissed application for business rescue and held that a liquidation of thecompany would achieve a similar result to that of a business rescue Prior to a company, or an affected person, placing a company inbusiness rescue, consideration should be given to - the nature of the company extent to which business rescue is the appropriate procedure for thatcompany extent to which business rescue would be more beneficial for the companythan a liquidation15
  • Role Players in Business Rescue16COMPANYSHAREHOLDERSPOSTCOMMENCEMENTFINANCIERSBUSINESSRESCUEPRACTITIONERCREDITORSSECURITYHOLDERSTRADEUNIONATTORNEYCOURTEMPLOYEESDIRECTORS
  • DIRECTORS‟ BUSINESSRESCUE & INSOLVENCYCHECKLIST
  • Solvency and Liquidity Test Section 4(1) - For any purpose of this Act, a companysatisfies the solvency and liquidity test at a particulartime if, considering all reasonably foreseeable financialcircumstances of the company at that time- the assets of the company or, if the company is a memberof a group of companies, the aggregate assets of thecompany, as fairly valued, equal or exceed the liabilitiesof the company or, if the company is a member of a groupof companies, the aggregate liabilities of the company, asfairly valued; and it appears that the company will be able to pay its debtsas they become due in the ordinary course of business fora period of- 12 months after the date on which the test is considered; or in the case of a distribution contemplated in paragraph (a) ofthe definition of ―distribution‖ in section 1, 12 monthsfollowing that distribution.18
  • Solvency and Liquidity Test Section 4(2) - For the purposes contemplated insubsection (1)- any financial information to be considered concerning thecompany must be based on- accounting records that satisfy the requirements of section28; and financial statements that satisfy the requirements of section29; subject to paragraph (c), the board or any other personapplying the solvency and liquidity test to a company- must consider a fair valuation of the company‘s assets andliabilities, including any reasonably foreseeable contingentassets and liabilities, irrespective of whether or not arising asa result of the proposed distribution, or otherwise, and may consider any other valuation of the company‘s assetsand liabilities that is reasonable in the circumstances; and19
  • Solvency and Liquidity Test unless the Memorandum of Incorporation of the companyprovides otherwise, a person applying the test in respect of adistribution contemplated in paragraph (a) of the definition of―distribution‖ in section 1 is not to be regarded as a liabilityany amount that would be required, if the company were tobe liquidated at the time of the distribution, to satisfy thepreferential rights upon liquidation of shareholders whosepreferential rights upon liquidation are superior to thepreferential rights upon liquidation of those receiving thedistribution.20
  • Test - Looming Financial Distress or Insolvency When does one file for business rescue or liquidation? as early as possible and before it is too late (6 months…) when the warning signs are self evident! directors need to make a proper and realistic assessment of allfinancial information available and test the veracity of such financialinformation if in doubt directors must take proper and sound legal and financialadvice must act on advice with no delays all of these actions will be tested by the Business Rescue Practitioneror by a liquidator at insolvency enquiries and specifically whendirectors are examined (in great detail) as to their actions or inactionsin the months preceding the Business Rescue and/or theinsolvency/winding up of the company21
  • 22
  • Checklist – Warning Signs of LoomingFinancial Distress or Insolvency Dishonesty Ineffectual leadership by the board Neglect and incompetence on the part of management Inability to adapt to a changing environment/marketconditions Loss of key personnel Monitoring of relationship with financiers General signs of pending disaster Directors role in the failing company scenario?23
  • Checklist – Causes of Financial Distress orInsolvency Dishonesty- fraud at management and employee level receive board information late (failure to highlight problem areas) inadequate explanations for variances from budgets (failure to meetbudgets which are consistently ignored) Ineffectual leadership by the board - inability to make decisions irregular / no contact with executive staff absence of board meetings worsening of relationships between directors and management dominance of the board by one individual (unhealthy)24
  • Checklist – Neglect & Incompetence ofManagement Lack of appreciation of impact of financial information High gearing / illiquidity / inability to meet terms of loan agreements Negative cash flow / insolvent balance sheet Failure to pay creditors as and when they fall due Lack of financial controls High staff turnover / poor staff morale High exposure to interest and currency fluctuations Auditors identify significant control problems and these are ignored Disagreement with management on material issues Delays in settling accounts payable Major or unexpected losses Overtrading with little cash Accounts receivables / debtors not being collected Failure to independently verify and safeguard the integrity of financial reporting25
  • Checklist – Inability to Adapt to ChangingEnvironment or Market Conditions Declining turnover Growth rate less than inflation rate Continued trend of losses Inadequate review and analysis of mistakes Significant loss of market share Company significantly affected by exchange ratefluctuations and commodity Risk of adverse market exposure (interest ratefluctuations)26
  • Checklist Loss of Key Personnel be careful.. rationalization of skilled employees could result in disaster (difficult toreplace) skilled staff may assist in managing financial crises when upturn comes.. will need these people! Monitoring of Relationship with Financiers be ―proactive‖ and not ―reactive‖ monitor levels of credit and overdraft facilities as economic crises prevails, financial institutions will become more circumspect inadvancing credit or restructuring loan facilities ―first loss is best loss‖? loan portfolios will be carefully managed by all financial institutions27
  • Checklist – Regulatory & Legal Compliance Regulatory contraventions (Environmental / CorporateGovernance) Proliferation of contingent liabilities (unforeseen) Uncertainty created by proliferation of litigation Change in Government policy(unexpected) Auditors – Qualify accounts (Going Concern) Unforeseen security and national catastrophes28
  • Checklist – General Signs of PendingDisaster ongoing trading losses unsustainably of the business model declining turnover adverse working capital ratios adverse solvency ratios adverse profitability ratios negative cash flows from operating activities continued failure to meet company commitments to SARS delayed payment to essential and non-essential creditors part payment to and installment plans with creditors failure to meet budgets default in long terms debt repayments adverse credit ratings (debt rating agencies)29
  • Checklist – General Signs of PendingDisaster downward trend in entity‘s share price (listed company) dishonored cheques artificial valuation of assets factoring of debts an increase in the incidence of fraud COD terms with suppliers receipt of letters of demand summons/actions/winding up notices continued injection by shareholders of working capital due to insufficient capitalrequirements increased requirement for long term financing for short terms needs management insisting on the reduced working week forcing employees to take unpaid leave general despondency industrial action inability to make important strategic decisions at critical times in distressed debtcycle30
  • Checklist Directors role in failing company - beware of personal liability Action plan – turnaround management (informal workouts) – personal liability if one fails? Trade out of financial difficulties - is this realistically possible? emotionally involved? obtain professional advice draw up detailed budgets (forecasts) cash flow change management? are business objectives realistic? change company structure retrench superfluous staff gearing… additional finance? Board requirements -• proper and meaningful feedback from management (budgets)• compile statement of affairs – assess when company has reached commercial insolvency• communicate – employees, shareholders, suppliers, customers, financial institutions31
