Category Archives: Business Rescue

THE MORATORIUM AGAINST LEGAL ACTIONS DURING BUSINESS RESCUE AND THE AMENDMENT OF BUSINESS RESCUE PLANS

The recent judgment in Booysen v Jonkheer Boerewynmakery (Pty) Limited and Another[1]  reminded us again that we would appear to have lost sight of the fact that business rescue was always intended to be a mechanism whereby companies experiencing financial distress should be afforded breathing space in order to restructure its affairs. The intention of the legislature was to ensure that businesses be rescued and being saved from liquidation as opposed to merely been liquidated by every dissatisfied and the recalcitrant creditor. The ability to stay legal proceedings against the entity while exploring restructuring options is vital for a successful business rescue regime.

The aim with the business recue provisions in Chapter 6 of the Companies Act 71 of 2008 (‘the Companies Act’) was surely that business rescue could only be achieved under circumstances where there is “peace and quiet” and circumstances under which the business rescue practitioner could go about this tasks unhindered and pursue the possibilities of restructuring the affairs of the company and finding common ground with creditors in order to arrive at a business rescue plan that balances the rights of all affected persons.

Section 133 of the Companies Act was in my view drafted to provide for a general moratorium on legal proceedings by creditors or other parties against the company under business rescue. It would however appear to have become common practice that unhappy creditors willy-nilly launch liquidation or legal proceedings against companies under business rescue without seeking the written consent of the practitioner and merely proceeds to request the court to grant it leaves to pursue with legal action.

This has not been without legal challenges, and in this regard the courts initially had differing views as to what ‘legal proceedings’ are[2] in certain instances and whether ‘arbitration’ or labour law issues are included. The matter was settled in the SCA[3] where it was held that on the basis that the phrase ‘legal proceeding’ may, depending on the context within which it is used, be interpreted restrictively, to mean court proceedings, or more broadly, to include proceedings before other tribunals, including arbitral tribunals.[4]

The SCA[5] also thereafter that where a right to cancel an agreement had accrued prior to the commencement of proceedings that the subsequent cancellation is not ‘enforcement action’.

The SCA also held that if cancellation is ‘enforcement action’, such steps would change the basic principles of the Law of Contracts, which provides for a unilateral act of cancellation in the case of a breach of contract.

It was held that the moratorium did not apply to proceedings for the ejectment of a company in business rescue from a premises where the lease regulating rights of occupation had been validly cancelled and the company had failed to vacate and was thus not in lawful possession of the property[6].

The Act provides that during business rescue proceedings no legal proceedings (including enforcement action) against a company may be “commenced or proceeded with” in any forum, except with the written consent of the business rescue practitioner[7] or with the leave of the court, in accordance with such terms as the court may deem “suitable”.[8]

This provision in the Act was the subject matter of conflicting decisions in certain judgments to date and which judgements were thoroughly analysed in the abovementioned Jonkheer judgment.[9] In Jonkheer, the court referred to the various conflicting judgments on the issue and the opposite views which have been expressed as to whether the provisions of the Act require a separate prior application[10] to be made for leave to commence or proceed with legal proceedings, or whether such leave may be sought in one and the same matter.[11]

In the further recent judgment of Arendse[12]  the court held that if “the legislature had intended to limit the grant of leave to ‘exceptional circumstances’[13], that test would have been expressly stated”. The court then held that it is “given wide powers not only to grant leave, but also to determine the terms on which such leave is granted”.

The Jonkheer judgment then also dealt with the vexing issue as to whether an adopted business rescue plan could be amended. I am of the opinion that, like any agreement or arrangement between parties, a business rescue plan may be amended by giving notice to the stakeholders or affected persons who initially adopted the business rescue plan.

In Jonkheer however the issue was whether there could be a unilateral amendment of business rescue plan by a practitioner.  It was contended buy the business rescue practitioner that the business rescue plan was subject to a proviso in terms of which the practitioner had reserved the right to amend that business rescue plan unilaterally, without reference to creditors

The court held that whole scheme of sections 150 and 153 of the Companies Act is that there is no room for a business rescue practitioner to reserve to himself the right to amend a business rescue plan and that this would circumvent the Companies Act in terms of which claims, which are to be discharged in terms of a rescue plan, derive their binding force.

I agree with this judgment insofar as the prohibition of the unilateral amendment of a business rescue plan by the practitioner is concerned but remain of the view that a business rescue plan may be amended by the same parties who adopted it, namely all creditors or affected persons.

By: Hans Klopper
Independent Advisory


[1]Booysen v Jonkheer Boerewynakery (Pty) Limited and Another (10999/16) [2016] ZAWCHC 192; [2017] 1 All SA 862 (WCC) (15 December 2016)

[2]Van Zyl v. Euodia Trust [Page 478(5)] (Edms) Bpk 1983 (3) SA 394 (T) at 397 as to mean: ‘…the ordinary meaning of legal proceedings in the context of s 13 [“regsgeding” in the signed Afrikaans version] is a law suit or “hofsaak”,’ a definition accepted in Lister Garment Corporation (Pty) Ltd v. Wallace NO 1992 (2) SA 722 (D) at 723; The test in the Van Zyl case supra was accepted in Chetty t/a Nationwide Electrical v. Hart NO and Another (12559/2012) [2014] ZAKZDHC 9 (25 March 2014).

[3] The Chetty (a quo) case, supra, was reversed on appeal in Chetty t/a Nationwide Electrical v Hart and Another NNO 2015 (6) SA 424 (SCA) .

