1. BUSINESS RESCUE
AND OPPORTUNITIES
FOR DISTRESSED
FUNDS IN SOUTH
AFRICA
SAVCA
CAPE TOWN / JOHANNESBURG
16 & 18 APRIL 2013
Eric Levenstein
Director, Werksmans Inc

2. OVERVIEW

3. General Overview
 Companies Act 71 of 2008 (Act) commenced on 1 May 2011
 Introduced an entirely new process of restructuring companies in
financial distress, namely Business Rescue
 Recognition of distressed debt – early warning signals of looming
financial distress or insolvency? Directors Business Rescue and
Insolvency Checklist
 Opportunities for financiers of distressed debt – pre-business
rescue?
 Which players will be forewarned of looming distress and how do
we make contact with these persons?
 What considerations necessitate a business rescue as opposed to
a liquidation?
 Positioning oneself to take advantage of companies in distress
and the potential of unlocking value
 Commencement of business rescue
3

4. 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, all
stakeholders)
 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
 Compromise
4

5. BUSINESS RESCUE

6. Origin of Concept of Business Rescue
 USA Chapter 11 proceedings and United Kingdom
administration proceedings
 Principles -
 Moratorium –
 moratorium is crucial for the success of a corporate rescue procedure
 some jurisdictions allow for a general or wide moratorium, some offer
more limited protection
 creates breathing space to allow for the success of the process
 Cram-down provision -
 need to bind dissenting creditors (avoids smaller creditors holding
larger creditors to ransom)
 without it, minority creditors can hold process to ransom by holding out
for a ―better deal‖
 majority of creditors required to make process workable
 is the sanction of the court needed to ensure equitable treatment of
creditors or can we proceed with the informal ―private pre-pack‖
option?
6

7. 7

8. 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 employees
of the company; and
if any of the employees of the company are not
represented by a registered trade union, each of
those employees or their respective representatives
8

9. Definitions from the Companies Act
 „„Business Rescue‟‟ - means proceedings to facilitate the
rehabilitation of a company that is financially distressed by
providing for—
 the temporary supervision of the company, and of the
management of its affairs, business and property;
 a temporary moratorium on the rights of claimants against the
company or in respect of property in its possession; and
 the development and implementation, if approved, of a plan to
rescue the company by restructuring its affairs, business,
property, debt and other liabilities, and equity in a manner that
maximizes the likelihood of the company continuing in existence
on a solvent basis or, if it is not possible for the company to so
continue in existence, results in a better return for the company‘s
creditors or shareholders than would result from the immediate
liquidation of the company
9

10. Definitions from the Companies Act
 “Business Rescue Practitioner” - means a person
appointed or two or more persons appointed jointly, in terms
of this Chapter to oversee a company during business rescue
proceedings and ‗practitioner‘ has a corresponding meaning
 ―Financially Distressed‖ - in reference to a particular
company at any particular time, means that-
 it appears to be reasonably unlikely that the company will be able
to pay all of its debts as they fall due and payable within the
immediately 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 company
during business rescue
10

11. Financially Distressed v Insolvent
 No definition of ―insolvent―
 ―Insolvent‖ can mean -
 commercial insolvency: company cannot pay its debts as and
when 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, considering
all reasonably foreseeable financial circumstances of the company
at that time -
(a)the assets of the company, as fairly valued, equal or exceed the
liabilities of the company, as fairly valued (factual insolvency); and
(b)it appears that the company will be able to pay its debts as they
become due in the ordinary course of business for a period of 12
months after the date on which the test is considered (commercial
insolvency)
11

12. 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 have
its 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 misapplied
or wasted
 by the CIPC or the Panel - fraudulent conduct of management or enforcement action
taken against the company, directors or prescribed officers
12

13. Consideration of Business Rescue
 Welman v Marcelle Props 193 CC (2012)
―business rescue proceedings are not for terminally ill
close corporations. Nor are they for chronically ill. They are
for ailing corporations, which given time will be rescued
and become solvent‖
 First signs of financial distress - apply for business
rescue
 More than just ―financially distressed‖ other options
such as liquidations or compromises may become
attractive
 Not to say that insolvent companies cannot utilise
business rescue. Needs to be determined on a case by
case basis
13

14. Business Rescue v Liquidation
 Directors‘ choice -
 company is ―insolvent‖ -
 voluntary liquidation
 compulsory liquidation - ground for winding up as set out in
section 344 - should be placed into a winding up/liquidation
process
 company is ―financially distressed‖ -
 business rescue - chapter 6 of the Companies Act
 Voluntary / compulsory liquidation (Old Act)
14

15. Pre-Assessment & Suitability of Business
Rescue 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 (ie
retail 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 where
liquidation was preferable
 dismissed application for business rescue and held that a liquidation of the
company would achieve a similar result to that of a business rescue
 Prior to a company, or an affected person, placing a company in
business rescue, consideration should be given to -
 the nature of the company
 extent to which business rescue is the appropriate procedure for that
company
 extent to which business rescue would be more beneficial for the company
than a liquidation
15

16. Role Players in Business Rescue
16
COMPANY
SHAREHOLDERS
POST
COMMENCEMENT
FINANCIERS
BUSINESS
RESCUE
PRACTITIONER
CREDITORS
SECURITY
HOLDERS
TRADE
UNION
ATTORNEY
COURT
EMPLOYEES
DIRECTORS

17. DIRECTORS‟ BUSINESS
RESCUE & INSOLVENCY
CHECKLIST

18. Solvency and Liquidity Test
 Section 4(1) - For any purpose of this Act, a company
satisfies the solvency and liquidity test at a particular
time if, considering all reasonably foreseeable financial
circumstances of the company at that time-
 the assets of the company or, if the company is a member
of a group of companies, the aggregate assets of the
company, as fairly valued, equal or exceed the liabilities
of the company or, if the company is a member of a group
of companies, the aggregate liabilities of the company, as
fairly valued; and
 it appears that the company will be able to pay its debts
as they become due in the ordinary course of business for
a period of-
 12 months after the date on which the test is considered; or
 in the case of a distribution contemplated in paragraph (a) of
the definition of ―distribution‖ in section 1, 12 months
following that distribution.
18

19. Solvency and Liquidity Test
 Section 4(2) - For the purposes contemplated in
subsection (1)-
 any financial information to be considered concerning the
company must be based on-
 accounting records that satisfy the requirements of section
28; and
 financial statements that satisfy the requirements of section
29;
 subject to paragraph (c), the board or any other person
applying the solvency and liquidity test to a company-
 must consider a fair valuation of the company‘s assets and
liabilities, including any reasonably foreseeable contingent
assets and liabilities, irrespective of whether or not arising as
a result of the proposed distribution, or otherwise, and
 may consider any other valuation of the company‘s assets
and liabilities that is reasonable in the circumstances; and
19