  • Checklist Consider a Business Rescue resolution early (6 months) and ifthe company is financially distressed, alternatively if noreasonable prospect of the company being rescued, file forliquidation Golden Rules –consideration of these issues must be done early (beforefingers can be pointed at directors for trading in insolventcircumstances)… THE BUCK STOPS WHERE?don‘t play the ―blame game‖…. what happens when themusic stops…..be able to ―let go‖32
  • ENTRY INTOBUSINESS RESCUE
  • Entry into Business Rescue Board resolution or application to court Section 129 resolution Board Resolution to begin business rescue proceedings and placecompany under supervision if board has reasonable grounds tobelieve – company is financially distressed reasonable prospect of rescuing the company Company must – within five business days of filing resolution - publish notice of the resolution with sworn statement as to the reasons why thecompany is financially distressed and detailing basis for the prospects of thecompany being rescued appoint a practitioner after appointing a practitioner - file notice of appointment of practitioner within 2 business days with CIPC publish notice of appointment within 5 business days after notice filed34
  • 35
  • Entry into Business Rescue Section 131 Application to Court – affected person to bring application to court - served on company and CIPC (provided the company has not adopteda resolution for business rescue) notify each affected person court may – place company under business rescue (and appoint an interimpractitioner) if it is satisfied that - company is financially distressed; company has failed to pay over any amount in terms of an obligation underor in terms of public regulation, or contract, with respect to employmentrelated matters; just and equitable to do so for financial reasonsand there is a reasonable prospect for rescuing the company dismiss the application (and place company in liquidation)36
  • Summary of Process37●Company Board ResolutionAppoint PractitionerNotification requirements (toaffected persons)● Affected PersonApply to court for businessrescue at any timeAppoint PractitionerNotification requirements(to affected persons)Once business rescue order granted,company can’t apply for liquidationIf liquidation proceedings have not yet been concluded (beforea final liquidation order is granted), affected person can stillapply to convert to business rescue proceedingsOnce business rescue order granted, liquidation proceedingsare suspended
  • 38Flow Chart of Time PeriodsPractitioner appointedDelivery up bydirectors of allbooks and recordsAs soon as practicable5 days Directors toProvideStatement ofAffairsFirst MeetingofCreditors / Employees10 days from date of appointmentPreparation &Publication ofPlan25 days from date ofappointmentSection 152Meeting to consider& Vote on Plan10daysApproved & PlanImplementedIf Rejected, Vote onRevised Plan / Applyto Court to Set AsideInappropriate Vote /Offer to PurchaseVoting Interests ofDissenting PartiesNote: business rescue should generally end within 3months, unless an extension is granted by court onapplication by practitioner(Days = Business Days)Section150(5)
  • ROLES,RESPONSIBILITIES& LIABILITIES OFDIRECTORS
  • Director‟s Responsibility Section 129(7)―If the board of a company has reasonable grounds tobelieve that the company is financially distressed, but theboard has not adopted a resolution contemplated in thissection, the board must deliver a written notice to eachaffected person, setting out the criteria referred to insection 128(1)(f) that are applicable to the company, andits reasons for not adopting a resolution contemplated inthis section‖ This will focus directors‘ minds in any financiallydistressed company Sending out notice must be carefully considered as itcan have serious consequences40
  • Liability of Directors Section 77 A director of a company is liable for any loss, damage orcosts sustained by the company as a direct or indirectconsequence of the director having -acquiesced in the carrying on of the company‘s businessdespite knowing that it was being conducted in a mannerprohibited by section 22(1) (reckless trading)been a party to any act or omission by the companydespite knowing that the act or omission was calculated todefraud a creditor, employee or shareholder of thecompany, or had another fraudulent purpose Serious implications for those directors who trade theircompanies at a time when the company is insolvent41
  • Companies Act Section 77(6) allows a creditor to sue the company for damages and loss as wellas the director liability of a person in terms of this section is joint and severalwith any other person who is or may be held liable for the sameact. Section 77(7) Proceedings to recover any loss, damages or costs for which aperson is or may be held liable in terms of this section maynot be commenced more than three years after the act oromission that gave rise to that liability Claims against directors will prescribe after a period of 3years No delay of the date from which prescription starts torun dependent on knowledge of the claimant42
  • Companies Act Section 77(8) In addition to the liability set out elsewhere in thissection, any person who would be so liable is jointly andseverally liable with all other such persons-to pay the costs of all parties in the court in a proceedingcontemplated in this section unless the proceedings areabandoned, or exculpate that person; andto restore to the company any amount improperly paid bythe company as a consequence of the impugned act, andnot recoverable in terms of this Act.43
  • Companies Act ―Honest or reasonable behaviour‖ on the part of adirector would be a defence to a claim in terms ofsection 77(3)(b) Section 77(9) states that in any proceedings against adirector, other than for willful misconduct or for breachof trust, the court may relieve the director, either whollyor in part, from any liability set out in this section orany terms the court considers just, if it appears to thecourt that the director is or may be liable, but has actedhonestly and reasonably; or having regard to all of thecircumstances of the case, including those connectedwith the appointment of the director, it would be fair toexcuse the directorBusiness Judgment Rule – protects directors and nowmodernizes SA company law for directors. Brings our lawin line with international standards of corporate conduct44
  • King III - Principles for Business Rescue1 March 2010 - “Apply or Explain” Board should consider business rescue proceedings or other turnaroundmechanisms as soon as the company is financially distressed (principle 2.15) Board must, on a continuous basis, monitor whether or not the company isfinancially distressed Board should consider respective advantages and disadvantages of appropriateaction to be taken to avoid financial distress… including workouts, sale,mergers, business rescue or a compromise with creditors If the company is currently insolvent, it should stop trading until solvent,alternatively file for liquidation Must comply with the obligations set out in section 129(7) – notice to creditors Board must ensure that the company maintains a list of contact details of allaffected persons for purposes of notification Recommended that the company should appoint a suitably qualified andindependent business rescue practitioner and not a person ―friendly‖ to theircause The board and individual directors should be aware of and understand theirduties during business rescue proceedings, as well as the duties and powers ofpractitioners45
  • Business Judgment Rule Originated in USA – relates to effective decision making! Rule protects directors against being held accountablefor business decisions however unwise theysubsequently turn out to have been, if they were madeon an informed basis, in good faith and without anyconflict of interest, and if the decision was rational atthe time in all the circumstances Not a ―general shield‖ for directors from personalliability Complimented by directors‘ ―duty of care‖ Duty of care always necessary… for example…. if adirector failed to verify a set of financial accounts(glaring errors), there could be liability under the dutyof care…. in these circumstances the ―businessjudgment‖ rule would not have application!46