[4]Delport PA and Vorster Q, Henochsberg on the Companies Act 71 of 2008.

[5] Cloete Murray and Another NNO v. FirstRand Bank Ltd t/a Wesbank 2015 (3) SA 438 (SCA).

[6]Kythera Court v Le Rendez-Vous Café CC 2016 (6) SA 63 (GJ)

[7]Section 133(1)(a) of the Act.

[8]Section 133(1)(b) of the Act.

[9]Booysen v Jonkheer Boerewynakery (Pty) Limited and Another (10999/16) [2016] ZAWCHC 192; [2017] 1 All SA 862 (WCC) (15 December 2016)

[10]Merchant West Working Capital Solutions (Pty) Ltd v Advanced Technologies (Pty) Ltd and Another, [2013] ZAGPJHC 109, decided on 10 May 2013; Redpath Mining SA (Pty) Ltd v Marsden NO and Others [2013] ZAGPJHC 148 decided on 14 June 2013; Msunduzi Municipality v Uphill Trading 14 (Pty) Ltd & Others [2014] ZAKZPHC 64 decided on 27 June 2014; Elias Mechanicos Building and Civil Engineering Contractors (Pty) Ltd v Stedone Developments (Pty) Ltd and Ors 2015 (4) SA 485 (KZD).

[11] Safari Thatching Lowveld CC v Misty Mountain Trading 2 (Pty) Ltd 2016 (3) SA 209 (GP).

[12] Arendse and Others v Van der Merwe and Another NNO 2016 (6) SA 56 (GJ)

[13] As was held in Redpath Mining SA (Pty) Ltd v Marsden NO and Others

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. (E&OE)

HOW TO RESCUE YOUR BUSINESS

Is your company experiencing financial strain? Are creditors breathing down your neck? Business Rescue proceedings may be a solution to your problems.

Business Rescue is an approach that is governed by the Companies Act 71 of 2008 (“the new Companies Act”) with the aim of assisting companies which are experiencing financial strain and are unable to pay their creditors in the ordinary course of business.

What is business rescue?

Section 128(1) (b) of the Companies Act defines Business Rescue proceedings as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing, inter alia, temporary supervision of a company under a Business Rescue practitioner.

The role of the Business Rescue practitioner (who must be appointed within 5 days after the company has been placed under Business Rescue) is to ensure that the company complies fully with the steps to be taken once Business Rescue proceedings have commenced. They must also ensure that everything reasonably possible is being done (including the drafting of a Business Rescue plan) to assist the company in getting out of its current state of financial strain and into a position where it will be able to pay its creditors in the ordinary course of business.

The new Companies Act stipulates that, in order to place a company under Business Rescue, a resolution must be taken by the Board of Directors and an application thereto must be made to the CIPC (Companies and Intellectual Property Commission). The Commissioner must then consider the application and approve or reject it. Alternatively, any interested or affected party may apply to the Court for a court order placing the company under Business Rescue.

A company that is under Business Rescue is protected from creditors in that no legal action or proceedings may be taken against a company that has commenced with Business Rescue proceedings.

It is imperative to note that a lack of full compliance with the requirements in respect of Business Rescue proceedings may render the Business Rescue proceedings null and void. This position was reiterated in the High Court case of Advanced Technologies & Engineering Company (Pty) Ltd v Aeronautique et Technologies Embarquees SAS (unreported CASE NO 72522/20110), and the Court further held that the new Companies Act does not provide for condonation of non-compliance with the requirements.

References:

Companies Act 71 of 2008

D Davis, W Geach, T Mongalo, D Butler, A Loubser, L Coetzee, D Burdette, 3rd Edition (2013) Commercial law: Companies and other Business Structures in South Africa.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

BUSINESS RESCUE SUCCESS

By Lebogang Mpakati

Independent Advisory (Pty) Limited

The aim of this document is to establish if Business Rescue can be described as successful or not in South Africa since promulgation.

What constitute success in terms of chapter 6 of Companies Act?

S128 (1b)(i)  define business rescue as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for – S128 (1b)(iii)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 the 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.

The first requirement of a successful restructuring is for the business to, in fact, emerge from the process as a going concern.  A further test is to assess the post-business rescue results of the entity as to its operating performance whether it continues to operate on a sustainable basis without being liquidated further down the line. This will constitute a successful restructuring of the business that emerges from business rescue.

Defining success in chapter 11 cases can be somewhat difficult. Success in chapter 11 is really a function of your perspective. A “successful” chapter 11 may be a success to a secured creditor and a disappointment to an unsecured creditor and a dismal failure to equity holders. (Thomas J. Salerno, Jordan A. Knoop and Craig D. Hansen)

With regards to the American Bankruptcy Institute publication, a critical difference between the 17% of successful non- “mega case” reorganisations and the 83% “might have beens” is the formulation of a well-defined exit strategy, i.e. what exactly does the company wants from the reorganization, and how, from a business perspective, does the company plan to achieve it? All and too often the company has only one desire from a bankruptcy filing: stop a pending foreclosure or other action by a creditor or group of creditors. This myopic analysis results in a reactive reorganization.

The most important determinant of a company’s likelihood of emerging successfully from these legislation, was the company’s size (measured by assets at the time of the bankruptcy petition – – see Hotchkiss (1993) and more recently by its ability to secure debtor-in possession financing (DIP) or post commencement finance (PCF) (Dahiya et al (2003).  Size and access to PCF are, not surprisingly, highly correlated.

