Business Rescue - SAIPA · Business Rescue Seminar - MAY 2017 16. Business Choice Liquidation is an...

Business RescueSeminar – May 2017

Compiled by:

Kneale Caine, Achmad Joseph & Rashied Small

Financial Status Continuum

Going concern

Financial distress

Bankruptcy

Business Rescue Seminar - MAY 2017 2

Accounting Policies - Extract

These financial statements have been prepared in accordance with the International Financial Reporting Standards for SME’s. The financial statements have been prepared under the historical cost convention (assumption of measurement based on the

going concern).


Going Concern


Going ConcernUnder the going concern assumption, an entity is ordinarily viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations.


Management’s responsibility but the Professional Accountant must:• Review management’s plans for future actions based

on its going concern assessment;• Gather sufficient appropriate evidence to confirm or

dispel whether or not a material uncertainty exist about the going concern of the organisation; and

• Seek written representations from management regarding its plans for future action

Going Concern - Indicators

Maturing of debts

Financial support

Defaulting loan conditions

Loss of market share, major

suppliers

Non-compliance to regulations


Liquidity & Solvency

Financial distress: is a term in corporate finance used to indicate a condition when obligations to creditors of a company are broken or honoured with difficulty. If financial distress cannot be relieved, it can lead to bankruptcy.

Factual (Technical) Insolvency: the liabilities of the organisation exceeds its assets (balance sheet test – ability to meet obligations from resources)

Commercial Insolvency: the organisation cannot pay its debts as and when they fall due (cash flow test – resources to meet financial obligations)


Financial Distress – Financial Overview

Financial statement review:

• Statement of Cash flow:• Trends in Cash & Cash equivalent• Trends in Cash generated from operations• Trends in Cash flows from financing activities

• Statement of Financial Position• Trends in Receivables and Payables• Trends in Inventory• Trends in Non-current liabilities• Trends in Capital Structure• Trends in Non-current assets



Financial statement review: continue

• Statement of Financial Performance:

• Trends in Revenue

• Trends in Repairs & Maintenance

• Trends in Finance Costs

• Trends in Profit

Review of accounting records:

• Trends in debtors age analysis

• Trends in creditors age analysis

• Trends in adjusting or correcting entries



Year 3 Year 2 Year 1

Movement in cash & cash equivalent (112,000) 38,000 156,000

Balance of cash & cash equivalent at beginning 239,000 201,000 45,000

Balance of cash & cash equivalent at end 127,000 239,000 201,000


Movement in cash for the period has declined consistently and significantly over the past three years – indication that the business may be facing difficulties in meet its financial obligations when they are due.The cash balance at the end of the period has declined over the three years which indicate that the organisation is “eating” into its cash reserves – indication that the bottom may be falling out the cash reserve pot.

Financial Distress – Financial OverviewYear 3 Year 2 Year 1

Cash received from customers 1,000,000 1,200,000 980,000

Cash paid to suppliers and employees (940,000) (1,090,000) (750,000)

Cash generated from operations 60,000 110,000 230,000


Cash received from customers fluctuated, but declined during the current year indicating the organisation may be facing challenges in collective its cash or that the credit terms to customers have been extended giving rise to cash flow difficulties.Cash paid to suppliers and employees also fluctuated but the increase is higher than the cash received from customers, this is an indication that creditors are requesting payment earlier.The cash generated from operations declined continuously over the three years indicating that the organisation is encountering working capital challenges.


Cash received from customers 1,000,000 1,200,000 980,000

Cash paid to suppliers and employees (940,000) (1,090,000) (750,000)

Cash generated from operations 60,000 110,000 230,000


Cash received from customers fluctuated, but declined during the current year indicating the organisation may be facing challenges in collective its cash or that the credit terms to customers have been extended giving rise to cash flow difficulties.Cash paid to suppliers and employees also fluctuated but the increase is higher than the cash received from customers, this is an indication that creditors demand payment earlier.The cash generated from operations declined continuously over the three years indicating that the organisation is encountering working capital challenges.


Inventory 290,000 400,000 450,000

Trade receivables 1,490,000 1,270,000 850,000

Trade payables 480,000 630,000 760,000


Inventory decreased continuously over the three years indicating that the organisation may be facing challenges in obtaining credit from suppliers – using cash to finance inventory.Receivables are increasing exponentially over the three years indicating that the growth may be due to extension of credit terms or that the organisation is facing difficulties in collecting its cash.Payables decreased continuously over the three years indication that suppliers are less willing to grant credit to the organisation – decrease in short-term financing of operations.