20. Solvency and Liquidity Test
 unless the Memorandum of Incorporation of the company
provides otherwise, a person applying the test in respect of a
distribution contemplated in paragraph (a) of the definition of
―distribution‖ in section 1 is not to be regarded as a liability
any amount that would be required, if the company were to
be liquidated at the time of the distribution, to satisfy the
preferential rights upon liquidation of shareholders whose
preferential rights upon liquidation are superior to the
preferential rights upon liquidation of those receiving the
distribution.
20

21. 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 all
financial information available and test the veracity of such financial
information
 if in doubt directors must take proper and sound legal and financial
advice
 must act on advice with no delays
 all of these actions will be tested by the Business Rescue Practitioner
or by a liquidator at insolvency enquiries and specifically when
directors are examined (in great detail) as to their actions or inactions
in the months preceding the Business Rescue and/or the
insolvency/winding up of the company
21

22. 22

23. Checklist – Warning Signs of Looming
Financial Distress or Insolvency
 Dishonesty
 Ineffectual leadership by the board
 Neglect and incompetence on the part of management
 Inability to adapt to a changing environment/market
conditions
 Loss of key personnel
 Monitoring of relationship with financiers
 General signs of pending disaster
 Directors role in the failing company scenario?
23

24. Checklist – Causes of Financial Distress or
Insolvency
 Dishonesty-
 fraud at management and employee level
 receive board information late (failure to highlight problem areas)
 inadequate explanations for variances from budgets (failure to meet
budgets 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

25. Checklist – Neglect & Incompetence of
Management
 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 reporting
25

26. Checklist – Inability to Adapt to Changing
Environment 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 rate
fluctuations and commodity
 Risk of adverse market exposure (interest rate
fluctuations)
26

27. Checklist
 Loss of Key Personnel
 be careful.. rationalization of skilled employees could result in disaster (difficult to
replace)
 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 in
advancing credit or restructuring loan facilities
 ―first loss is best loss‖?
 loan portfolios will be carefully managed by all financial institutions
27

28. Checklist – Regulatory & Legal Compliance
 Regulatory contraventions (Environmental / Corporate
Governance)
 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 catastrophes
28

29. Checklist – General Signs of Pending
Disaster
 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

30. Checklist – General Signs of Pending
Disaster
 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 capital
requirements
 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 debt
cycle
30

31. 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 institutions
31

32. Checklist
 Consider a Business Rescue resolution early (6 months) and if
the company is financially distressed, alternatively if no
reasonable prospect of the company being rescued, file for
liquidation
 Golden Rules –
consideration of these issues must be done early (before
fingers can be pointed at directors for trading in insolvent
circumstances)… THE BUCK STOPS WHERE?
don‘t play the ―blame game‖…. what happens when the
music stops…..
be able to ―let go‖
32

33. ENTRY INTO
BUSINESS RESCUE

34. Entry into Business Rescue
 Board resolution or application to court
 Section 129 resolution
 Board Resolution to begin business rescue proceedings and place
company under supervision if board has reasonable grounds to
believe –
 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 the
company is financially distressed and detailing basis for the prospects of the
company 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 filed
34

35. 35

36. 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 adopted
a resolution for business rescue)
 notify each affected person
 court may –
 place company under business rescue (and appoint an interim
practitioner) if it is satisfied that -
 company is financially distressed;
 company has failed to pay over any amount in terms of an obligation under
or in terms of public regulation, or contract, with respect to employment
related matters;
 just and equitable to do so for financial reasons
and there is a reasonable prospect for rescuing the company
 dismiss the application (and place company in liquidation)
36

37. Summary of Process
37
●Company Board Resolution
Appoint Practitioner
Notification requirements (to
affected persons)
● Affected Person
Apply to court for business
rescue at any time
Appoint Practitioner
Notification requirements
(to affected persons)
Once business rescue order granted,
company can’t apply for liquidation
If liquidation proceedings have not yet been concluded (before
a final liquidation order is granted), affected person can still
apply to convert to business rescue proceedings
Once business rescue order granted, liquidation proceedings
are suspended

38. 38
Flow Chart of Time Periods
Practitioner appointed
Delivery up by
directors of all
books and records
As soon as practicable
5 days Directors to
Provide
Statement of
Affairs
First Meeting
of
Creditors / Employees
10 days from date of appointment
Preparation &
Publication of
Plan
25 days from date of
appointment
Section 152
Meeting to consider
& Vote on Plan
10
days
Approved & Plan
Implemented
If Rejected, Vote on
Revised Plan / Apply
to Court to Set Aside
Inappropriate Vote /
Offer to Purchase
Voting Interests of
Dissenting Parties
Note: business rescue should generally end within 3
months, unless an extension is granted by court on
application by practitioner
(Days = Business Days)
Section
150(5)

39. ROLES,
RESPONSIBILITIES
& LIABILITIES OF
DIRECTORS

40. Director‟s Responsibility
 Section 129(7)
―If the board of a company has reasonable grounds to
believe that the company is financially distressed, but the
board has not adopted a resolution contemplated in this
section, the board must deliver a written notice to each
affected person, setting out the criteria referred to in
section 128(1)(f) that are applicable to the company, and
its reasons for not adopting a resolution contemplated in
this section‖
 This will focus directors‘ minds in any financially
distressed company
 Sending out notice must be carefully considered as it
can have serious consequences
40

41. Liability of Directors
 Section 77
 A director of a company is liable for any loss, damage or
costs sustained by the company as a direct or indirect
consequence of the director having -
acquiesced in the carrying on of the company‘s business
despite knowing that it was being conducted in a manner
prohibited by section 22(1) (reckless trading)
been a party to any act or omission by the company
despite knowing that the act or omission was calculated to
defraud a creditor, employee or shareholder of the
company, or had another fraudulent purpose
 Serious implications for those directors who trade their
companies at a time when the company is insolvent
41

42. Companies Act
 Section 77(6)
 allows a creditor to sue the company for damages and loss as well
as the director
 liability of a person in terms of this section is joint and several
with any other person who is or may be held liable for the same
act.
 Section 77(7)
 Proceedings to recover any loss, damages or costs for which a
person is or may be held liable in terms of this section may
not be commenced more than three years after the act or
omission that gave rise to that liability
 Claims against directors will prescribe after a period of 3
years
 No delay of the date from which prescription starts to
run dependent on knowledge of the claimant
42