In terms of S128 (1b)(iii) of Chapter 6, If it is not possible for the company to so continue in existence, the reorganization must result in a better return for the company’s creditors or shareholders than it would result from the immediate liquidation of the company. This option can be pursued as an alternative success outcome. However, this statement is not acceptable by many role players within the SA regime of business rescue as per the Business Enterprises at University of Pretoria (Pty) Ltd report prepared in March 2015 for CIPC.

In accordance with Business Enterprises at University of Pretoria (Pty) Ltd report prepared in March 2015 for CIPC it mentioned that from the substantial implementations filed (COR 125.3) the available figures refers to terminations only and appears to be 132/1398 = 9.4%. The statistics kept by the CIPC do not distinguish between the different options that are regarded as “success in business rescue” as it does not provide for recording the specifics for reorganization vs better return than in Liquidation (BRIL).

The Act further makes provision for another alternative if reorganization is not possible i.e. Section 155 – Compromise between the company and its creditors, Section 155. This alternative is not unique to Chapter 6 in South African context and can be found in similar legislation for Canada, UK and Australia.

Other options although not specified in the Act itself, it appears that the “spirit” of the Act provides for actions that are associated with the “benefit of the common” that includes business in general, economic growth and employment protection (section 7). Thus, alternatives such as business sales through mergers or acquisitions can be contemplated as successful outcomes as per the Business Enterprises at University of Pretoria (Pty) Ltd report prepared in March 2015 for CIPC.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

COMMENCEMENT OF BUSINESS RESCUE PROCEEDINGS

Is your company experiencing financial strain? Are creditors breathing down your neck? Business Rescue proceedings may be a solution to your problems.

Business Rescue is a new approach that is governed by the Companies Act 71 of 2008 (“the new Companies Act”) with the aim of assisting companies which are experiencing financial strain and are unable to pay their creditors in the ordinary course of business. This article will look at what Business Rescue encompasses, as well as how Business Rescue proceedings are commenced.

Section 128(1) (b) of the Companies Act defines Business Rescue proceedings as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing, inter alia, temporary supervision of a company under a Business Rescue practitioner.

The role of the Business Rescue practitioner (who must be appointed within 5 days after the company has been placed under Business Rescue) is to ensure that the company complies fully with the steps to be taken once Business Rescue proceedings have commenced. They must also ensure that everything reasonably possible is being done (including the drafting of a Business Rescue plan) to assist the company in getting out of its current state of financial strain and into a position where it will be able to pay its creditors in the ordinary course of business.

The new Companies Act stipulates that, in order to place a company under Business Rescue, a resolution must be taken by the Board of Directors and an application thereto must be made to the CIPC (Companies and Intellectual Property Commission). The Commissioner must then consider the application and approve or reject it. Alternatively, any interested or affected party may apply to the Court for a court order placing the company under Business Rescue.

A company that is under Business Rescue is protected from creditors in that no legal action or proceedings may be taken against a company that has commenced with Business Rescue proceedings.

It is imperative to note that a lack of full compliance with the requirements in respect of Business Rescue proceedings may render the Business Rescue proceedings null and void. This position was reiterated in the High Court case of Advanced Technologies & Engineering Company (Pty) Ltd v Aeronautique et Technologies Embarquees SAS (unreported CASE NO 72522/20110), and the Court further held that the new Companies Act does not provide for condonation of non-compliance with the requirements.

References:

  • Companies Act 71 of 2008
  • D Davis, W Geach, T Mongalo, D Butler, A Loubser, L Coetzee, D Burdette, 3rd Edition (2013) Commercial law: Companies and other Business Structures in South Africa.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. (E&OE)

LIABILITY OF SURETIES FOR DEBTS OF A COMPANY IN BUSINESS RESCUE

By Hillary Plaatjies

of Independent Advisory (Pty) Ltd

It is clear from case law and the applicable sections in the Act that the current legal position regarding the liability of sureties for the debts of a company in business rescue, is not settled.  There are different interpretations and views regarding this which are illustrated by the various court cases and contrasting judgements.

Scope of applicable law, legal principles and case law:

Section 133(2) of the Companies Act 71 of 2008 states that during business rescue proceedings, a surety by the company in favor of any person may not be enforced by any other person against the surety except with the leave of the court.  This have the effect that the company under business rescue may not be sued by the creditor.  The Companies Act (“the Act”) is not clear as to whether this protection afforded to the company under business rescue, is also applicable to sureties and co-principal debtors of the company and the question is whether the moratorium is applicable to the sureties.   Since the inception of the Companies Act, it has been left to the courts to determine the extent of the protection to which the sureties and co-principal debtors of the company is entitled to.

Section 155(9) of the Act states that a compromise with the creditors of the company, does not affect the liability of a person who is a surety of the company.   In Investec Bank v Andre Bruyns 2012(5) SA 430 (WCC), it was held that the moratorium and protection under Section 133(2) of the Act is a defence in personam for the company under business rescue and this protection does not extend to the sureties of the company.  This have the effect that a creditor can enforce payment of the debt against the surety during business rescue proceedings.  This can only apply where no business rescue plan has been approved yet because the company can be discharged of its debts at a later stage in terms of an approved business rescue plan.

In African Banking Corporation of Botswana Ltd v Kariba Furniture Manufacturers (Pty) Ltd & Others 2013 (6) SA 471 (GNP) the court held that the liability of sureties is not affected and they remain liable.  In DH Brothers Industries (Pty) Ltd v Gribnitz NO & Others 2014(1) SA 103 (KZP) it was held that if the plan provided for a discharge of the main debt and the creditor acceded to it, then the common law position will be applicable which would have the effect that the liability of the surety for the debt will no longer exist.