Year 3 Year 2 Year 1

Revenue 23 000 000 27 800 000 21 900 000

Cost of goods sold 14 950 000 16 680 000 13 140 000

Inventory 340 000 480 000 430 000

Trade receivables 1 540 000 1 100 000 870 000

Other receivables 40 000 60 000 50 000

Cash & cash equivalent 35 600 167 800 202 100

Trade payables 560 000 870 000 960 000

Other payables 160 000 80 000 50 000



Year 3 Year 2 Year 1Current ratio 2,7 1,9 1,5Acid test ratio 2,2 1,4 1,1Cash ratio 0,05 0,18 0,20Inventory holding period (days) 8 11 12Debtors’ collection period (days) 24 14 15Creditors’ repayment period 14 19 27Debtors to revenue ratio 7% 4% 4%Creditors to purchases(inventory) 165% 181% 223%

Legislative Regulations

Legislative regulations

Chapter Six of Companies Act

[No. 71 of 2008]

Companies Amendments Act

[No. 3 of 2011]

Regulation published

[26 April 2011]


Business Choice

Liquidation is an event that usually occurs when a company is insolvent, meaning it

cannot pay its obligations as and when they come due. The company's operations are

brought to an end, and its assets are divided up among creditors and shareholders,

according to the priority of their claims.

“Business rescue, as defined by the Companies Act 2008, aims to facilitate the

rehabilitation of a company that is "financially distressed" by providing for: the temporary supervision of the company and

management of its affairs, business and property by a business rescue practitioner, a

temporary moratorium ("stay")


Liquidation versus Business Rescue• If liquidation has already commenced, an application to court for business rescue will

suspend the liquidation proceedings until the court has adjudicated on the application or when business rescue proceedings end when the court grants an order applied for -s131(6)).

• Court may grant an order placing a company under business rescue at any time during the course of any liquidation proceedings or proceedings to enforce any security against the company - s131(7))

• If business rescue proceedings have commenced by way of an application to court, the organisation may not adopt a resolution for its liquidation until business rescue proceedings have terminated – notification to all affected persons within five business days of the date of the order - s131(8)


Business Rescue - ConditionsBusiness rescue provides for the efficient rescue and recovery of financially distressed organisations in a manner that balances the rights and interests of all relevant stakeholders - s7(k)

Welman vs Marcelle Props (South Gauteng High Court)

“Business rescue are neither for terminally-ill nor chronically-ill close corporations. They are for ailing corporations, which given time will be rescued and become solvent.

At first sight of financial distress an organisation should apply for business rescue. Once an organisation is more than “financially distressed”, options other than business rescue become more attractive such as liquidation.


Business Rescue - Conditions

Assessment

Organisation is in financial distress

[s128(2)(f)]

Business rescue

Liquidation


Factual insolvency –

next 6 months

Commercial insolvency –

next 6 months

Business Rescue – Purpose & ObjectiveBusiness rescue objectives:

• maximise the likelihood the company continuing in existence on a solvent basis.

• result in better returns for creditors or shareholders than on liquidated

Business rescue purpose

• avoiding liquidations (not postponement)

• avoiding and job losses

• providing protection against creditors from filing for liquidation or legal action

• providing an opportunity to re-organise and restructure distressed organization to ensure better the returns for all affected parties


Business Rescue – Concept & Overview

Temporary supervision

Moratorium

Rescue Plan


the temporary supervision of the company, and of the management of its affairs, business and property;

develop and implement a rescue plan by restructuring its affairs and business - maximize likelihood of continuing in existence on a solvent basis

a temporary moratorium on the rights of claimants against the company or in respect of property in its possession

Business Rescue - Evaluation

Business rescue

analysis

Financial due

diligence

Technical due

diligence

Operating due

diligence

Business feasibility

Financial feasibility


Financial Due Diligence 1. Financial indicators

• Regular and continuous trading losses• Unsustainable business model or lack of understanding the business model• Negative ratios – working capital, liquidity & solvency• Negative cash flow from operations• Continuous failure to meet SARS obligations• Default in meeting debt obligations• Artificial valuation of assets• Factoring of debtors – using factoring as a source of financing• Decline in the terms with suppliers – COD• Increase in the receipt of letters of demand• Continuous injection of cash by shareholders• Financing working capital by long-term debt• Changes in working conditions – short-time or unpaid leave• Industrial and labour action against business