43. Companies Act
 Section 77(8)
 In addition to the liability set out elsewhere in this
section, any person who would be so liable is jointly and
severally liable with all other such persons-
to pay the costs of all parties in the court in a proceeding
contemplated in this section unless the proceedings are
abandoned, or exculpate that person; and
to restore to the company any amount improperly paid by
the company as a consequence of the impugned act, and
not recoverable in terms of this Act.
43

44. Companies Act
 ―Honest or reasonable behaviour‖ on the part of a
director would be a defence to a claim in terms of
section 77(3)(b)
 Section 77(9) states that in any proceedings against a
director, other than for willful misconduct or for breach
of trust, the court may relieve the director, either wholly
or in part, from any liability set out in this section or
any terms the court considers just, if it appears to the
court that the director is or may be liable, but has acted
honestly and reasonably; or having regard to all of the
circumstances of the case, including those connected
with the appointment of the director, it would be fair to
excuse the director
Business Judgment Rule – protects directors and now
modernizes SA company law for directors. Brings our law
in line with international standards of corporate conduct
44

45. King III - Principles for Business Rescue
1 March 2010 - “Apply or Explain”
 Board should consider business rescue proceedings or other turnaround
mechanisms as soon as the company is financially distressed (principle 2.15)
 Board must, on a continuous basis, monitor whether or not the company is
financially distressed
 Board should consider respective advantages and disadvantages of appropriate
action 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 all
affected persons for purposes of notification
 Recommended that the company should appoint a suitably qualified and
independent business rescue practitioner and not a person ―friendly‖ to their
cause
 The board and individual directors should be aware of and understand their
duties during business rescue proceedings, as well as the duties and powers of
practitioners
45

46. Business Judgment Rule
 Originated in USA – relates to effective decision making!
 Rule protects directors against being held accountable
for business decisions however unwise they
subsequently turn out to have been, if they were made
on an informed basis, in good faith and without any
conflict of interest, and if the decision was rational at
the time in all the circumstances
 Not a ―general shield‖ for directors from personal
liability
 Complimented by directors‘ ―duty of care‖
 Duty of care always necessary… for example…. if a
director failed to verify a set of financial accounts
(glaring errors), there could be liability under the duty
of care…. in these circumstances the ―business
judgment‖ rule would not have application!
46

47. Business Judgement Rule
 Encourages directors to be entrepreneurs and to be able to
take informed and innovative decisions and the necessary
business risks that directors honestly believe to be in the best
interests of the company (even though those decisions may
ultimately turn out to be incorrect)
 Fisheries Development Corporation v Jorgenson (1980) – ―A
director is not liable for mere errors of judgment‖. Business
Judgment Rule will now protect directors from risk inherent in
post mortem reviews of their business decisions
 Section 77(10) - a director who has reason to apprehend that a
claim may be made alleging that the director is liable, other than for
willful misconduct or willful breach of trust, may apply to a court for
relief, and the court may grant relief to the director on the same
grounds as if the matter had come before the court in terms of
subsection (9).
47

48. Reckless Trading
 Section 22
 ―A company must not carry on its business recklessly, with
gross negligence, with the intent to defraud any person or
for any fraudulent purpose‖
 Role of the Companies and Intellectual Property
Commission (CIPC)
 Section 22(2) states –
 if the CIPC has reasonable grounds to believe that a company
is engaging in conduct prohibited by subsection (1), the CIPC
may issue a notice to the company to show cause why the
company should be permitted to continue carrying on its
business, or to trade, as the case may be.
 Section 22(3) states –
 if a company to whom a notice has been issued in terms of
subsection (2) fails within 20 business days to satisfy the CIPC
that it is not engaging in conduct prohibited by subsection (1),
the CIPC may issue a compliance notice to the company
requiring it to cease carrying on its business or trading, as the
case may be.
48

49. Companies Act
 Application of section 77 -
does not only apply to directors!
applies to an alternate director, prescribed officer, person
who is a member of a committee of a board of a company,
or of the audit committee of a company irrespective of
whether or not the person is also a member of the
company’s board
 Note: director may be sued (in general terms) by ―the
company‖ for losses/damage caused to the company
49

50. Directors‟ Liability
 Section 214
 ―A person is guilty of an offence if the person…was
knowingly a party to any act or omission by a company
calculated to defraud a creditor or employee of the
company or a holder of a company‘s securities (includes
shareholders) or with another fraudulent purpose‖
 Section 216
 ―Penalties include a fine or imprisonment for a period
not exceeding 10 years‖
50

51. Companies Act
 Knowledge of prohibited conduct?
 ―Knowing‖ ―knowingly‖ or ―knows‖ – is defined as –
a person either having actual knowledge of a particular
matter
person who has investigated the matter to an extent that
would 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 person
with actual knowledge of the matter.
51

52. 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 faced
with similar circumstances will differ from case to case.
Whether or not reasonable behaviour will constitute a
defence will have to be looked at with the particular and
peculiar circumstances of the issues facing that
particular director!
52

53. 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 he
have conducted himself in a similar situation when faced
with the same knowledge and having had access to the
same financial information.
the courts will have regard to the scope of operations of
the company, the role, functions and powers of the
directors, the amount of the corporate debt, the extent of
the company‘s financial difficulties and the prospect, if
any, of recovery.
53

54. KNOWLEDGE OF
FINANCIAL DISTRESS

55. Who Will be Forewarned of Looming Financial
Distress?
 Auditors – during the audit process, auditors may very
well qualify their financial statements and particularly bring
the attention of financial distress to the attention of board
members and those that rely on the financial statements
(i.e. going concern or reportable irregularity)
 South African Revenue Services – if VAT and/or PAYE
are not being paid, SARS will be warned at a very early
stage of the existence of financial distress
 Employees – one of the first signs of financial distress will
be employee salaries not being paid on time or a reduced
working week as a result of ineffective cash flow
 Financial Institutions – overdraft and loan facilities not
being met on time (call up of a cession of debtors)
 Lawyers – general counsel and law firms representing
companies in financial distress will be inundated with legal
process, summonses, actions and writs of execution
55