Section 154(2) of the Act states that where a business rescue plan has been approved and or the implemented in accordance with the Act, a creditor is not entitled to enforce any debt owed by the company prior to commencement of the business rescue proceedings, except to the extent provided for in the business rescue plan.

In the case of Tuning Fork (Pty) Ltd v Green and another 2014 JOL (WCC), it was held that unless otherwise stated in the business rescue plan, a creditor may not proceed against any person who signed as surety for the debtor company in business rescue after the adoption of the business rescue plan which provides for the discharge of the debt by agreement between the debtor company under business rescue and the creditor or release of such debtor company’s obligations to the creditor.  In the Tuning Fork case, it appears as if the judge held the view that where there is no statute dealing with this situation, the common law must be followed and under the general principals of suretyship, if a debtor has been released of his liability, the surety is also released from such liability.

The Act does not make provision for the situation where a business rescue plan have been adopted and what the effect is on the sureties of the company.  Where a compromise was entered into by the company, with its creditors, Section 154(2) of the Act is applicable which states that the liability of sureties is not affected.

In Blignaut v Stalcor (Pty) Ltd 2014 JDR 0349 (FB), the court held that it could not have been the intention of the legislature to also give sureties and co-principal debtors the same protection that it gives the company.

Section 154(1) of the Act provides that if business rescue plan is implemented in accordance with the terms and conditons, the creditor who has acceded to the discharge of the debt in whole or in part, will lose the right to enforce the relevant debt.

Conclusion:

The purpose of the Act includes inter alia to provide for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders”.   It was never the intention of the legislator, to extent the same protection to sureties that it provides to the principal debtor.   The legislator would have made provision in the Act for such protection to the sureties.  The purpose of the suretyship, is to ensure that the creditor receives payment in the event of failure to pay the debt by the principal debtor.  Suretyships is for the purpose of protecting the creditor and to ensure that the creditor can pursue his claim against the surety and co-principal debtor.

The liability of the surety is not affected by the business rescue of the principal debtor.  Creditors must ensure that a business rescue plan must make specific provision for the situation of the sureties and that the business rescue plan preserve claims against sureties.

Alternatively, guarantees from third parties for the principal debt or obligation must be obtained rather than to rely on the suretyships as the only form of security.  The claim against the surety must be preserved by stipulation in the business rescue plan, so that the principal debt is not discharged by way of release of the principal debt in a business rescue plan.  Specific inclusion of the preservation of this claim in the Business Rescue Plan is of utmost importance.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. (E&OE)

YOUR SPECIALIST ADVISORS IN TIMES OF GROWTH, CHANGE OR CRISIS

Leaders in Restructuring, Business Rescue and Corporate Recovery Services in South Africa

Economic and market conditions continue to pose both short- and long-term risks for even the most well-planned of businesses.

Our experienced restructuring and recovery team has been able to help save many financially distressed businesses utilising restructuring and business recovery strategies, guiding them through their financial crisis with understanding, integrity and professionalism.

Difficulties mastered are opportunities won.” ~ W Churchill

OUR SERVICES

 Whether a business is looking to redress under performance, enhance stakeholder value or resolve a crisis, our professionals have a proactive, innovative and entrepreneurial approach to problem solving. We provide positive and commercial solutions and advice for businesses in crisis and to funders of those businesses.

Our services cover the following areas:

  • Restructuring and Business Recovery
  • Corporate Finance
  • Business Rescue
  • Business Broking
  • Independent Business Reviews
  • Management  Support Services
  • Turnaround Management

WHY CHOOSE INDEPENDENT ADVISORY? 

  • Independent Advisory is a leading provider of corporate restructuring services in South All assignments are led from the top and supported by a talented team of consisting of nine practitioners and a national network of professional staff with collective experience of over 80 years operating throughout the country.
  • We strive to understand the perspective and requirements of each client, always providing an independent and objective approach towards achieving the right way forward for the business
  • We have demonstrable experience of cross-border corporate recovery assignments and our team has significant experience of operating in overseas
  • We can also call on assistance from professionals from multiple jurisdictions around the world through our membership of HWW Insolvency Cooperation Partners, enabling us to be at the forefront of the latest restructuring
  • Countries include Argentina (Beunos Aires) Austria (Vienna) Australia (Sydney) Brazil (Sao Paulo) Cayman Islands (Grand Cayman) Czech Republic (Prague) Eastern Europe, France (Paris)  Germany (Hamburg)  Great Britain (London)  Hungary (Budapest)  India (New Delhi)  Italy (Rome)  Mexico (Mexico City)  Netherlands (Amsterdam)  Poland (Warsaw)  Republic of China (Hong Kong)  Romania (Bucharest)  Russia (Moscow) Spain (Barcelona)  Sweden (Stockholm) Switzerland (Basel)  USA (New York)
  • We have acted for overseas funders and stakeholders as well as international companies with business activities and interests in South Africa and have hands-on experience of executing restructuring and re-organization activities across multiple

Independent Advisory has been involved and restructured a wide variety of matters over the entire spectrum of the economy and have provide services in the following industries:

  • Mining and Minerals
  • Agriculture
  • Automotive Industry
  • Retail
  • Financial Sector
  • Construction
  • Property
  • Film Industry
  • Manufacturing
  • Information Technology
  • Engineering

KEY CONTACTS

Directors of Independent Advisory

Directors of Independent Advisory

Senior Business Restructuring, Rescue and Reorganisation Specialists

Senior Business Restructuring, Rescue and Reorganisation Specialists

Business Rescue and Recovery Specialists

Business Rescue and Recovery Specialists

ABOUT INDEPENDENT ADVISORY

The firm has evolved since 1996 from a Corporate and Commercial law firm to being one of South Africa’s leading insolvency practices and recovery advisors.  The firm re-launched itself into the market in 2004 as Independent Advisory (Pty) Ltd with a national and international footprint and embodies a proudly South African ethos.  The directors, partners and employees are members of the South African Restructuring and Insolvency Practitioners Association as well as Insol International.  The managing director was a director of Insol International.  The optimum use of the latest technology ensures that communication and service to our clients are faster, effective and efficient.