Financial Due Diligence

2. Financial statement analysis

• Ratio and trend analysis

• Liquidity and solvency tests

• Working capital and cash management analysis

3. Information risk

• Intentional misstatement of information by staff and management – fraud

• Information is not presented timeous – cannot highlight problems efficiently

• Inadequate explanations for variances - failure to meet budgetary targets


Technical Due Diligence

1. Inability to adapt to changing environment

• Declining revenue – loss of market share and customer base

• Slow growth rate in relation to inflation rate – no real growth

• Continued declining trends in sales activities

• Significant losses resulting from exchange rate fluctuations

3. Loss of key staff

• Lack of succession planning for key staff

• Reliance on key staff – loss of expertise


Operating Due Diligence 1. Ineffective leadership

• Lack of vision – not being proactive• Inability to make timeous decisions – delay difficult decisions• Lack of communication with executive staff• Breakdown of trust and communication between directors and management• Dominance of the board by a single individual

2. Incompetence of management• Lack of understanding the importance & impact of financial information• Lack of financial management competence – failure to meet financial obligations• Poor cash management competence – operating under insolvent conditions• Lack of human resource management competence – high staff turnover• Lack of risk management focus – ignoring control weaknesses• Lack of operational competence - major or unexpected losses• Lack of debtors management strategies – high risk of collectability• Lack of financial reporting risk strategies


Operating Due Diligence

3. Non-compliance to regulations

• Lack of corporate governance policies and strategies – business ethics and values

• Significant and continuous recognition of contingent liabilities

• Unsatisfactory external reports – qualified audit/review report

• Lack of disaster risk management strategy

• Lack of legislative awareness – do not foresee changes in regulations

4. Breakdown in stakeholder relationships

• Lack of stakeholder relationship strategy – proactive in servicing relationships

• Lack of understanding success factors of relations – monitor and maintain contact

• Lack of strategy to maintain relationships with financiers

• Lack of monitoring and managing debt obligations

• Lack of financial risk management


Liquidity and Solvency TestsOutline in Section 4 of the Companies Act

• A company will satisfy the Solvency & Liquidity Test if• Considering all reasonably foreseeable financial circumstances - forecasting and

projections may be required

• Factual solvency: Assets is equal to or exceed the liabilities of the company – based on the fair values(a) liquidity test – current assets versus current liabilities(b) solvency test – total assets versus total liabilities

• Commercial solvency: Organisation will be able to pay its debts as they become due in the ordinary course of business for the next 12 months – consider the cash position of the organisation(a) working capital test – operating risk (b) operation cash cycle – cash management risk test


Financial distress, Liquidity and Solvency Tests

• Financially distressed:• either factually or commercial insolvent

• whether or not the company will be factually or commercially insolvent in the immediately ensuing six months

• Solvent and liquid:• satisfies both factual and commercial solvency


Business Rescue – Voluntary Proceedings• File Form CoR123.1 with CIPC

• accompanied by the resolution of the board of directors resolving:(a) to commence business rescue (b) appointment of a certain person as the practitioner(c) statement setting out the facts upon which the resolution was founded

• Thereafter, the company must comply with a number of notice and publication requirements prescribed by the Act.

• In pursuant to the passing of a board resolution for business rescue, the company must – s129(3) & (4):• within five business days of filing the Form CoR123.1, the resolution and statement, with

the CIPC • publish a notice of the resolution, together with the sworn statement setting out the

reasons why the organisation is financially distressed, detailing the prospects of rescue to all affected persons

• appoint a practitioner


Business Rescue – Voluntary Proceedings• After appointing a practitioner:

• file a notice of the appointment of the practitioner within two business days with the CIPC

• publish a notice of the appointment of the practitioner to affected persons within five business days after the notice is filed.