56. Who Will be Forewarned of Looming Financial
Distress?
 Creditors – creditors would be the first to know of financial
distress as a result of credit terms not being met and in
particular when companies are placed on a cash supply
basis as opposed to normal credit terms
 Judgement Creditors – once in receipt of a ―nulla bona‖
return (i.e insufficient disposable property to meet the
judgement debt) from the Sheriff are entitled to demand a
set of the most recent annual financial statements of a
company within 5 business days after making a demand
(Section 31(2))
 Section 129(7) Notice – directors are obligated to send
out such a notice if the company is financially distressed
(personal liability if notice not sent out)
 Shareholders – lack of reporting, negligible dividends and
lack of financial information being made available to
shareholders would be a sure sign of financial distress
56

57. Making Contact with Persons who have
Knowledge of a Company‟s Financial Distress
 Making contact with the abovementioned stakeholders is
the key for Venture Capital Funds considering turnaround
strategies in distressed companies
 At a very early stage in the distressed cycle, companies
that offer finance for distressed debt would be in a very
good position to introduce loan capital in order to turn the
company around
 Informal compromises – these are possible provided you
have 100% of all creditors agreeing to the compromised
position. This is a risky strategy if greedy creditors wish
to get paid! Such creditors will apply to court for the
company‘s liquidation unless they get paid ahead of the
queue
57

58. Making Contact with Persons who have
Knowledge of a Company‟s Financial Distress
 Trade Unions would be the first organisation to know of
wages 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 if
one wishes to play in the distressed debt market and to
make use of opportunities to take the ―up-side‖
58

59. Opportunities – Pre-Business Rescue
 Any Venture Capital Fund needs to develop a strategy
and identify contact points in order to become aware of a
distressed debt situation
 The recognition of underlying value (at an early stage)
will be critical in making decisions as to which companies
should be propped up with early loan finance and/or
suggestions in respect of turnaround strategies
 Once a Venture Capital Fund is already working with the
directors and creditors and looking at a possible
restructuring, that fund will be placed in a very
advantageous position to engage with the company, if
necessary, all the way into a formal business rescue
proceeding
59

60. Practical Example - Mining Operation in
Financial Distress
 Company has a substantial asset, mine with rich gold
deposits
 Company is financially distressed and cannot pay its
creditors as and when debts become due and payable
 Cash flow is the major constraint
 Identify this as an opportunity – engage a business
rescue practitioner to go in and do a pre-assessment
(consult with all shareholders, directors, management,
creditors, employees and shareholders) - establish if the
company is a candidate for business rescue
 Consult with the nominated business rescue practitioner
– would have already been identified if the company is a
candidate for business rescue!
60

61. Practical Example - Mining Operation in
Financial Distress
 Identify the funds that will be required to ―prop‖ up the
company in business rescue proceedings (ie. identify
the quantum of post-commencement finance required
to pay operational expenses)
 Company files for a business rescue resolution (by the
board) 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 in
restructuring debt, re-organisation of contracts,
employees, management, sell off loss making divisions
61

62. Practical Example - Mining Operation in
Financial 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 the
acquisition transaction
 Have business rescue plan approved by creditors and
shareholders (vote it in)
 Ensure the business rescue plan is implemented correctly
and in terms of identified time lines contained in the plan
 Exit business rescue proceedings (substantial
implementation)
 ENJOY THE UPSIDE!
62

63. The Distressed Debt Cycle
63
Commencement of Trading
Profitable Business Grows
Flat Trading Years
Business Rescue
Trade out on a
Solvent Basis
Opportunity for Post-Commencement FinanceF
I
N
A
N
C
I
A
L
D
I
S
T
R
E
S
S
YEARS OF TRADING
Financial Distress
BR Process

64. BUSINESS RESCUE
PRACTITIONER

65. Business Rescue Practitioners
 Section 138 - qualifications for business rescue practitioner -
 a member in good standing of a legal, accounting or business management
profession 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 accredited
profession need not be licensed by CIPC
 CIPC advised that they are not accrediting certain professions for
now
 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 of
section 69(8) of the Act;
 must not have any relationship with the company that would lead a
reasonable and informed third party to conclude that the integrity,
impartiality or objectivity of that person is compromised by such
relationship; and
 must not be related to a person who has a relationship as contemplated
above.
65

66. 66
Categories of Practitioners
 Senior practitioner –
 ten years experience
 medium company (public interest score between 100 and 500) or a
large company (public interest score of 500 or more)
 Experienced practitioner –
 five years experience
 small company (public interest score of less than 100) or for a
medium company (public interest score between 100 and 500)
 Junior practitioner –
 has not previously engaged in business turnaround before the
effective date of the Act or acted as a business rescue practitioner in
terms of the Act; or
 has actively engaged in business turnaround practice before the
effective date of the Act or as a business rescue practitioner for
period of less than five years
 small companies (public interest score of less than 100)

67. 67
Remuneration of Practitioner
 Charge for remuneration and expenses
 Tariff -
 R1250 per hour (max of R15 625 per day) (incl VAT) - small
company.
 R1500 per hour (max of R18 750 per day) (incl VAT) - medium
company; or
 R2000 per hour (max of R25 000 per day) (incl VAT) - large
company or state owned company.
 Contingency agreement
 additional remuneration based on agreed incentives
 approved by holders of a majority of the creditors‘ voting
interests and holders of a majority of the voting rights attached to
any shares of the company
 Practitioner - reimbursed for actual costs of disbursements
incurred by the practitioner, or expenses incurred by
practitioner, to extent reasonably necessary to carry out the
practitioner‘s functions and to facilitate the conduct of the
business rescue

68. 68
 Section 140
Full management control in substitution for
the company‘s board and pre-existing
management, but may delegate powers to
former board member or pre-existing
management
May remove from office any existing officer or
appoint any new officer
 Unclear what is meant by ―in substitution for the
company‘s board‖ as ―directors must continue to
exercise the functions of director, subject to the
authority of the practitioner‖ (section 137(2)(a))
Powers of Practitioners

69. 69
Business Rescue Practitioners
 During business rescue, practitioner is an ―officer of the
court‖, has responsibilities, duties and liabilities of a director
as set out in sections 75 to 77
 In proceedings against a director, other than for wilful
misconduct or willful breach of trust, court may relieve
director wholly or partly if –
director is or may be liable but he acted honestly and
reasonably;
it would be fair to excuse the director, having regard to all
the circumstances
 Possibility of practitioner being sued by the liquidator or
creditors if business rescue fails and company goes into
liquidation
 Insurance – deep pocket syndrome!