Business Rescue procedure serves as a safety net which ensures that businesses in financial distress are able of being rescued or restructured.  We strife to build long lasting and mutually beneficial relationships with our clients by providing personalized professional services.

Stitch

A STITCH IN TIME

We look forward to working with you.

MAY THE SOUTH AFRICAN REVENUE SERVICES IMPOSE POST COMMENCEMENT CHARGES BECAUSE OF OUTSTANDING RETURNS UNDER BUSINESS RESCUE

By: Hans Klopper

It is trite law that SARS will be unable to contend that a claim, which arose in respect of activities of a company prior to the date of liquidation, but in respect of which returns were only submitted to SARS subsequent to the date of liquidation, must be dealt with by the liquidator as a cost of administration in the liquidation process and that SARS is under such circumstances released from the duty to prove its claim as it existed as at the date of concursus creditorum as provided for in terms of the Insolvency Act.

For SARS to contend, as they seem to be doing in on-going communication with business rescue practitioners, that they are a “super preferent creditor’ in terms of Section 135 of the Companies Act, 71 of 2008 (“the Act”) merely because returns were outstanding at the beginning of business rescue proceedings and thereby achieving a “higher status” than what they would ordinarily have received under the Laws of Insolvency is fallacious. We are of the view that, on the same basis that SARS cannot, upon the liquidation of a company, assert to have an entitlement to be treated as a cost of administration where returns have been submitted post the commencement of concursus creditorum, they can equally not content to be entitled to treated as a “post commencement cost” under business rescue.

The purposes of the Act are contained in, inter alia, Section 7(k) thereof. This sub-section provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders.

Before and during the enactment of the Act it was widely publicised  that the intention of the legislature was,  with the promulgation thereof, to ensure that businesses be rescued as opposed to prior to 2011, when companies in financial distress were merely liquidated. This led to unnecessary job losses. SARS’s attitude in developing a contrived (or artificial) interpretation as contained in your letter under reply would appear to fly in the face of what the legislature intended.

It is therefore fundamentally flawed to argue that claims against entities, already incurred as at the commencement date of business rescue proceeding, but at that stage unassessed, should now be treated as “super preferent” in terms of the provisions of section 135 of the Act. The simple reason for this has been dealt with above. We are of this view for the same reason as to why claims already incurred upon the arrival of concursus creditorum, but as yet unassessed at that date, would rank as a statutory preferent claim in terms of the Laws of Insolvency are not costs of administration in liquidation circumstances such claims cannot be “post commencement finance” under business rescue.

The provisions of Section 135 of the Act are furthermore clear insofar that the plain wording thereof contemplates the following to be incurred by the company (under the management of the BRP) during business rescue proceedings[1]:

  • the remuneration, reimbursement for expenses or any amount relating to employment due and payable to any employee during business rescue proceedings[2];
  • finance obtained[3];
  • payment of the BRP’s remuneration and expenses incurred under Section 143 of the Act;
  • other claims arising out of the cost of business rescue proceedings

These claims will be treated equally but will have preference over finance obtained as envisaged above[4]

Section 135 of the Act therefore provides that “post commencement finance” relate to expenses incurred and finance confirmed by the company [5]post the commencement of businesses rescue proceedings. SARS continuously express the view that the company is under the management control of the BRP and therefore it follows that the company, represented by the BRP, can thus only be liable for expenses and costs incurred at the BRP’s behest and duly authorised by the BRP after the commencement of proceedings.

In fact, nowhere does Section 135 suggest that the company, duly represented by the BRP, will become liable for post commencement finance as a consequence of a mere act or omission by the company prior to the commencement of proceedings.

For SARS to read into Section 135 that there could be an ‘automatic” imposing of post commencement funding upon by virtue of some event prior to the commencement of proceedings (over which the BRP had no control whatsoever) is most certainly fanciful. SARS ought to be aware and is hereby reminded that the High Court of South Africa found that SARS used an “artificial and strained interpretation” of certain provisions of Chapter 6 of the Act[6] insofar as that matter was concerned.

We furthermore submit that the clear intention of the legislature with the promulgation of the Act was to create a platform for a business under financial distress to make a fresh start. The post commencement finance provisions contained in Section 135 of the Act were introduced to provide for a mechanism to introduce new money to the business and not to burden the business with historic debt. If it was the intention of the legislature to retain old debt under section 135 it would have made it clear as appears from the following dictum by Fourie J:

I would have expected that, if it were the intention of the legislature to confer a preference on SARS in business rescue proceedings, it would have made such intention clear.”[7]

The purpose and nature of post commencement finance was extensively discussed and dealt with in a recent MBA dissertation[8]  by Wanya du Preez of Deloitte & Touche and the following passage appears therein[9] with reference to the United Nations Commission on International Trade Law (UNCITRAL) model Law that has been developed for cross-border insolvencies and rescue legislation. Post commencement or “post-petition” funding is described as follows:

“It is critical for the company in distress to have access to funds to be able to pay for crucial day to day costs. This funding may come from existing liquid assets of the company or incoming cash flow from operations. Alternatively this funding should be sourced from a third party through extended trade credit or loans. These financing needs should be established early to accommodate financing requirements post filing and post acceptance of the business plan (UNCITRAL, 2005).”  