  • Business Judgement Rule Encourages directors to be entrepreneurs and to be able totake informed and innovative decisions and the necessarybusiness risks that directors honestly believe to be in the bestinterests of the company (even though those decisions mayultimately turn out to be incorrect) Fisheries Development Corporation v Jorgenson (1980) – ―Adirector is not liable for mere errors of judgment‖. BusinessJudgment Rule will now protect directors from risk inherent inpost mortem reviews of their business decisions Section 77(10) - a director who has reason to apprehend that aclaim may be made alleging that the director is liable, other than forwillful misconduct or willful breach of trust, may apply to a court forrelief, and the court may grant relief to the director on the samegrounds as if the matter had come before the court in terms ofsubsection (9).47
  • Reckless Trading Section 22 ―A company must not carry on its business recklessly, withgross negligence, with the intent to defraud any person orfor any fraudulent purpose‖ Role of the Companies and Intellectual PropertyCommission (CIPC) Section 22(2) states – if the CIPC has reasonable grounds to believe that a companyis engaging in conduct prohibited by subsection (1), the CIPCmay issue a notice to the company to show cause why thecompany should be permitted to continue carrying on itsbusiness, or to trade, as the case may be. Section 22(3) states – if a company to whom a notice has been issued in terms ofsubsection (2) fails within 20 business days to satisfy the CIPCthat it is not engaging in conduct prohibited by subsection (1),the CIPC may issue a compliance notice to the companyrequiring it to cease carrying on its business or trading, as thecase may be.48
  • Companies Act Application of section 77 -does not only apply to directors!applies to an alternate director, prescribed officer, personwho is a member of a committee of a board of a company,or of the audit committee of a company irrespective ofwhether or not the person is also a member of thecompany’s board Note: director may be sued (in general terms) by ―thecompany‖ for losses/damage caused to the company49
  • Directors‟ Liability Section 214 ―A person is guilty of an offence if the person…wasknowingly a party to any act or omission by a companycalculated to defraud a creditor or employee of thecompany or a holder of a company‘s securities (includesshareholders) or with another fraudulent purpose‖ Section 216 ―Penalties include a fine or imprisonment for a periodnot exceeding 10 years‖50
  • Companies Act Knowledge of prohibited conduct? ―Knowing‖ ―knowingly‖ or ―knows‖ – is defined as –a person either having actual knowledge of a particularmatterperson who has investigated the matter to an extent thatwould have provided the person with actual knowledge; ora person who has taken other measures which, if taken,would reasonably be expected to have provided the personwith actual knowledge of the matter.51
  • Companies Act Evidential Investigation Sound business practice (King III) Evidence in such circumstances should speak for itself.What is reasonably expected of a director when facedwith similar circumstances will differ from case to case.Whether or not reasonable behaviour will constitute adefence will have to be looked at with the particular andpeculiar circumstances of the issues facing thatparticular director!52
  • Companies Act A test for negligence - the standard of conduct of the―notionally reasonable director‖ –look at the concept of the notional director – how would hehave conducted himself in a similar situation when facedwith the same knowledge and having had access to thesame financial information.the courts will have regard to the scope of operations ofthe company, the role, functions and powers of thedirectors, the amount of the corporate debt, the extent ofthe company‘s financial difficulties and the prospect, ifany, of recovery.53
  • KNOWLEDGE OFFINANCIAL DISTRESS
  • Who Will be Forewarned of Looming FinancialDistress? Auditors – during the audit process, auditors may verywell qualify their financial statements and particularly bringthe attention of financial distress to the attention of boardmembers and those that rely on the financial statements(i.e. going concern or reportable irregularity) South African Revenue Services – if VAT and/or PAYEare not being paid, SARS will be warned at a very earlystage of the existence of financial distress Employees – one of the first signs of financial distress willbe employee salaries not being paid on time or a reducedworking week as a result of ineffective cash flow Financial Institutions – overdraft and loan facilities notbeing met on time (call up of a cession of debtors) Lawyers – general counsel and law firms representingcompanies in financial distress will be inundated with legalprocess, summonses, actions and writs of execution55
  • Who Will be Forewarned of Looming FinancialDistress? Creditors – creditors would be the first to know of financialdistress as a result of credit terms not being met and inparticular when companies are placed on a cash supplybasis as opposed to normal credit terms Judgement Creditors – once in receipt of a ―nulla bona‖return (i.e insufficient disposable property to meet thejudgement debt) from the Sheriff are entitled to demand aset of the most recent annual financial statements of acompany within 5 business days after making a demand(Section 31(2)) Section 129(7) Notice – directors are obligated to sendout such a notice if the company is financially distressed(personal liability if notice not sent out) Shareholders – lack of reporting, negligible dividends andlack of financial information being made available toshareholders would be a sure sign of financial distress56
  • Making Contact with Persons who haveKnowledge of a Company‟s Financial Distress Making contact with the abovementioned stakeholders isthe key for Venture Capital Funds considering turnaroundstrategies in distressed companies At a very early stage in the distressed cycle, companiesthat offer finance for distressed debt would be in a verygood position to introduce loan capital in order to turn thecompany around Informal compromises – these are possible provided youhave 100% of all creditors agreeing to the compromisedposition. This is a risky strategy if greedy creditors wishto get paid! Such creditors will apply to court for thecompany‘s liquidation unless they get paid ahead of thequeue57
  • Making Contact with Persons who haveKnowledge of a Company‟s Financial Distress Trade Unions would be the first organisation to know ofwages being held back or not being paid Lawyers – the problem here of course is ―attorney client‖privilege Financial Institutions – the problem here would be the―customer/banking‖ privilege relationship These are all challenges which need to be considered ifone wishes to play in the distressed debt market and tomake use of opportunities to take the ―up-side‖58
  • Opportunities – Pre-Business Rescue Any Venture Capital Fund needs to develop a strategyand identify contact points in order to become aware of adistressed debt situation The recognition of underlying value (at an early stage)will be critical in making decisions as to which companiesshould be propped up with early loan finance and/orsuggestions in respect of turnaround strategies Once a Venture Capital Fund is already working with thedirectors and creditors and looking at a possiblerestructuring, that fund will be placed in a veryadvantageous position to engage with the company, ifnecessary, all the way into a formal business rescueproceeding59
  • Practical Example - Mining Operation inFinancial Distress Company has a substantial asset, mine with rich golddeposits Company is financially distressed and cannot pay itscreditors as and when debts become due and payable Cash flow is the major constraint Identify this as an opportunity – engage a businessrescue practitioner to go in and do a pre-assessment(consult with all shareholders, directors, management,creditors, employees and shareholders) - establish if thecompany is a candidate for business rescue Consult with the nominated business rescue practitioner– would have already been identified if the company is acandidate for business rescue!60