70. 70
Duties of Practitioner
 Section 141
 Must investigate affairs and then decide if there is any prospect of
rescuing the company (if not, must inform court and apply for
termination of proceedings and commencement of liquidation)
 If evidence of voidable transactions found, reckless trading or fraud,
practitioner must forward the evidence to the appropriate authorities
for further investigation and/or prosecution and must also direct
management to rectify matter including recovering any
misappropriated assets of the company
 What is meant by a ―voidable transaction‖ in the context of business
rescue?
 Importantly there is no sanction on practitioner if non-compliance
with these obligations!
 Question arises as to whether practitioner should have similar rights
to liquidator under insolvency? (section 417 enquiries)

71. 71
Duties of Directors
 Section 142(1)
―As soon as practicable after business rescue begins, each
director must deliver to the practitioner all books and records that
relate to the affairs of the company and are in the director‘s
possession‖
 Section 142(2)
―Any director who knows where other books and records relating
to the company are being kept, must inform the practitioner as to
the whereabouts of those books and records‖
 Section 142(3)
―Within five business days after business rescue proceedings
begin, or such longer period as the practitioner allows, the
directors of a company must provide practitioner with a
statement of affairs containing, at a minimum, particulars of
the following –
 material transactions involving company or assets of company,
and occurring within 12 months immediately before the business
rescue proceedings began

72. 72
Duties of Directors
 any court, arbitration or administrative proceedings,
including pending enforcement proceedings, involving the
company
 the assets and liabilities of the company, and its income
and disbursements within the immediately preceding 12
months
 the number of employees, and any collective agreements
or 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 the
company
 Section 142(4) - no person is entitled, as against the
practitioner of a company, to retain possession of any
books or records of the company, or to claim or enforce
a lien over any such books or records

73. FUNDING

74. 74
Post-Commencement Finance
 Funding made available or services rendered during business rescue
 Any remuneration or other amount relating to employment that becomes
payable 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 these
employee claims will have preference over claims of lenders under
sub-section (2) – irrespective if such claims are secured – and all the
unsecured claims against the company
 Employees will be placed in a position of ―super-priority‖ creditors (above
lenders) after proceedings commence
 Post-commencement financing (such as from financial institutions) may be
obtained during proceedings and any such financing (section 135(2)) -
 may be secured to the lender by utilizing any asset of the company to
the 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!

75. 75
Post-Commencement Finance
 Only practitioner‘s remuneration and costs incurred in running
proceedings and existing secured claims, will rank higher than
employee claims (section 135(3)) – ―costs of administration‖
 Order of preference for repayment to post-commencement
lenders, is the order in which the debt was incurred (the
earliest in time loan financier will get the priority)
 If proceedings superseded by a liquidation order, the
preference conferred in terms of this section remains in force
during liquidation proceedings (section 135(4)) – therefore all
employee/financier claims are converted into a ―super-
priority‖ category after proceedings terminate and are
superseded by a liquidation
 This would motivate trade unions and employees to always
ensure that business rescue is chosen as the favoured
procedure. ie employees can ―leap frog‖ their claims into that
of a ―super-priority‖ claim (in the ordinary course, employees
remain preferent creditors in a liquidation)

76. 76
Ranking of Claims
 Practitioner‘s remuneration and expenses and claims arising
out of the costs of the proceedings (section 135(3))
 Remuneration, reimbursement for expenses or other amounts
of money relating to employment due and payable by the
company to an employee once business rescue commenced
 Secured lenders/creditors before business rescue (debateable
as the Companies Act is not clear and no judgment on this
yet)
 Secured claims by post commencement financiers or
lenders/creditors in the order in which the claims were
incurred (section 135(3)(a)(i))
 Unsecured claims –
 by post-commencement financiers or lenders/creditors during
business rescue in the order in which they were incurred (section
135(3)(b))

77. Ranking of Claims
 remuneration of employees which became due and payable
before 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 secured
pre-commencement financiers
 In most cases, business rescue practitioners determine the
ranking and this is often challenged by the creditors
 Also depends on whether or not the post commencement
financier is the same party as the pre-secured financier (will
then make little difference)
77

78. GENERAL ASPECTS OF
BUSINESS RESCUE

79. Moratorium on Legal Proceedings
 Section 133
 No legal proceedings (including enforcement actions) against
the company or in relation to any property belonging to the
company, or lawfully in its possession, may be commenced or
proceeded 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 in
legal proceedings, irrespective of when the proceedings
commence
criminal proceedings against the company / directors
proceedings concerning any property or right over which
the company exercises the powers of a trustee
proceedings by a regulatory authority in the execution of
its duties after written notification to the practitioner
79

80. 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 from
business rescue to liquidation
will be no time to apply to court to perfect GNB
 Creditor believes plan is not going to succeed, there is a
possibility (in terms of the exceptions to section 133)
that such creditor could apply to court to perfect its GNB
whilst the company is in business rescue
 Section 131(7) - court can during proceedings to perfect
security, mero motu, place the company into business
rescue
80

81. 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 of
business rescue would probably not equate to an enforcement by
the bank in relation to property (debtors book) belonging to the
company
 bank would possibly be able to enforce its rights in terms of its
cession of book debts subsequent to the commencement of
business rescue proceedings
 Section 134(1)(b) - if a company has ceded its book debts to the
bank, it is arguable that such book debt is no longer in the company
its lawful possession
 Gormley v West City Precinct Properties (Pty) Ltd 2012 -
―Bank's entitlement to all rents and revenue is a right which it will
enforce against the third parties who owe rents and revenue.
Such rents and revenue do not constitute property belonging to
West City, nor are such rents and revenue in its possession nor
will it ever be. The provisions of section 133(1), in my view, have
no bearing on the Bank's entitlement to the rents and revenue, as
the collection thereof does not constitute enforcement
proceedings‖
81

82. Suretyships and Guarantees
 Section 133(2)
―During business rescue proceedings, a guarantee or surety by
company in favour of any other person may not be enforced by any
person against company except with the leave of court and in
accordance with any terms that the court considers to be just and
equitable‖
 Investec Bank Ltd v Bruyns (14 November 2011) - court considered
meaning of section 133 and status of a surety and guarantee provided by
company, or by another person or entity in favour of the company, during
business rescue
 Held –
 section 133(2) prohibits a creditor from enforcing a suretyship or
guarantee, provided by the company, against the company, whilst in
business rescue
 statutory moratorium that arises for the benefit of a company does not
automatically arise for the benefit of a suretyship (provided in favour
of the company) on the basis that the statutory moratorium is a
personal defence that arises for the benefit of the principal debtor (ie
the distressed company) and not for the benefit of a surety
82