In another article[10] by Wanya du Preez referred to above she summarised the purpose of PCF as follows:

“Therefore one of the critical components of the business rescue plan involves securing turnaround finance to meet short-term trade obligations (such as working capital requirements), covering turnaround/restructuring costs, and restoring the company’s balance sheet to solvency.”

In an article by Vatsal Gaur[11] a comparative study of post-petition regimes over various jurisdictions was conducted in respect of:

  • The United States of America – debtor in possession finance under Chapter 11 of the USA Bankruptcy Code;
  • The United Kingdom – under the Insolvency Act, 1986 and Enterprise Act 2002;
  • Canada- the Companies Creditors Arrangement Act (CCAA);
  • China- Enterprise Bankruptcy Law (2007); and
  • India – Indian Companies Act 1956.

It is clear from this article that, internationally, the funding in the nature of post commencement finance is “funding” in the nature of:

  • Finance;
  • goods delivered; or
  • services rendered

to the business under distress and no mention is made of a contrived “snatching” at an opportunity by the relevant country’s Revenue services to create a “post commencement preference” as SARS would appear to be trying to achieve in this matter.

It is furthermore stated in this article by Guar that it is “very common” (sic) in the USA for Chapter 11 debtors to seek post-petition financing, either from pre-petition lenders or from another source and that the “economic desirability of this debtor in possession financing is that it would inject absolutely new value into the distressed firm.”

In Canada, the need for post-petition financing stems from the inability of financially distressed companies to either obtain trade credit from existing suppliers or to raise fresh funds to finance after the filing under the CCAA.

What is therefore clear and which is consistent with the South African legislation, is that, internationally, the intention with post-petition funding is the introduction of new funds to the distressed business with view to procuring a turnaround and not whereby old, but as yet unassessed, debt is forced upon the post commencement period by way of an artificial mechanism.

By:  HANS KLOPPER ATTORNEY

MANAGING DIRECTOR AT INDEPENDENT ADVISORY

[1] As was confirmed in Merchant West Working Capital Solutions v Advanced Technologies And Engineering Company (Pty) Limited – Case No: 13/12406 – South Gauteng High Court (Johannesburg) Judgement by Kgomo J – 10 May 2013 : p 9-10

[2] Section 135(1) of the Act

[3] Section 135(2) of the Act

[4] Section 135(3)(a)(i) of the Act

[5]As was confirmed in Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 314

[6] See Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 314 – line 25

[7] Commissioner, South African Revenue Service V Beginsel No And Others 2013 (1) SA 307 (WCC) – at p 311 – paragraph 24

[8] By Wanya Du Preez  in a research project submitted to the Gordon Institute of Business Science, University of Pretoria, in partial fulfilment of the requirements for the degree of Masters of Business Administration named “ The status of post commencement finance for business rescue in South-Africa

[9] Du Preez – p 22

[10] “Post-commencement finance: The silver bullet of business rescue”

[11] Gaur, V. (2012). Post-petition financing in corporate insolvency proceedings. Issue I of Taxmann‘s SEBI & Corporate Laws Journal, Volume 111, 17-26.

Hans Klopper, Attorney and Managing Director at Independent Advisory.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

HOW GENERAL IS THE GENERAL MORATORIUM IN BUSINESS RESCUE

By: Danielle Koen and Thabile Fuhrmann

Since the inception of Chapter 6 of the Companies Act 71 of 2008, many creditors have become loathe of the word moratorium albeit the cornerstone of business rescue procedures. Section 133(1) of the Companies Act heralds the automatic and inevitable consequence of the commencement of business rescue proceedings, the general moratorium. The section sets out, with a number of exceptions that, during business rescue proceedings, no legal proceeding, including enforcement action, 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.

What we have come to understand about Section 133(1) is that it acts as a general moratorium or stay on legal proceedings or executions against the company, its property and its assets and, on the exercise of the rights of creditors of the company. This general moratorium, in principle, restricts legal proceedings against the company since such proceedings may have a detrimental effect on the outcome of the business rescue process. The stringency of the protection afforded to the company is however not a blank restriction against proceedings and can be relaxed by inter alia, (a) the written consent of the business rescue practitioner and (b) leave of the court.

The ambit of what is meant by legal proceedings and enforcement action was initially an uncertainty. A practical interpretation of the section clearly intends that enforcement action relates to formal proceedings ancillary to legal proceedings, such as the execution of court orders by means of writs of execution or attachment. These steps against the company cannot be initiated, and if they have already commenced, are frozen until the written consent of the business rescue practitioner or leave of the court has been obtained. A clear understanding of ‘enforcement action’ or legal proceedings relates to that which must be commenced or proceeded with in a forum, i.e. a court or tribunal. If this is what is understood by ‘enforcement action’ what then is left of a creditors contractual rights and obligations in terms of an agreement concluded between it and the company in rescue?