• If a company fails to comply with the provisions of sections 129(3) and (4):• resolution lapses and is a nullity and the organisation may not file a further resolution for a

period of three months after the date on which the resolution was adopted• unless a court, on good cause shown, approves of the company filing a further resolution -

s129(5)(b)

• Affected person can make application to court to set aside the resolution on the grounds that the organisation has failed to satisfy the procedural requirements -s130(1)(a)(iii)


Business Rescue – Opposing ProceedingsAffected person may apply to court for an order – s130

• setting aside the resolution on the grounds that:• there is no reasonable basis for believing that the organisation is financially distressed

• there is no reasonable prospect for rescuing the organisation

• the organisation failed to satisfy the procedural requirements in s129

• setting aside the appointment of the practitioner on the grounds:• does not satisfy the requirements of s138

• is not independent of the organisation or its management

• lacks the necessary skills, having regard to the organisation’s circumstances


Business Rescue – Opposing Proceedings• requiring the practitioner to provide security:

• in an amount and on terms and conditions that the court considers necessary

• to secure the interests organisation and any affected person

• director that votes in favour of a resolution may not apply to court to set aside the resolution or the appointment of the practitioner unless:• such person can satisfy the court that he acted in good faith on the basis of information

that has since been found to be false or misleading - s130(2)

• Each affected person has a right to participate in a hearing contemplated by this section (s130(47).


Business Rescue Practitioner - Qualification

Qualifications as per s138(1):

• member in good standing of a Professional Organisation that is subject to regulation by a regulatory authority

• has been licensed as such by the Commission

• Disqualified:

• is not subject to an order of probation in terms of Section 162(7) - delinquent director

• from acting as a director in terms of Section 69(8) - delinquent director, unrehabilitatedinsolvent, removed from office on grounds of misconduct involving dishonesty, has been convicted of an offence for, inter alia, theft, fraud, forgery and perjury

• Independence and relationship:

• does not have any other relationship with the organisation that comprises the integrity, impartiality or objectivity of that person – perceived independence;

• is not related to a person who has a relationship contemplated above


Business rescue Practitioner - Appointment• Board

• within five business days after the adoption and filing of the resolution - s129(3)

• Court – appoint an alternate practitioner

• application brought by an affected person to set aside the appointment by board

• appoint an alternate practitioner recommended by or acceptable to the holders of a majority of the independent creditors voting interests - s130(6)

• Court – appoint and interim practitioner

• on application to it by an affected person to place the organisation under business rescue

• appointing an interim practitioner who is qualified and nominated by the affected person

• appointment is subject to ratification by the creditors at the first meeting - s131(5)

• Board or affected person who nominated the practitioner – replacement

• appoint a new practitioner if a practitioner dies, resigns or is removed from office

• subject to the right of an affected person to object to the appointment and set aside that new appointment - s139(3)


Business rescue Practitioner - Appointment


Type of appointment Criteria and responsiblities

Senior practitioner • actively engaged in business rescue / turnaround practice for a minimum of 10 years

• medium organisations (PI score of 100 to 500) • large organisations (PI score of 500 or more).

Experience practitioner • actively engaged in business rescue / turnaround minimum of five years

• small organisation (PI score of less than 100) • medium organisation (PI score between of 100 to 500)

Junior practitioner • has not previously engaged in business rescue / turnaround • has actively engaged in business rescue / turnaround for a period

of less than five years• small companies (PI score of less than 100) • assistant to an experienced or senior practitioner.

Business rescue Practitioner - Appointment

Restriction on appointment - s138(1)(e)

• “does not have any other relationship with the organisation such as would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that person is compromised by that relationship”.

• removal of a if he is either not independent of the organisation or its management or has a conflict of interest or lack of independence – s130(1)(b)

• limitation with respect to prior engagement:• practitioner will not by virtue of his prior engagement with creditors or shareholders, be

held to lack independence - some “other relationship” will need to exist

• practitioner should engage with the creditors and shareholders before taking appointment - ensure there is a reasonable prospect the organisation can be rescued


Role of Business Rescue Practitioner• Immediately after appointment - investigation of affairs of company - s141(2)

• decide if there is any prospect of rescuing the company • if not, inform court and apply for termination of proceedings and commence liquidation

• During the business rescue – report to board, court or affected parties:

• no reasonable prospect of organisation being rescued• no longer reasonable grounds to believe the organisation is financially distressed• evidence in the dealings of the company before the commencement of business rescue:

• voidable transactions or a failure by the company or any director to perform any material obligation

(a) direct management to take steps to rectify the problem• reckless trading, fraud or other contravention of any law

(a) forward the evidence to the appropriate authority for further investigation and possible prosecution

(b) direct the management to take any necessary steps to rectify the matter -including recovering any misappropriated assets


Powers of the Business Rescue PractitionerPowers of the practitioner - s140:

• full management and control over the affairs and business of the organisation:• may delegate certain functions to directors or pre- existing management

• power to:

• remove pre-existing management from office

• appoint an independent person as part of management(a) does not have any other relationship with the company

(b) compromise the integrity, impartiality or objectivity of that person by that relationship

(c) is related to a person who has such a relationship

(d) may require approval of the court for an appointment.


