Business Maverick


Weighing the cost of business rescue

Weighing the cost of business rescue

Business rescue does not guarantee a company will live to see another day, but it does give it a fighting chance.

South African employees, shareholders and investors have witnessed a slew of high-profile business rescue cases over the past few weeks including SAA, Comair, Edcon, Phumelela and the Fairmont Zimbali hotel.

Many business rescue (BR) cases devolve into media spectacles – with rescue practitioners often on the receiving end of one party crying foul. This forces one to ask whether BR is effective in rescuing distressed companies. This is particularly relevant as economic conditions suggest we may see more companies take this route.

Latest data by Stats SA shows that company liquidations decreased 7.1% for the quarter ending July 2020 compared with the same period last year, which is counterintuitive considering that companies would have been negatively affected by the lockdown which had a catastrophic effect on commerce in South Africa (and globally).

While it is likely that liquidations will increase as companies consider all their options, it is plausible that the lower-than-expected liquidations is an indicator that more companies are considering business rescue proceedings, the supposedly more palatable of the two options faced by business owners when running into financial distress.

Business rescue was thrust into the national spotlight last December when SAA was placed under BR. Being a public carrier, the outcome would not only affect employees but also the taxpayer, which resulted in intense scrutiny.

Listed companies Comair and Phumelela Gaming and Leisure seemingly had no alternative but to enter into voluntary business rescue after not being able to generate revenue, while still incurring costs.

Unlike their American counterparts, which benefited from the US government’s $2.2-trillion coronavirus relief package – which is about six-times South Africa’s entire GDP – distressed businesses have two options – liquidation or business rescue.

But who really benefits from business rescue proceedings and what is the success rate?

The Companies and Intellectual Property Commission’s Business Rescue Proceedings Status Report, released on 14 August 2020, provides some insight into the success rate of business rescue in South Africa. According to the report, between April and August 2020, 157 business rescue proceedings had commenced.

This number may seem rather high, but when compared to previous years it is, well, rather average.

The report goes on to state that, for the financial year April 2015 to March 2016, 481 business rescue proceedings commenced, some 160 cases every four months. Of the 481 businesses placed into business rescue, 156 are still active while 73 of the proceedings ended with the business being placed directly into liquidation.

More recently, for the financial year April 2018 to March 2019, 349 business rescue proceedings commenced, with 194 proceedings still active while the financial year ending March 2020 saw 369 commencing with 278 still active.

If so few business rescue proceedings actually result in the business being rescued, why are business owners still turning to business rescue as opposed to liquidation? Or is it still too early to tell, with the majority of the proceeding that commenced from April 2018 still active? Perhaps the process just takes longer than expected.

“Business rescue” is defined in the Companies Act as “proceedings to facilitate the rehabilitation of a company that is financially distressed”.

I am of the opinion that, given the Sens announcements released by Phumelela Gaming and Leisure Limited and Comair, their respective boards of directors were acting in the best interest of the company by placing them in business rescue.

The process is designed to assist financially distressed companies with the reorganisation and restructuring of their affairs, assets and liabilities.

The process was hailed as a more promising alternative for shareholders, but is it really?

Of course, the shareholders ultimately appoint directors who are required in terms of the Companies Act to act in the best interests of the Company. Therefore, when directors make a decision to place a business in business rescue as opposed to liquidation, such a decision must, in the minds of said directors, be in the best interests of the company in question.

Moreover, the board of directors must “truly believe that prospects of rescue exist and such belief must be based on a concrete foundation” (as was held in African Banking Corporation of Botswana v Kariba Furniture Manufacturers.

I am of the opinion that, given the Sens announcements released by Phumelela Gaming and Leisure Limited and Comair, their respective boards of directors were acting in the best interest of the company by placing them in business rescue.

In the case of Phumelela, although some shareholders may have disagreed with the initial decision, it is important to recognise that they still have rights under the business rescue process.

The rights of shareholders are protected (in theory) under the Companies Act during the proceedings. Section 146 of the Companies Act provides shareholders with the following rights during the business rescue process.

  • Shareholders are provided with notice of any relevant event concerning the business rescue proceedings.
  • Shareholders have a right to participate in any court proceedings arising during the business rescue proceedings.
  • Most importantly, shareholders are entitled to vote to approve or reject a proposed business rescue plan, therefore they have the right to propose the development of an alternative plan.

To the extent that any shareholder believes that any vote made by the majority shareholders was incorrect, such a shareholder may also approach a court to have said vote set aside.

In Comair’s case, shareholders and creditors recently approved a plan that could see the national carrier take to the skies as early as December.

It’s also worth pointing out that even though the National Union of Metalworkers was seemingly opposed to Comair’s rescue plan, the only other alternative for employees at that stage was going down the path of 1Time Airlines and into liquidation. BM/DM

Caleb McKellar is a partner at Barter McKellar, a business law firm. McKellar heads the commercial litigation practice within the firm and advises clients on complex high court cases as well as private arbitration cases.


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