A recent Constitutional Court ruling has brought clarity to South Africa's business rescue framework, which aims to rehabilitate financially distressed companies. The process, introduced in 2011 through the Companies Act 71 of 2008, provides a safety net for struggling companies, allowing them to restructure and potentially return to business. This framework is similar to those in other countries, such as the UK, Canada, France, Germany, and Japan, which also offer restructuring plans to help companies avoid bankruptcy.
The business rescue process has received mixed reviews from experts. Koos Benadie, director of insolvency, business rescue, and restructuring at Barnard Incorporated Attorneys, believes that the process can be effective if done correctly. However, Julian Jones, a partner at Webber Wentzel Attorneys, notes that business rescue is not a solution for all companies, and some may be better off undergoing liquidation. Jones also warns that the process can be abused, with some companies using it to delay the inevitable.
Effective communication and early intervention are crucial for the success of business rescue. Eric Levenstein, head of insolvency and business rescue at Werksmans Attorneys, suggests that companies should engage with business rescue advisers earlier in the process. This can help ensure that the plan is approved and successful. Benadie also emphasizes the importance of identifying the right candidate for business rescue, particularly for state-linked companies with essential duties, such as South African Airways (SAA) and the South African Post Office.
The size and complexity of a company's business can significantly impact the business rescue process. Benadie notes that SAA's business rescue process was complicated due to its size and the number of creditors involved. He also highlights that the initial three-month timeframe for business rescue is often unrealistic, and a more achievable timeline is needed to avoid protecting "a business that is terminally ill."
Some industries, such as airlines, may face unique challenges in business rescue. Blacky Komani, the chair of FlySafair and former CEO of 1Time, notes that an airline in business rescue can create a cash-flow issue, as passengers may book closer to the time of travel. This can lead to a vicious cycle, where the business rescue process intended to help the company ultimately hurts it. Komani also emphasizes the importance of trust between business rescue practitioners and the company's management.
The Constitutional Court's recent ruling has provided clarity on the role of post-commencement creditors in business rescue plans. The court decided that post-commencement creditors, who agree to loan a company money after it has entered business rescue, will not have the right to vote on adopting the business rescue plan. This ruling aims to create certainty and predictability in the business rescue process.
The court's decision is expected to add to the efficient administration of rescue proceedings. Benadie explains that post-commencement financiers already have an advantage due to the security they can arrange in business rescue, and therefore do not need a place at the table when it comes to voting on the plan. This clarification is a step towards improving the business rescue process in South Africa.
Key points
- The Constitutional Court's ruling clarifies the role of post-commencement creditors in business rescue plans.
- Effective communication and early intervention are crucial for the success of business rescue.
- The business rescue process can be a lifeline for struggling companies, but its effectiveness depends on various factors, including the company's size, complexity, and industry.