Business Rescue Practitioner - Liabilities

Liabilities of the practitioner - s140(3)

• as an officer of the court and is obligated to report to the court in accordance with any applicable rules or orders;

• has responsibilities, duties and liabilities which are incumbent on directors (s75 – 77)

• not liable for any act or omission performed in good faith in the course of the exercise of the powers and during the performance of his functions

• may be held liable in terms of any law for any act or omission that amounts to gross negligence


Business Rescue – Affected Parties

Affected parties

Creditor

Equity holder

Employee & trade unions

Directors

Management

Other interested

parties


Business Rescue – Effect on Directors• Position of directors:

• remain the directors

• their powers and duties are constricted as practitioner has full management control over the organisation in substitution for the board management - s137

• Responsibilities of directors:

• continue to exercise the functions of a director, subject to the authority of the practitioner;

• exercise any management function in accordance with the express instructions or direction of the practitioner - reasonable

• remain bound by the requirements concerning the personal financial interests of the directors or related persons

• relieved from the duties of a director (standards conduct), and the incurrence of personal liability – s76 and s77

• Actions of directors that requires the approval of the practitioner is void unless it is approval is obtained – s137(4)


Business Rescue – Directors’ Liability• Directors are liable for any losses, damages or costs incurred sustained as a direct or idirect

consequence of:

• acquiesced in carrying on the business despite knowing it was conducted in a reckless manner – prohibited by s 22(1)

• Been party to any act or omission despite knowing that it was calculated to defraud a creditor, employee or shareholder or had a fraudulent purpose

• trading the organisation when it is insolvent

• allow a creditor to sue the organisation or the directors for damages

• Directors are jointly and severally liable

• to pay costs of all parties in court proceedings unless the proceedings are abandoned or exculpate that person

• to restore to the organisation any amount improperly paid as a consequence of the impunged act and not recoverable in terms of the Companies Act


Business Rescue – Effect on Directors• Co-operate with, assist and attend to the requests of the practitioner at all times and to provide

any information about the organisation’s affairs as may be reasonably required - s142

• Deliver all books and records and a statement of affairs containing certain information as prescribed - s142

• May apply to court for an order to remove a director from his office if the director has – s137(5)

• failed to comply with the duties imposed on him by the provisions of chapter 6; or

• by an act or omission, has impeded, or is impeding,

(a) the practitioner in the performance of his powers and functions

(b) management of the company by the practitioner

(c) the development or implementation of the business rescue plan


Business Rescue – Effect on Shareholders• Shareholders do not have the right to – s137:

• attend the meeting held to consider the business rescue plan

• to vote on the business rescue plan

• except for any shareholder whose rights will be altered by the plan

• Alteration in the classification or status of any issued securities:• other than by way of a transfer of securities in the ordinary course of business is invalid

• except to the extent that the court, or the business rescue plan, directs otherwise


Business Rescue - Moratorium• Moratorium of creditor claims critical

• Moratorium of some kind is crucial for the success of business rescue

• Moratorium is an important tool for creating a breathing space to allow for the success of business rescue

• Bind dissenting creditors - avoids smaller creditors holding larger creditors to ransom

• Avoid minority creditors by holding the process to ransom for a better deal

• Majority of creditors required to make process workable

• Moratorium must ensure equitable treatment of creditors - informal agreement with creditors


Business Rescue – Effect on Creditors• Creditor is not entitled to enforce payment any debt - extent provided for in the plan

• Creditors will need to comply with their obligations to supply goods or services in the same manner in which they did prior to the business rescue proceedings unless:• agreement between with creditors regulates the relationship between the parties in the

event of an insolvency or business rescue.