  • Practical Example - Mining Operation inFinancial Distress Identify the funds that will be required to ―prop‖ up thecompany in business rescue proceedings (ie. identifythe quantum of post-commencement finance requiredto pay operational expenses) Company files for a business rescue resolution (by theboard) and appoints a business rescue practitioner –need to consider and control time lines in this process Opportunity for venture capitalists - introduce post-commencement finance (preferred in a business rescue)to keep company afloat Work with the Business Rescue Practitioner inrestructuring debt, re-organisation of contracts,employees, management, sell off loss making divisions61
  • Practical Example - Mining Operation inFinancial Distress Options for venture capitalists – offer for the business or assets of the company offer for the shares of the company acquire the debt of the company and convert it to equity Formulate a business rescue plan which includes theacquisition transaction Have business rescue plan approved by creditors andshareholders (vote it in) Ensure the business rescue plan is implemented correctlyand in terms of identified time lines contained in the plan Exit business rescue proceedings (substantialimplementation) ENJOY THE UPSIDE!62
  • The Distressed Debt Cycle63Commencement of TradingProfitable Business GrowsFlat Trading YearsBusiness RescueTrade out on aSolvent BasisOpportunity for Post-Commencement FinanceFINANCIALDISTRESSYEARS OF TRADINGFinancial DistressBR Process
  • BUSINESS RESCUEPRACTITIONER
  • Business Rescue Practitioners Section 138 - qualifications for business rescue practitioner - a member in good standing of a legal, accounting or business managementprofession accredited by CIPC (section 138(1)(a)); and be licensed as such by CIPC (section 138(1)(b)). Regulation 126 suggests that a person who is part of an accreditedprofession need not be licensed by CIPC CIPC advised that they are not accrediting certain professions fornow Further, prospective business rescue practitioner - must not be subject to an order of probation; must not be disqualified from acting as a director of a company in terms ofsection 69(8) of the Act; must not have any relationship with the company that would lead areasonable and informed third party to conclude that the integrity,impartiality or objectivity of that person is compromised by suchrelationship; and must not be related to a person who has a relationship as contemplatedabove.65
  • 66Categories of Practitioners Senior practitioner – ten years experience medium company (public interest score between 100 and 500) or alarge company (public interest score of 500 or more) Experienced practitioner – five years experience small company (public interest score of less than 100) or for amedium company (public interest score between 100 and 500) Junior practitioner – has not previously engaged in business turnaround before theeffective date of the Act or acted as a business rescue practitioner interms of the Act; or has actively engaged in business turnaround practice before theeffective date of the Act or as a business rescue practitioner forperiod of less than five years small companies (public interest score of less than 100)
  • 67Remuneration of Practitioner Charge for remuneration and expenses Tariff - R1250 per hour (max of R15 625 per day) (incl VAT) - smallcompany. R1500 per hour (max of R18 750 per day) (incl VAT) - mediumcompany; or R2000 per hour (max of R25 000 per day) (incl VAT) - largecompany or state owned company. Contingency agreement additional remuneration based on agreed incentives approved by holders of a majority of the creditors‘ votinginterests and holders of a majority of the voting rights attached toany shares of the company Practitioner - reimbursed for actual costs of disbursementsincurred by the practitioner, or expenses incurred bypractitioner, to extent reasonably necessary to carry out thepractitioner‘s functions and to facilitate the conduct of thebusiness rescue
  • 68 Section 140Full management control in substitution forthe company‘s board and pre-existingmanagement, but may delegate powers toformer board member or pre-existingmanagementMay remove from office any existing officer orappoint any new officer Unclear what is meant by ―in substitution for thecompany‘s board‖ as ―directors must continue toexercise the functions of director, subject to theauthority of the practitioner‖ (section 137(2)(a))Powers of Practitioners
  • 69Business Rescue Practitioners During business rescue, practitioner is an ―officer of thecourt‖, has responsibilities, duties and liabilities of a directoras set out in sections 75 to 77 In proceedings against a director, other than for wilfulmisconduct or willful breach of trust, court may relievedirector wholly or partly if –director is or may be liable but he acted honestly andreasonably;it would be fair to excuse the director, having regard to allthe circumstances Possibility of practitioner being sued by the liquidator orcreditors if business rescue fails and company goes intoliquidation Insurance – deep pocket syndrome!
  • 70Duties of Practitioner Section 141 Must investigate affairs and then decide if there is any prospect ofrescuing the company (if not, must inform court and apply fortermination of proceedings and commencement of liquidation) If evidence of voidable transactions found, reckless trading or fraud,practitioner must forward the evidence to the appropriate authoritiesfor further investigation and/or prosecution and must also directmanagement to rectify matter including recovering anymisappropriated assets of the company What is meant by a ―voidable transaction‖ in the context of businessrescue? Importantly there is no sanction on practitioner if non-compliancewith these obligations! Question arises as to whether practitioner should have similar rightsto liquidator under insolvency? (section 417 enquiries)
  • 71Duties of Directors Section 142(1)―As soon as practicable after business rescue begins, eachdirector must deliver to the practitioner all books and records thatrelate to the affairs of the company and are in the director‘spossession‖ Section 142(2)―Any director who knows where other books and records relatingto the company are being kept, must inform the practitioner as tothe whereabouts of those books and records‖ Section 142(3)―Within five business days after business rescue proceedingsbegin, or such longer period as the practitioner allows, thedirectors of a company must provide practitioner with astatement of affairs containing, at a minimum, particulars ofthe following – material transactions involving company or assets of company,and occurring within 12 months immediately before the businessrescue proceedings began
  • 72Duties of Directors any court, arbitration or administrative proceedings,including pending enforcement proceedings, involving thecompany the assets and liabilities of the company, and its incomeand disbursements within the immediately preceding 12months the number of employees, and any collective agreementsor other agreements relating to the rights of employees any debtors and their obligations to the company; and any creditors and their rights or claims against thecompany Section 142(4) - no person is entitled, as against thepractitioner of a company, to retain possession of anybooks or records of the company, or to claim or enforcea lien over any such books or records
  • FUNDING
  • 74Post-Commencement Finance Funding made available or services rendered during business rescue Any remuneration or other amount relating to employment that becomespayable to an employee during business rescue but is not paid - such amount is regarded as post-commencement financing; and must be paid in the order of preference set out in sub-section 3(a),which envisages pari passu payment of all such claims, but theseemployee claims will have preference over claims of lenders undersub-section (2) – irrespective if such claims are secured – and all theunsecured claims against the company Employees will be placed in a position of ―super-priority‖ creditors (abovelenders) after proceedings commence Post-commencement financing (such as from financial institutions) may beobtained during proceedings and any such financing (section 135(2)) - may be secured to the lender by utilizing any asset of the company tothe extent that it is not encumbered will be paid in the order of preference set out in sub-clause 3(b) Will there be assets left in the company over which security can be taken?In all likelihood, at this stage, all assets will already be encumbered!