83. 83
Effect on Contracts
 Practitioner may -
 entirely, partially or conditionally suspend, for the duration
of the proceedings, any obligation of the company that -
 arises under an agreement to which the company was a party
at the commencement of the proceedings; and
 would otherwise become due during those proceedings; or
 apply urgently to court to entirely, partially or conditionally
cancel, on any terms that are just and reasonable in the
circumstances, any agreement to which the company is
party
 Other party to the agreement may only assert claim for
damages (no specific performance) – radical departure
 Can only cancel if apply to court

84. 84
 Section 137
 Must continue to exercise their functions as director, subject to
authority of the practitioner (board is not replaced)
 Have a duty to the company to exercise any management
function within the company in accordance with the express
instructions or direction of the practitioner (to the extent that it
is reasonable to do so)
 Must attend to the requests of the practitioner at all times, and
provide any requested information about the affairs of the
company as may reasonably be required
 Is this a ―debtor in possession‖ scenario?
 Is there an implication that ―directors‖ will continue to manage
the company and not the practitioner? – Probably not, but
depends on the skill of the practitioner in managing this
process and interaction with directors
 Directors may try and appoint their own nominee/puppet
practitioner. Can be dangerous as ―bad‖ directors remain in
control… DIP is the result!
Effect on Directors

85. 85
Rights of Creditors
 Section 145
 Creditors entitled to –
 notice of each court proceeding, decision, meeting or other
relevant event
 participate in every court proceeding arising from business
rescue
 formally participate in company‘s business rescue proceedings
 informally participate in the proceedings by making proposals
for a plan to the practitioner
 the right to vote to amend, approve or reject a plan and, if
the plan is rejected, to propose the development of an
alternative plan or present an offer to acquire the interests of
any or all of the other creditors in terms of section 153

86. 86
Rights of Creditors
 Form a creditors‘ committee and through that committee to
be consulted by the practitioner on the development of a
plan
 Provisions relating to voting interests in section 145(4) are
as follows –
a secured or unsecured creditor (preferrent creditor) has
a voting interest equal to the value of the amount owed
to that creditor by the company; and
a concurrent creditor who would be subordinated in a
liquidation has a voting interest, as independently and
expertly appraised and valued at the request of the
practitioner, equal to the amount, if any, that the
creditor could reasonably expect to receive in such a
liquidation of the company
 Practitioner must determine whether creditors are
independent for purposes of the proceeding and request a
suitably independent person to independently and expertly
appraise and value an interest contemplated in section
145(4). Such valuation is subject to review together with a
re-valuation of the creditors‘ voting interest

87. 87
First Meeting of Creditors
 Section 147(1)
 Within 10 business days after being appointed, the
practitioner must convene and preside over a first
meeting of creditors, at which –
 the practitioner –
 must inform the creditors whether the practitioner believes
that 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 committee
of creditors should be appointed and, if so, may appoint
the members of the committee

88. 88
First Meeting of Creditors
 Practitioner must give notice of the first meeting of creditors to
every creditor of the company whose name and address is
known 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 meeting
contemplated in section 151, a decision supported by the
holders of a simple majority of the independent creditors‘
voting interests voted on a matter, is the decision of the
meeting 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 in
terms of section 131(5), must be ratified by the holders of the
majority of the independent creditor‘s voting interests
 The practitioner appointed by the company in terms of a
resolution does not have to be ratified at the first meeting of
creditors

89. 89
Employees
 Employees continued to be employed by company on same terms and
conditions 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 or
present 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

90. 90
Development and Approval of Plan
 Section 150
 Practitioner must prepare a plan after consulting with
creditors, other affected persons and management of
the company
 Plan must contain all information reasonably required by
affected persons to decide whether or not to accept or
reject plan

91. 91
 Plan divided into 3 parts
 Part A: Background (including list of assets, which assets are
secured, list of creditors indicating secured, statutory preferent
and concurrent in terms of laws of insolvency, probable
dividend should insolvency ensue, list of all holders of
companies securities, a copy of the written agreement
concerning the practitioner‘s remuneration, a statement
whether the plan includes a proposal made informally by a
creditor of the company)
 Part B: Proposals (including nature and duration of
moratorium, extent to which company is to be released from
payment of debts, the extent to which any debt is proposed to
be converted to equity in the company or another company,
the ongoing role of the company and the treatment of any
existing agreements, property of the company available to pay
creditors‘ claims in terms of the plan, the order of preference in
which the proceeds of the property will be applied to pay
creditors of the plan is adopted, the benefits of adopting the
plan as opposed to the benefits that would be received by
creditors of the company if the company were to be placed in
liquidation and the effect that the plan will have on the holders
of each class of the company‘s issued securities).
Development and Approval of Plan

92. 92
Development and Approval of Plan
 Part C: Assumptions and Conditions (including a
statement of the conditions that must be satisfied for
the plan to come into operation and be fully
implemented, effect on employees and their conditions
of employment, the circumstances in which the plan will
end and a projected balance sheet for the company and
a statement of income and expenses for the ensuing 3
years)
 All of the above to be prepared on the assumption that
the proposed business plan is adopted

93. 93
 Plan must conclude with a certificate by practitioner
stating that information provided appears to be
accurate, complete and up to date, and projections
provided are estimates made in good faith on the basis
of factual information and assumptions as set out in the
statement (if inaccurate certificate, practitioner may be
sued by liquidator or creditors for damages)
 Plan must be published by company within 25 business
days after date on which practitioner appointed, or such
longer time as may be allowed by -
the court, on application by the company; or
the holders of a majority of the creditors‘ voting interests
Business Rescue Plan

94. 94
Meeting to Determine Future of Company
 Section 151
 Within 10 business days after publishing a business rescue
plan -
 practitioner must convene and preside over a meeting of
creditors and any other holders of a voting interest, called for the
purpose 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 meeting
to 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 at
the meeting
 Meeting contemplated in this section may be adjourned from time
to time, as necessary or expedient, until a decision regarding the
company‘s future has been taken in accordance with sections 152
and 153

95. 95
Development and Approval of Plan
 Section 152(2)
 Plan approved on a preliminary basis if -
 75% of the creditors (all creditors – secured, unsecured) voting
interests that were voted (in value); and
 votes in support of the proposed plan included at least 50% of the
independent creditors‘ voting interests, if any, that were voted
(note: independent creditors are defined as creditors but who are
persons not related to the company, a director or the practitioner)
 Section 152(3)(a) - plan is not approved on a preliminary
basis, it is rejected and may only be considered further in
terms of section 153
 Section 152 (3)(b) – plan is approved on a preliminary basis
and the plan does not alter the rights of any class of the
company‘s securities, the plan is finally adopted subject to
any conditions upon which the plan is contingent