In a recent decision of the Supreme Court of Appeal, Cloete Murray NO & another v FirstRand Bank Ltd (20104/2014) [2015] ZASCA 39, the issue to be decided by the court was, whether once business rescue proceedings have commenced, the creditor of a company under business rescue can unilaterally cancel an existing agreement that it had concluded with the company prior to it being placed under business rescue.

Briefly set out, on 22 July 2010, FirstRand Bank Ltd t/a Wesbank, concluded a written Master Instalment Sale Agreement (the MISA) with Skyline Crane Hire (Pty) Ltd, in terms of which Wesbank sold and delivered movable goods to Skyline, with Wesbank retaining ownership in the goods until the purchase price had been paid in full. Skyline was voluntarily placed under business rescue on 30 May 2012 and by that date had fallen into arrears with its monthly payments to Wesbank. On this same date, Wesbank sent a letter to Skyline cancelling the MISA as a result of Skyline’s failure to make payment and reserved its right to repossess the goods, value and sell same and credit the relevant accounts. In any event, Wesbank sought and obtained the written consent of the business rescue practitioner to cancel the MISA. The business rescue proceedings were eventually discontinued and Skyline was placed in liquidation.

The liquidators of Skyline, the appellants in this instance, were of the view that in terms of Section 133(1), the cancellation of an agreement constitutes ‘enforcement action’ which requires the consent of the business rescue practitioner or the court. The court disagreed and found that if this interpretation was favoured, it would fundamentally change our law of contract which provides for unilateral cancellation in the case of a breach of contract.

Business rescue is intended to provide a company in distress with the necessary breathing space to enable it to restructure its affairs by placing a moratorium on legal proceedings and enforcement action but is not intended to interfere with the contractual rights and obligations of the parties to an agreement. This lends itself then to the concept that the general moratorium is a temporary one in respect of a creditor bringing claims against the company, rather than a greater restriction on a creditors’ rights. The decision of the Supreme Court of Appeal has therefore confirmed that the general moratorium is not as generally wide or far reaching so as to equate a creditor’s contractual right of cancellation to that of enforcement action and, that these concepts are in fact mutually exclusive.

Danielle Koen and Thabile Fuhrmann are attorneys at Cliffedekkerhofmeyer Attorneys at their Johannesburg Office

www.cliffedekkerhofmeyr.com

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

A BINDING OFFER AND A DISSENTING CREDITOR

by Hans Klopper, Independent Advisory

One of the cornerstones in any restructuring regime is to deal with uncooperative creditors in an effective manner, and to find an equitable mechanism to ensure that a rescue or reorganization plan is successfully implemented while there are objections to the plan. In the United States, under Chapter 11 of their Bankruptcy code a “cram down” allows the Bankruptcy Courts to impose conditions to ensure that all parties have a better return than what they would have had without such modifications.

This was undoubtedly also what the South African legislature had in mind with the provisions of s153 (1) (b) (ii) of the Companies Act 71 of 2008 (‘the Act”) (“the binding offer provisions”).

In the United States,[1] the term “cram down” originates from the notion that the proposed “haircut” or changes to a loan are “crammed down” creditors’ throats. Creditors can thus either renegotiate their position through a Chapter 11 reorganization, or lose everything through a liquidation process under Chapter 7 of the US Bankruptcy code.

In my view, the binding offer provisions under this Act were intended to be a mechanism to “force” a creditor who does not accept the proposals enclosed in a business rescue plan to be forced to participate and to be “crammed down”.

On 20 May 2015 the SCA handed down judgement in the matter of African Bank Corporation of Botswana v Kariba Furniture Manufacturers & Others (228/2014) [2015] ZASCA 69 (20 May 2015) and provided their interpretation on the meaning of the “binding offer provisions”. The conflicting judgements of the court a quo in the Kariba Matter and the DH Brothers Industries (Pty) Limited v Gribnitz NO 2014 (1) SA 417 (GNP) matter, now appear to have been settled. Have we seen the end of this matter?

Upon an initial reading of the latest Kariba judgement one would think that the ability of affected persons to purchase the voting interest of a dissenting creditor would henceforth be difficult, as a binding offer will only result in an enforceable contract once the creditor accepts the offer.

In my view however, it is inconceivable that the legislature intended that a binding offer to a dissenting creditor, at all relevant times, require the acceptance thereof. The reason for my view is to be found in a subsequent section of the Companies Act, more specifically s153 (6) of the Act.

It is provided in s153 (6) that the 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…” This raises the question as to why the legislature provided for this remedy to unlock a potential deadlock. If an offer first had to be accepted before a legally enforceable contract comes into existence, to purchase a voting interest, then it can be asked, why would it be necessary to approach the court if consensus was the order of the day and an agreement had to come into existence on every occasion? Was it not the intention that an unhappy holder of a voting interest who received and was bound by a “binding offer” has the remedy and option to approach a court to “review, re-appraise and re-value a determination by an independent expert”?

It would therefore appear that the door might still be open for affected parties to, in the event of a specific creditor dissenting upon being offered a return better than the immediate liquidation of the company; properly invoke the provisions of the aforesaid section. The first step in this process is to attend a proper independent and expert valuation of the underlying assets forming the subject matter of the proceeds likely to accrue to creditors upon liquidation. Secondly, having the financial means and ability to make an immediate payment in respect of the amount offered to the expert calculation of the liquidation dividend.

What would appear to have gone wrong in the Kariba matter was that the business rescue practitioner, in conjunction with affected persons merely, upon his published business rescue plan being rejected, indicated that the shareholders wished to make a binding offer to purchase the dissenting bank’s voting interest and himself ruled that it was not open for the bank to reject to the offer.