  • 75Post-Commencement Finance Only practitioner‘s remuneration and costs incurred in runningproceedings and existing secured claims, will rank higher thanemployee claims (section 135(3)) – ―costs of administration‖ Order of preference for repayment to post-commencementlenders, is the order in which the debt was incurred (theearliest in time loan financier will get the priority) If proceedings superseded by a liquidation order, thepreference conferred in terms of this section remains in forceduring liquidation proceedings (section 135(4)) – therefore allemployee/financier claims are converted into a ―super-priority‖ category after proceedings terminate and aresuperseded by a liquidation This would motivate trade unions and employees to alwaysensure that business rescue is chosen as the favouredprocedure. ie employees can ―leap frog‖ their claims into thatof a ―super-priority‖ claim (in the ordinary course, employeesremain preferent creditors in a liquidation)
  • 76Ranking of Claims Practitioner‘s remuneration and expenses and claims arisingout of the costs of the proceedings (section 135(3)) Remuneration, reimbursement for expenses or other amountsof money relating to employment due and payable by thecompany to an employee once business rescue commenced Secured lenders/creditors before business rescue (debateableas the Companies Act is not clear and no judgment on thisyet) Secured claims by post commencement financiers orlenders/creditors in the order in which the claims wereincurred (section 135(3)(a)(i)) Unsecured claims – by post-commencement financiers or lenders/creditors duringbusiness rescue in the order in which they were incurred (section135(3)(b))
  • Ranking of Claims remuneration of employees which became due and payablebefore business rescue commenced lenders/creditors before business rescue (S135(3)(a)(ii)) Importantly, the ranking of claims is not settled Post commencement financiers may rank ahead of securedpre-commencement financiers In most cases, business rescue practitioners determine theranking and this is often challenged by the creditors Also depends on whether or not the post commencementfinancier is the same party as the pre-secured financier (willthen make little difference)77
  • GENERAL ASPECTS OFBUSINESS RESCUE
  • Moratorium on Legal Proceedings Section 133 No legal proceedings (including enforcement actions) againstthe company or in relation to any property belonging to thecompany, or lawfully in its possession, may be commenced orproceeded with in any forum, except -with the written consent of the practitionerwith the leave of the courtas a set-off against any claim made by the company inlegal proceedings, irrespective of when the proceedingscommencecriminal proceedings against the company / directorsproceedings concerning any property or right over whichthe company exercises the powers of a trusteeproceedings by a regulatory authority in the execution ofits duties after written notification to the practitioner79
  • Moratorium on Legal Proceedings Will affect perfection of securities General notarial bond -need to perfect GNB prior to liquidationdangerous for GNB holder if a conversion frombusiness rescue to liquidationwill be no time to apply to court to perfect GNB Creditor believes plan is not going to succeed, there is apossibility (in terms of the exceptions to section 133)that such creditor could apply to court to perfect its GNBwhilst the company is in business rescue Section 131(7) - court can during proceedings to perfectsecurity, mero motu, place the company into businessrescue80
  • Moratorium on Legal Proceedings Cession of book debts does calling up a cession amount to ―enforcement action‖ calling up a cession of book debts after commencement ofbusiness rescue would probably not equate to an enforcement bythe bank in relation to property (debtors book) belonging to thecompany bank would possibly be able to enforce its rights in terms of itscession of book debts subsequent to the commencement ofbusiness rescue proceedings Section 134(1)(b) - if a company has ceded its book debts to thebank, it is arguable that such book debt is no longer in the companyits lawful possession Gormley v West City Precinct Properties (Pty) Ltd 2012 -―Banks entitlement to all rents and revenue is a right which it willenforce against the third parties who owe rents and revenue.Such rents and revenue do not constitute property belonging toWest City, nor are such rents and revenue in its possession norwill it ever be. The provisions of section 133(1), in my view, haveno bearing on the Banks entitlement to the rents and revenue, asthe collection thereof does not constitute enforcementproceedings‖81
  • Suretyships and Guarantees Section 133(2)―During business rescue proceedings, a guarantee or surety bycompany in favour of any other person may not be enforced by anyperson against company except with the leave of court and inaccordance with any terms that the court considers to be just andequitable‖ Investec Bank Ltd v Bruyns (14 November 2011) - court consideredmeaning of section 133 and status of a surety and guarantee provided bycompany, or by another person or entity in favour of the company, duringbusiness rescue Held – section 133(2) prohibits a creditor from enforcing a suretyship orguarantee, provided by the company, against the company, whilst inbusiness rescue statutory moratorium that arises for the benefit of a company does notautomatically arise for the benefit of a suretyship (provided in favourof the company) on the basis that the statutory moratorium is apersonal defence that arises for the benefit of the principal debtor (iethe distressed company) and not for the benefit of a surety82
  • 83Effect on Contracts Practitioner may - entirely, partially or conditionally suspend, for the durationof the proceedings, any obligation of the company that - arises under an agreement to which the company was a partyat the commencement of the proceedings; and would otherwise become due during those proceedings; or apply urgently to court to entirely, partially or conditionallycancel, on any terms that are just and reasonable in thecircumstances, any agreement to which the company isparty Other party to the agreement may only assert claim fordamages (no specific performance) – radical departure Can only cancel if apply to court
  • 84 Section 137 Must continue to exercise their functions as director, subject toauthority of the practitioner (board is not replaced) Have a duty to the company to exercise any managementfunction within the company in accordance with the expressinstructions or direction of the practitioner (to the extent that itis reasonable to do so) Must attend to the requests of the practitioner at all times, andprovide any requested information about the affairs of thecompany as may reasonably be required Is this a ―debtor in possession‖ scenario? Is there an implication that ―directors‖ will continue to managethe company and not the practitioner? – Probably not, butdepends on the skill of the practitioner in managing thisprocess and interaction with directors Directors may try and appoint their own nominee/puppetpractitioner. Can be dangerous as ―bad‖ directors remain incontrol… DIP is the result!Effect on Directors
  • 85Rights of Creditors Section 145 Creditors entitled to – notice of each court proceeding, decision, meeting or otherrelevant event participate in every court proceeding arising from businessrescue formally participate in company‘s business rescue proceedings informally participate in the proceedings by making proposalsfor a plan to the practitioner the right to vote to amend, approve or reject a plan and, ifthe plan is rejected, to propose the development of analternative plan or present an offer to acquire the interests ofany or all of the other creditors in terms of section 153