96. 96
Shareholders‟ Rights
 Section 152(3)(c)
 If the plan does alter (impairment) the rights of any class of
holders of the company's securities then –
 practitioner must call a meeting of the holders of the class
or classes of securities whose rights would be altered by
the plan and call for a vote by them to approve the
adoption of the proposed plan; and
 if, in a vote, (contemplated by (i)), a majority (51%) of
the voting rights that were exercised, support the plan, it
will have been finally adopted

97. 97
Failure to Adopt a Plan
 Section 153(1)
 If plan has been rejected as contemplated in section
152(3)(a) or (c)(ii)(bb), the practitioner may-
 seek a vote of approval from the holders of voting
interests to prepare and publish a revised plan; or
 advise the meeting that the company will apply to a
court to set aside the result of the vote by the
holders of voting interests or shareholders, as the
case may be, on the grounds that it was
inappropriate
 ―Inappropriate‖ – grounds are set out in section 153(7)

98. 98
Failure to Adopt a Plan
 Section 153(1)
 If the practitioner does not take any action contemplated in
paragraph (a) –
 any affected person present at the meeting may -
 call for a vote of approval from the holders of voting interests
requiring 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 of
voting interests or shareholders, as the case may be, on the grounds
that it was inappropriate; or
 any affected person, or combinations of affected persons,
may make a binding offer to purchase the voting
interests of one or more persons who opposed adoption
of the business rescue plan, at a value independently and
expertly determined, on the request of the practitioner,
to be a fair and reasonable estimate of the return to that
person, or those persons, if the company were to be
liquidated

99. 99
Failure to Adopt Plan
 ―Binding Offer‖ – if it is an ―offer‖, how can it be
binding without acceptance?
 ―Liquidation Value‖ – the ―break up value" that a
creditor would receive as a dividend on its claim upon
the liquidation of the company, taking all liquidation
costs 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 the
support of the holders of creditors‘ voting interests
(deals with secured, unsecured voting on value and
concurrent creditors subordinated in a liquidation voting
at a liquidation value)
 ―One or more persons‖ – is this limited to creditors only
or does it include shareholders/holders of securities?

100. 100
Failure to Adopt Plan
 Section 146(e) contemplates holders of company‘s
securities being able to make an offer to acquire the
interest of any or all the creditors or other holders of the
company‘s securities in the manner contemplated in
section 153
 Question: can creditors buy out dissenting shareholders
and vice-versa?
 Section 153(5) - if no person takes any action
contemplated in sub-section (1), the practitioner must
promptly file a notice of the termination of the business
rescue proceedings

101. 101
Failure to Adopt Plan
 Section 153(6) - holder of a voting interest, or a person
acquiring that interest in terms of a binding offer, may apply to
a court to review, re-appraise and re-value a determination by
an 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 a
business rescue plan be set aside if the court is satisfied that it
is reasonable and just to do so, having regard to -
 the interests represented by the person or persons who voted
against the proposed business rescue plan;
 the provision, if any, made in the proposed business rescue plan
with respect to the interests of that person or those persons; and
 a fair and reasonable estimate of the return to that person, or
those persons, if the company were to be liquidated

102. 102
Discharge of Debts and Claims
 Section 154
 A business rescue plan may provide that, if it is
implemented in accordance with its terms and conditions,
a creditor who has acceded to the discharge of the whole
or part of a debt owing to that creditor will lose the right
to enforce the relevant debt or part of it
 If a business rescue plan has been approved and
implemented in accordance with chapter 6, a creditor is
not entitled to enforce any debt owed by the company
immediately before the beginning of the business rescue
process, except to the extent provided for in the business
rescue plan
 Note – if underlying principle debt goes, so does the
suretyship obligation - for example against a director

103. Some Recent Statistics Provided by the
Companies and Intellectual Property
Commission (CIPC) (March 2013)
 Approximately 126 business rescue practitioners have
been appointed to supervise companies under business
rescue (interim conditional licenses)
 Have been approximately 840 companies (commencement
by resolution and by applications to court) placed under
business rescue since 1 May 2011
 64 rescues and 45 liquidations
 Success rate is 55% of businesses that have concluded
their rescue operations (CIPC believe the real rate is closer
to 12 – 15% taking into account pending business rescue
proceedings)
 Average turn-around time is 5.6 months
 Approximately 4 500 jobs have been saved as a result of
successful business rescue proceedings (25% of jobs were
lost)
103

105. COMPROMISES

106. Overview on Compromises
 Reflects what is common business practice in South Africa
 Used –
 to overcome the practical difficulty facing a company to obtain
the consent of every creditor to the settlement of their claims
 when creditors are in various places in a country and difficult
to access
 Provides a mechanism for an ―arrangement‖ or
―compromise‖ with shareholders or creditors
 “compromise” – usually between a company and its creditors
where there is a dispute about rights
 “arrangement” – usually between the company and its
shareholders
 Enables a company to avoid liquidation or business rescue
106

107. Overview on Compromises
 Common law compromises and statutory law
compromises
 Statutory law compromises -
Old Act - section 311 to 313 – provided the process
for compromises and arrangements between the
company and its shareholders or creditors
New Act – compromise between the company and its
creditors (section 155) and arrangement between
the company and its shareholders (section 114)
 Informal offers of compromise by a company and its
creditors
 Focus – statutory law compromises with creditors and
not arrangements with shareholders
107

108. Application of Section 155 of New Act
 Applies to a company, irrespective of whether or not it is
financially distressed unless it is engaged in business
rescue 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 in
the ensuing six months (cash flow test)
 ―Business Rescue‖ – proceedings to facilitate the
rehabilitation of a company so that –
it can continue to trade on a solvent basis; or
achieve a better return for the creditors or shareholders
of the company than would result from the immediate
liquidation of the company
108

109. Application of Section 155
 Issues to consider -
interesting that a company does NOT have to be
―financially distressed‖ in order to effect a section 155
compromise
cannot be done in a business rescue proceeding
opportunities to canvass creditors upfront and assess the
appetite for a section 155 compromise
if creditors and company on board, can put together a
―pre-packaged deal‖ (pre-pack) and negotiate to its
conclusion
can do a section 155 in a liquidation (preferably in
provisional liquidation)
109

110. Role Players in Compromise Process
COMPANY
CREDITORS‘
CLAIMS
BOARD
INITIATE THE
PROCEEDINGS
LIQUIDATOR
INITIATE THE
PROCEEDINGS
COURT
HEARING IN
TERMS OF
SECTION
155(7)