The SCA criticised the practitioner who appeared not to have provided sufficient financial detail to enable a valuation of the liquidation value of the bank’s voting interest to be ascertained, in his business rescue plan. The business rescue practitioner would also appear not to have provided any evidence by an independent valuation of the company’s assets but rather relied on his own valuation. The offer made was not accompanied by the demonstration of immediate funding being available to make payment in respect of the offer. Finally the offer did not present the creditor bank with an opportunity to, in the face of an expertly determined valuation of its voting interest and likely liquidation outcome, consider the offer in a business-like manner.

The Kariba judgement appears to have closed the door on affected persons who are aggrieved by a dissenting creditor’s refusal to accept an offer that forms part of a professionally proposed business rescue plan. However, I believe that in the event of a properly constituted binding offer made, the intention of the legislature and the success of our business rescue regime would be better served by a more lenient interpretation to the concept of a binding offer.

The criticism levelled at the practitioner in Kariba judgement and the successful appeal would appear to relate to an ill-conceived “offer” having been made without any substantiation and being accompanied by the wherewithal and demonstrated ability to make payment of the amount offered.

[1] Read more:

http://www.investopedia.com/terms/c/cramdown.asp#ixzz3b2mOx0od

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.

DRACONIAN UNDERSTATEMENT PENALTIES AND POTENTIAL PERSONAL LIABILITY FOR LIQUIDATION AND BUSINESS RESCUE PRACTITIONERS

by ANDRÉ VAN STADEN 

The impact of draconian ‘understatement penalties’ provided for in sections 222 and 223 of the Tax Administration Act No. 28 of 2011 (“TAA”) for non-compliance with the provisions of the Income Tax Act No. 58 of 1962 (“ITA”) and other fiscal statutes, is not always fully understood. For example, understatement penalties of 50% and 125% on the difference between ‘tax’ properly chargeable and the amount of ‘tax’ that would have been chargeable if the understatement were accepted, are imposed in cases involving failure to take reasonable care and gross negligence, respectively, in completing a return. The taxpayer or ‘representative taxpayer’ must pay the understatement penalty in addition to the tax payable for the relevant tax period. The adverse impact of non-compliance with fiscal statutes by liquidation and business rescue practitioners cannot be ignored in light of the SARS insistence on compliance, especially with the advent of the TAA. Ignore the SARS call to compliance at your own peril.

Section 153 (1) of the TAA defines a ‘representative taxpayer’ as the person who is responsible for paying the tax liability of another person as an agent, other than as a withholding agent, and includes a person who is a ‘representative taxpayer’ in terms of the ITA; is a ‘representative employer’ in terms of the Fourth Schedule to the ITA; or is a ‘representative vendor’ in terms of section 46 of the Value-Added Tax Act No. 89 of 1991 (“VAT Act”). In terms of the ITA, this includes, in the event of a company being placed under business rescue in terms of Chapter 6 of the Companies Act, 2008, the business rescue practitioner and in respect of the income received by or accrued to an insolvent estate, the trustee or administrator of such insolvent estate. For VAT purposes, the ‘representative vendor’ is the natural person who resides in the Republic and is responsible for the duties imposed by the VAT Act in the case of any company which is placed under business rescue, or in liquidation, the business rescue practitioner or the liquidator thereof. The jury is still out in case of the ‘representative employer’ with judicial precedent expected in the near future.

Alarmingly, the personal liability provisions relating to ‘representative taxpayer/vendor’, find direct application to business rescue practitioners as well as liquidators – SARS will get its pound of flesh! A liquidator, or business rescue practitioner, for that matter, as ‘representative taxpayer/vendor’ of the company in liquidation or under business rescue, is personally liable for income tax or VAT payable in his or her representative capacity, if, while it remains unpaid the ‘representative taxpayer/vendor’ alienates, charges or disposes of amounts in respect of which the tax is chargeable; or disposes of or parts with funds or moneys, which are his or her possession or come to the ‘representative taxpayer/vendor’ after the tax is payable, if the tax could legally have been paid from or out of the funds or moneys (Section 155 of the TAA).

Moreover, a person is personally liable for any outstanding tax debt of the taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay the tax debt if the person controls or is regularly involved in the management of the overall financial affairs of a taxpayer; and a senior SARS official is satisfied that the person is or was negligent or fraudulent in respect of the payment of the tax debts of the taxpayer (Section 180 of the TAA).

If a person knowingly assists in dissipating a taxpayer’s assets in order to obstruct the collection of a tax debt of the taxpayer, the person is jointly and severally liable with the taxpayer for the tax debt to the extent that the person’s assistance reduces the assets available to pay the taxpayer’s tax debt (Section 183 of the TAA).

The TAA also deals with the trustees obligations to maintain and preserve records. The trustee or executor is required to maintain and preserve the records of the estate in the form and manner required by section 55 of the VAT Act and sections 29 and 30 of the Tax Administration Act 28 of 2011 (“TAA”).

Generally, all records have to be maintained and preserved for a period of at least five years from the date the relevant return was submitted. This would be the case irrespective of whether the Master granted permission to the trustee or executor of a VAT registered estate to destroy the records within a shorter period.

ANDRÉ VAN STADEN
Proc. LLM (Tax Law) Adv. Cert. Tax, H. Dip. International Tax, MTP (SA)  TEL 27 11 803 6897 | FAX 0866 376 258

SAIT Member Number: 10863209

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.