  • 86Rights of Creditors Form a creditors‘ committee and through that committee tobe consulted by the practitioner on the development of aplan Provisions relating to voting interests in section 145(4) areas follows –a secured or unsecured creditor (preferrent creditor) hasa voting interest equal to the value of the amount owedto that creditor by the company; anda concurrent creditor who would be subordinated in aliquidation has a voting interest, as independently andexpertly appraised and valued at the request of thepractitioner, equal to the amount, if any, that thecreditor could reasonably expect to receive in such aliquidation of the company Practitioner must determine whether creditors areindependent for purposes of the proceeding and request asuitably independent person to independently and expertlyappraise and value an interest contemplated in section145(4). Such valuation is subject to review together with are-valuation of the creditors‘ voting interest
  • 87First Meeting of Creditors Section 147(1) Within 10 business days after being appointed, thepractitioner must convene and preside over a firstmeeting of creditors, at which – the practitioner – must inform the creditors whether the practitioner believesthat there is a reasonable prospect of rescuing the company;and may receive proof of claims by creditors; the creditors may determine whether or not a committeeof creditors should be appointed and, if so, may appointthe members of the committee
  • 88First Meeting of Creditors Practitioner must give notice of the first meeting of creditors toevery creditor of the company whose name and address isknown to, or can reasonably be obtained by, the practitioner,setting out the – date, time and place of the meeting agenda for the meeting At any meeting of creditors, other than the meetingcontemplated in section 151, a decision supported by theholders of a simple majority of the independent creditors‘voting interests voted on a matter, is the decision of themeeting on that matter ie 51% majority vote At the first meeting of creditors, an ―interim practitioner‖nominated by an affected person and appointed by the court interms of section 131(5), must be ratified by the holders of themajority of the independent creditor‘s voting interests The practitioner appointed by the company in terms of aresolution does not have to be ratified at the first meeting ofcreditors
  • 89Employees Employees continued to be employed by company on same terms andconditions except – changes in the ordinary course of attrition Employees and company agree other terms Any retrenchment to be done in terms of labour legislation (section 189/189A) Employees, represented by a trade union or not, entitled to – notice of each court proceeding, decision, meeting or other relevant event participate form a committee be consulted by practitioner be present and make submission to the meeting when the plan is voted vote with creditors to approve a plan if employee is a creditor if the plan is rejected, propose the development of an alternate pan orpresent an offer to acquire the interests of one or more affected persons First meeting of employees – 10 days after appointment of practitioner practitioner to advise of reasonable prospect of success form an employees committee
  • 90Development and Approval of Plan Section 150 Practitioner must prepare a plan after consulting withcreditors, other affected persons and management ofthe company Plan must contain all information reasonably required byaffected persons to decide whether or not to accept orreject plan
  • 91 Plan divided into 3 parts Part A: Background (including list of assets, which assets aresecured, list of creditors indicating secured, statutory preferentand concurrent in terms of laws of insolvency, probabledividend should insolvency ensue, list of all holders ofcompanies securities, a copy of the written agreementconcerning the practitioner‘s remuneration, a statementwhether the plan includes a proposal made informally by acreditor of the company) Part B: Proposals (including nature and duration ofmoratorium, extent to which company is to be released frompayment of debts, the extent to which any debt is proposed tobe converted to equity in the company or another company,the ongoing role of the company and the treatment of anyexisting agreements, property of the company available to paycreditors‘ claims in terms of the plan, the order of preference inwhich the proceeds of the property will be applied to paycreditors of the plan is adopted, the benefits of adopting theplan as opposed to the benefits that would be received bycreditors of the company if the company were to be placed inliquidation and the effect that the plan will have on the holdersof each class of the company‘s issued securities).Development and Approval of Plan
  • 92Development and Approval of Plan Part C: Assumptions and Conditions (including astatement of the conditions that must be satisfied forthe plan to come into operation and be fullyimplemented, effect on employees and their conditionsof employment, the circumstances in which the plan willend and a projected balance sheet for the company anda statement of income and expenses for the ensuing 3years) All of the above to be prepared on the assumption thatthe proposed business plan is adopted
  • 93 Plan must conclude with a certificate by practitionerstating that information provided appears to beaccurate, complete and up to date, and projectionsprovided are estimates made in good faith on the basisof factual information and assumptions as set out in thestatement (if inaccurate certificate, practitioner may besued by liquidator or creditors for damages) Plan must be published by company within 25 businessdays after date on which practitioner appointed, or suchlonger time as may be allowed by -the court, on application by the company; orthe holders of a majority of the creditors‘ voting interestsBusiness Rescue Plan
  • 94Meeting to Determine Future of Company Section 151 Within 10 business days after publishing a business rescueplan - practitioner must convene and preside over a meeting ofcreditors and any other holders of a voting interest, called for thepurpose of considering the plan at least 5 business days before the meeting contemplated in sub-section (1), the practitioner must deliver a notice of the meetingto all affected persons, setting out – date, time and place of the meeting agenda of the meeting; and summary of the rights of affected persons to participate in and vote atthe meeting Meeting contemplated in this section may be adjourned from timeto time, as necessary or expedient, until a decision regarding thecompany‘s future has been taken in accordance with sections 152and 153
  • 95Development and Approval of Plan Section 152(2) Plan approved on a preliminary basis if - 75% of the creditors (all creditors – secured, unsecured) votinginterests that were voted (in value); and votes in support of the proposed plan included at least 50% of theindependent creditors‘ voting interests, if any, that were voted(note: independent creditors are defined as creditors but who arepersons not related to the company, a director or the practitioner) Section 152(3)(a) - plan is not approved on a preliminarybasis, it is rejected and may only be considered further interms of section 153 Section 152 (3)(b) – plan is approved on a preliminary basisand the plan does not alter the rights of any class of thecompany‘s securities, the plan is finally adopted subject toany conditions upon which the plan is contingent
  • 96Shareholders‟ Rights Section 152(3)(c) If the plan does alter (impairment) the rights of any class ofholders of the companys securities then – practitioner must call a meeting of the holders of the classor classes of securities whose rights would be altered bythe plan and call for a vote by them to approve theadoption of the proposed plan; and if, in a vote, (contemplated by (i)), a majority (51%) ofthe voting rights that were exercised, support the plan, itwill have been finally adopted