111. 111
Requirements
 Board or liquidator (if it is being wound up) may
propose an arrangement or a compromise of its
financial obligations to all of its creditors/members of
any class of its creditors
 Process is driven by the directors or a liquidator
 No longer necessary for a company to get court
approval to propose a compromise
 Third party creditor cannot propose the compromise and
cannot be party to the compromise to the exclusion of
the company and creditors ie creditor can propose a
section 155 compromise, but can only do so with the
co-operation and approval of the board
 Only deals with compromises with creditors. Section
114 deals with shareholders‘ schemes of arrangement

112. Requirements
 Board or liquidator will deliver the proposal, and notice
of meeting to consider the proposal, to -
every creditor or member of the relevant class of
creditors whose name or address is known to, or can
reasonably be obtained by, the company; and
the Companies and Intellectual Property Commission
(CIPC)
 Not necessary to call a meeting of a particular class of
creditors where there is only one creditor in that class
112

113. Proposal
 Proposal must contain all information reasonably
required to facilitate creditors in deciding whether or not
to accept or reject the proposal
 Divided into three parts
 Part A - Background - include at least -
a complete list - material assets as well as an
indication as to which assets are held as security by
creditors as of the date of the proposal;
a complete list - creditors at the date of the
proposal, as well as an indication as to which
creditors would qualify as secured, statutory
preferent and concurrent in terms of the laws of
insolvency, and an indication of which of the
creditors have proved their claims 113

114. Proposal
probable dividend that would be received by
creditors, in their specific classes, if the company
were to be liquidated (if the proposal is made as an
alternative to liquidation, a statement of the dividend
that creditors would receive with the proposal as
opposed to on a liquidation, should be included)
a complete list - the company‘s issued securities,
and the effect that the proposal would have on
them; and
whether the proposal includes a proposal made
informally by a creditor of the company
 Proposal should advise in its background whether the
proposal was made informally by a creditor of the
company
114

115. 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 the
payment of its debts, and the extent to which any debt is
proposed to be converted to equity in the company, or
another company;
 treatment of contracts and on-going role of the company;
 property of the company that is proposed to be available to
pay creditors‘ claims;
 order of preference in which the proceeds of property of the
company will be applied to pay creditors if the proposal is
adopted; and
 benefits of adopting the proposal versus the benefits that
would be received by creditors if the company were to be
placed in liquidation
115

116. Proposal
 Part C-Assumptions and conditions - include at least -
statement of the conditions that must be satisfied, if
any, for the proposal to -
come into operation; and
be fully implemented
effect that the plan contemplates on the number of
employees, 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 years
prepared on the assumption that the proposal is accepted
116

117. Proposal
 The projected balance sheet and statement -
must include a notice of any significant assumptions on
which the projections are based; and
may include alternative projections based on varying
assumptions and contingencies
 Proposal must conclude with a certificate by an
authorised director or prescribed officer of the company
stating that any -
factual information provided appears to be accurate,
complete, and up to the date; and
projections provided are estimates made in good faith on
the basis of factual information and assumptions as set out
in the statement
117

118. Adoption of Proposal
 Proposal will have been adopted by the creditors of the company, or
the members of a relevant class of creditors, if it is supported by –
 majority in number, representing at least 75% in value of the
creditors or class, as the case may be;
 present and voting in person or by proxy, at a meeting called for
that purpose
 Therefore, there are two requirements –
 a majority in number of creditors who are present or represented
by proxy and who vote on the proposal, irrespective of the value
of their claims, must support the proposal; and
 such majority must own or represent at least 75% of the total
value of all creditors‘ claims
 There is no minimum quorum requirement
 First requirement protects smaller creditors from larger creditors
pushing through a proposal to their detriment
118

119. Consequence of Adoption of Proposal
 Company may apply to the court for an order approving the
proposal (not peremptory)
 No longer obligatory to obtain the sanction of the court for a
compromise to become legally binding on all dissenting
creditors
 A court, on an application may sanction the compromise if it
considers 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 who
voted in favour of the proposal; and
in the case of a compromise in respect of a company being
wound up, the report of the Master of the High Court as
required in terms of the Old Act
119

120. 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 into
an order of court;
must be attached to each copy of the company‘s
memorandum of incorporation that is kept at the
company‘s registered office, or elsewhere as
contemplated in the New Act; and
is final and binding on all creditors or members of the
relevant class of creditors as of the date on which it is
filed
120

121. Compromises versus Business Rescue
121
COMPROMISES BUSINESS RESCUE
No requirement to be ―financially
distressed‖ to propose a
compromise
Must be ―financially distressed‖ to
apply for business rescue
No statutory moratorium
(although it can be included in the
proposal)
Statutory moratorium from the
date of the commencement of
business rescue
No appointment of the equivalent
to a ―business rescue practitioner‖
Business rescue practitioner
appointed in resolution or by the
court (and the latter sanctioned
at a creditors‘ meeting)
No requirement that the majority
in number of creditors who
approve the proposal must be
independent
Majority who approve a business
rescue plan must be independent
of the company
No provision which states that an
adopted proposal is binding on all
creditors – only once an order
sanctioning the compromise is
obtained
An adopted proposal is binding on
all creditors, whether or not they
voted

122. Similarities with Business Rescue
 Almost identical information in a business rescue plan
should also be contained in a compromise proposal
 Court will only sanction a scheme if it is ―just and
equitable‖ and a court will only grant a business rescue
order if, inter alia, it is ―just and equitable‖ to do so for
financial reasons
122

123. Take – Aways
 Fundamental starting point is to identify the opportunity – need to
have a distressed debt strategy!
 Need to identify key people who are the ―players‖ in the
distressed debt market and who can introduce the opportunity at
an early stage in the distressed debt cycle
 Key – identify the warning signals of looming financial distress
and act on them!
 Identify and work with business rescue practitioners who have a
proven track record in the business recue industry
 Must develop a skill set to identify the right opportunities and
know how to take advantage of these opportunities
 Appreciate the different opportunities offered by a Chapter 6
business rescue versus a Section 155 compromise
 Understand the business rescue process and how it can be used
to unlock value and the ―upside‖ – remember the Mine example!
123

124. QUESTIONS

125. THANK YOU
Eric Levenstein
April 2013
Nothing in this presentation should be construed as formal
legal advice from any lawyer or this firm. Readers are
advised to consult professional legal advisors for guidance
on legislation which may affect their businesses.
© 2011 Werksmans Incorporated trading as Werksmans
Attorneys. All rights reserved.