  • 97Failure to Adopt a Plan Section 153(1) If plan has been rejected as contemplated in section152(3)(a) or (c)(ii)(bb), the practitioner may- seek a vote of approval from the holders of votinginterests to prepare and publish a revised plan; or advise the meeting that the company will apply to acourt to set aside the result of the vote by theholders of voting interests or shareholders, as thecase may be, on the grounds that it wasinappropriate ―Inappropriate‖ – grounds are set out in section 153(7)
  • 98Failure to Adopt a Plan Section 153(1) If the practitioner does not take any action contemplated inparagraph (a) – any affected person present at the meeting may - call for a vote of approval from the holders of voting interestsrequiring the practitioner to prepare and publish a revised plan; or apply to the court to set aside the result of the vote by the holders ofvoting interests or shareholders, as the case may be, on the groundsthat it was inappropriate; or any affected person, or combinations of affected persons,may make a binding offer to purchase the votinginterests of one or more persons who opposed adoptionof the business rescue plan, at a value independently andexpertly determined, on the request of the practitioner,to be a fair and reasonable estimate of the return to thatperson, or those persons, if the company were to beliquidated
  • 99Failure to Adopt Plan ―Binding Offer‖ – if it is an ―offer‖, how can it bebinding without acceptance? ―Liquidation Value‖ – the ―break up value" that acreditor would receive as a dividend on its claim uponthe liquidation of the company, taking all liquidationcosts into account ―Voting Interest‖ – defined as an ―interest recognized,appraised and valued in terms of section 145(4) to (6)‖ Section 145(4) – (6) relates to decisions requiring thesupport of the holders of creditors‘ voting interests(deals with secured, unsecured voting on value andconcurrent creditors subordinated in a liquidation votingat a liquidation value) ―One or more persons‖ – is this limited to creditors onlyor does it include shareholders/holders of securities?
  • 100Failure to Adopt Plan Section 146(e) contemplates holders of company‘ssecurities being able to make an offer to acquire theinterest of any or all the creditors or other holders of thecompany‘s securities in the manner contemplated insection 153 Question: can creditors buy out dissenting shareholdersand vice-versa? Section 153(5) - if no person takes any actioncontemplated in sub-section (1), the practitioner mustpromptly file a notice of the termination of the businessrescue proceedings
  • 101Failure to Adopt Plan Section 153(6) - holder of a voting interest, or a personacquiring that interest in terms of a binding offer, may apply toa court to review, re-appraise and re-value a determination byan independent expert in terms of subsection (1)(b)(ii) Section 153(7) - on an application contemplated in sub-section(1)(a)(ii) or (1)(b)(i)(bb), a court may order that the vote on abusiness rescue plan be set aside if the court is satisfied that itis reasonable and just to do so, having regard to - the interests represented by the person or persons who votedagainst the proposed business rescue plan; the provision, if any, made in the proposed business rescue planwith respect to the interests of that person or those persons; and a fair and reasonable estimate of the return to that person, orthose persons, if the company were to be liquidated
  • 102Discharge of Debts and Claims Section 154 A business rescue plan may provide that, if it isimplemented in accordance with its terms and conditions,a creditor who has acceded to the discharge of the wholeor part of a debt owing to that creditor will lose the rightto enforce the relevant debt or part of it If a business rescue plan has been approved andimplemented in accordance with chapter 6, a creditor isnot entitled to enforce any debt owed by the companyimmediately before the beginning of the business rescueprocess, except to the extent provided for in the businessrescue plan Note – if underlying principle debt goes, so does thesuretyship obligation - for example against a director
  • Some Recent Statistics Provided by theCompanies and Intellectual PropertyCommission (CIPC) (March 2013) Approximately 126 business rescue practitioners havebeen appointed to supervise companies under businessrescue (interim conditional licenses) Have been approximately 840 companies (commencementby resolution and by applications to court) placed underbusiness rescue since 1 May 2011 64 rescues and 45 liquidations Success rate is 55% of businesses that have concludedtheir rescue operations (CIPC believe the real rate is closerto 12 – 15% taking into account pending business rescueproceedings) Average turn-around time is 5.6 months Approximately 4 500 jobs have been saved as a result ofsuccessful business rescue proceedings (25% of jobs werelost)103
  • COMPROMISES
  • Overview on Compromises Reflects what is common business practice in South Africa Used – to overcome the practical difficulty facing a company to obtainthe consent of every creditor to the settlement of their claims when creditors are in various places in a country and difficultto access Provides a mechanism for an ―arrangement‖ or―compromise‖ with shareholders or creditors “compromise” – usually between a company and its creditorswhere there is a dispute about rights “arrangement” – usually between the company and itsshareholders Enables a company to avoid liquidation or business rescue106
  • Overview on Compromises Common law compromises and statutory lawcompromises Statutory law compromises -Old Act - section 311 to 313 – provided the processfor compromises and arrangements between thecompany and its shareholders or creditorsNew Act – compromise between the company and itscreditors (section 155) and arrangement betweenthe company and its shareholders (section 114) Informal offers of compromise by a company and itscreditors Focus – statutory law compromises with creditors andnot arrangements with shareholders107
  • Application of Section 155 of New Act Applies to a company, irrespective of whether or not it isfinancially distressed unless it is engaged in businessrescue proceedings ―Financial Distress‖ –liabilities will exceed assets in the ensuing six months(balance sheet test); orwill be unable to pay debts as and when they fall due inthe ensuing six months (cash flow test) ―Business Rescue‖ – proceedings to facilitate therehabilitation of a company so that –it can continue to trade on a solvent basis; orachieve a better return for the creditors or shareholdersof the company than would result from the immediateliquidation of the company108
  • Application of Section 155 Issues to consider -interesting that a company does NOT have to be―financially distressed‖ in order to effect a section 155compromisecannot be done in a business rescue proceedingopportunities to canvass creditors upfront and assess theappetite for a section 155 compromiseif creditors and company on board, can put together a―pre-packaged deal‖ (pre-pack) and negotiate to itsconclusioncan do a section 155 in a liquidation (preferably inprovisional liquidation)109
  • Role Players in Compromise ProcessCOMPANYCREDITORS‘CLAIMSBOARDINITIATE THEPROCEEDINGSLIQUIDATORINITIATE THEPROCEEDINGSCOURTHEARING INTERMS OFSECTION155(7)
  • 111Requirements Board or liquidator (if it is being wound up) maypropose an arrangement or a compromise of itsfinancial obligations to all of its creditors/members ofany class of its creditors Process is driven by the directors or a liquidator No longer necessary for a company to get courtapproval to propose a compromise Third party creditor cannot propose the compromise andcannot be party to the compromise to the exclusion ofthe company and creditors ie creditor can propose asection 155 compromise, but can only do so with theco-operation and approval of the board Only deals with compromises with creditors. Section114 deals with shareholders‘ schemes of arrangement
  • Requirements Board or liquidator will deliver the proposal, and noticeof meeting to consider the proposal, to -every creditor or member of the relevant class ofcreditors whose name or address is known to, or canreasonably be obtained by, the company; andthe Companies and Intellectual Property Commission(CIPC) Not necessary to call a meeting of a particular class ofcreditors where there is only one creditor in that class112
  • Proposal Proposal must contain all information reasonablyrequired to facilitate creditors in deciding whether or notto accept or reject the proposal Divided into three parts Part A - Background - include at least -a complete list - material assets as well as anindication as to which assets are held as security bycreditors as of the date of the proposal;a complete list - creditors at the date of theproposal, as well as an indication as to whichcreditors would qualify as secured, statutorypreferent and concurrent in terms of the laws ofinsolvency, and an indication of which of thecreditors have proved their claims 113
  • Proposalprobable dividend that would be received bycreditors, in their specific classes, if the companywere to be liquidated (if the proposal is made as analternative to liquidation, a statement of the dividendthat creditors would receive with the proposal asopposed to on a liquidation, should be included)a complete list - the company‘s issued securities,and the effect that the proposal would have onthem; andwhether the proposal includes a proposal madeinformally by a creditor of the company Proposal should advise in its background whether theproposal was made informally by a creditor of thecompany114
  • Proposal Part B-Proposals - include at least- nature and duration of any proposed debt moratorium; extent to which the company is to be released from thepayment of its debts, and the extent to which any debt isproposed to be converted to equity in the company, oranother company; treatment of contracts and on-going role of the company; property of the company that is proposed to be available topay creditors‘ claims; order of preference in which the proceeds of property of thecompany will be applied to pay creditors if the proposal isadopted; and benefits of adopting the proposal versus the benefits thatwould be received by creditors if the company were to beplaced in liquidation115
  • Proposal Part C-Assumptions and conditions - include at least -statement of the conditions that must be satisfied, ifany, for the proposal to -come into operation; andbe fully implementedeffect that the plan contemplates on the number ofemployees, and their terms and conditions of employment;anda projected-balance sheet for the company; andstatement of income and expenses for the ensuing three yearsprepared on the assumption that the proposal is accepted116
  • Proposal The projected balance sheet and statement -must include a notice of any significant assumptions onwhich the projections are based; andmay include alternative projections based on varyingassumptions and contingencies Proposal must conclude with a certificate by anauthorised director or prescribed officer of the companystating that any -factual information provided appears to be accurate,complete, and up to the date; andprojections provided are estimates made in good faith onthe basis of factual information and assumptions as set outin the statement117
  • Adoption of Proposal Proposal will have been adopted by the creditors of the company, orthe members of a relevant class of creditors, if it is supported by – majority in number, representing at least 75% in value of thecreditors or class, as the case may be; present and voting in person or by proxy, at a meeting called forthat purpose Therefore, there are two requirements – a majority in number of creditors who are present or representedby proxy and who vote on the proposal, irrespective of the valueof their claims, must support the proposal; and such majority must own or represent at least 75% of the totalvalue of all creditors‘ claims There is no minimum quorum requirement First requirement protects smaller creditors from larger creditorspushing through a proposal to their detriment118
  • Consequence of Adoption of Proposal Company may apply to the court for an order approving theproposal (not peremptory) No longer obligatory to obtain the sanction of the court for acompromise to become legally binding on all dissentingcreditors A court, on an application may sanction the compromise if itconsiders it just and equitable to do so, having regard to -the number of creditors of any affected class of creditors,who were present or represented at the meeting, and whovoted in favour of the proposal; andin the case of a compromise in respect of a company beingwound up, the report of the Master of the High Court asrequired in terms of the Old Act119
  • Process Subsequent to Adoption of Proposal A copy of an order of the court sanctioning a compromise-must be filed by the company within five business days.Compromise has no effect unless it is filed with CIPC.This, however, does not convert the compromise intoan order of court;must be attached to each copy of the company‘smemorandum of incorporation that is kept at thecompany‘s registered office, or elsewhere ascontemplated in the New Act; andis final and binding on all creditors or members of therelevant class of creditors as of the date on which it isfiled120
  • Compromises versus Business Rescue121COMPROMISES BUSINESS RESCUENo requirement to be ―financiallydistressed‖ to propose acompromiseMust be ―financially distressed‖ toapply for business rescueNo statutory moratorium(although it can be included in theproposal)Statutory moratorium from thedate of the commencement ofbusiness rescueNo appointment of the equivalentto a ―business rescue practitioner‖Business rescue practitionerappointed in resolution or by thecourt (and the latter sanctionedat a creditors‘ meeting)No requirement that the majorityin number of creditors whoapprove the proposal must beindependentMajority who approve a businessrescue plan must be independentof the companyNo provision which states that anadopted proposal is binding on allcreditors – only once an ordersanctioning the compromise isobtainedAn adopted proposal is binding onall creditors, whether or not theyvoted
  • Similarities with Business Rescue Almost identical information in a business rescue planshould also be contained in a compromise proposal Court will only sanction a scheme if it is ―just andequitable‖ and a court will only grant a business rescueorder if, inter alia, it is ―just and equitable‖ to do so forfinancial reasons122
  • Take – Aways Fundamental starting point is to identify the opportunity – need tohave a distressed debt strategy! Need to identify key people who are the ―players‖ in thedistressed debt market and who can introduce the opportunity atan early stage in the distressed debt cycle Key – identify the warning signals of looming financial distressand act on them! Identify and work with business rescue practitioners who have aproven track record in the business recue industry Must develop a skill set to identify the right opportunities andknow how to take advantage of these opportunities Appreciate the different opportunities offered by a Chapter 6business rescue versus a Section 155 compromise Understand the business rescue process and how it can be usedto unlock value and the ―upside‖ – remember the Mine example!123
  • QUESTIONS
  • THANK YOUEric LevensteinApril 2013Nothing in this presentation should be construed as formallegal advice from any lawyer or this firm. Readers areadvised to consult professional legal advisors for guidanceon legislation which may affect their businesses.© 2011 Werksmans Incorporated trading as WerksmansAttorneys. All rights reserved.