• Unsecured creditors and lenders may be wary of continuing to service or supply goods on the same basis as their claims will be satisfied last in accordance with the order of preference - s135(3)(a)(ii)

• If obligations have been suspended, or cancelled by the court:• agreement regulating the relationship may be prescribed

• creditor will not perform its obligations if the practitioner

(a) has suspended the performance of the organisation’s obligations

(b) cancelled the agreement and the other party will have a claim for damages in terms of s136(3).


Business Rescue – Effect on EmployeesInterests of employees – s136

• Remain employed by the organisation

• Same terms and conditions on which they were employed prior to business rescue

• Except to the extent that • changes occur in the ordinary course of attrition • different terms and conditions are agreed with in accordance with labour laws.

• Recognised as preferred unsecured creditors with a voting interest - extent of unpaid remuneration and medical aid scheme payments

• Requiring consultation with them in the development of the business rescue plan

• Permitting them an opportunity to address creditors before a vote on the plan; and

• Any amendments of employment terms or retrenchments are subject to the Labour Relations Act


Business Rescue – Effect on ContractsObligations in terms of contracts - s136

• Practitioner will not have the power to cancel any provision of a contract, but may apply to court to entirely, partially or conditionally cancel any agreement on terms that are just and reasonable in the circumstances

• Practitioner may entirely, partially or conditionally suspend any obligation – s136(2) • for the duration of the business rescue• arises under an agreement to which the organisation was a party • that would otherwise become due during the business rescue proceedings• apply urgently to a court to entirely, partially or conditionally cancel, on any terms that are just

and reasonable in the circumstances• exception:

(a) employment contracts(b) agreements in terms of the Insolvency Act – s35A and s35B(c) agreement relating to security granted to a creditor, that provision continues to apply -

s134

• Party to a contract that has been partially or entirely suspended or cancelled may claim only damages from the company and not, for example, specific performance of the contract


Business Rescue – Effect on GuaranteesGuarantee or surety – s133(2)

• May not be enforced against the organisation except:• with the leave of the court • in accordance with any terms that the court considers to be just and equitable.

• Investec Bank Ltd v Bruyns 2011 JDR1563 (WCC) - Western Cape High Court:• prohibits a third party from enforcing a suretyship or guarantee provided by the

organisation• statutory moratorium does not automatically arise for the benefit of a surety provided in

favour of the organisation • statutory moratorium is a personal defence that arises for the benefit of the principal

debtor and not for the benefit of a surety

• The above apply provided that the principal obligation is not compromised

• If it is, the accessory obligation of the surety will fall away

• A guarantee on the other hand, which is generally independent of the principal obligation, remains in place


Business Rescue – Effect on Legal ProceedingsInstitution of legal proceedings against the organisation – s133

• Subjected to “statutory moratorium” or “stay” that arises from the moment that business rescue commence

• No legal proceedings (legal or arbitration proceedings), including enforcement action (execution of a court, or other, order) against the organisation or in relation to its property or in its possession

• Exceptions s133(a) to (f):• with the written consent of the practitioner;• with the leave of the court (and in accordance with any terms the court consider suitable);• as a set-off against any claim made by the organisation in any legal proceedings• criminal proceedings against the organisation or any of its directors or officers;• proceedings concerning any property or right over which the organisation exercises the

powers of a trustee• proceedings by a regulatory authority in the execution of its duties after written

notification to the practitioner


Business Rescue – Proof of Claims

• Claim need not be in the format as with liquidation - deposing to an affidavit

• Standard proof of claim forms have been used to submit claims to the practitioner• not necessary to file a formal affidavit

• statement detailing the claim together with supporting certificates of balance and documents is sufficient proof of the claim

• No specific time by when a claim should be submitted

• “Receive proof of claims by creditors” at the first meeting of creditors - s147(1)a)(ii)

• Practitioner would then either accept or reject such claims


Business Rescue – Preference of Claims• Claims of creditors rank in order of preference and will be paid out accordingly:

• practitioner’s remuneration, expenses and claims arising out of the costs of the business rescue - s135(1));

• remuneration, reimbursement for expenses or other amounts relating to employment, due and payable by to an employee (post-commencement finance);

• secured claims by post-commencement financiers, lenders or creditors in the order in which the claims were incurred - s135(3)(a)(i)

• unsecured claims by post-commencement financiers, lenders or creditors during business rescue in the order in which they were incurred - s135(3)(b)

• remuneration of employees which became due and payable before business rescue commenced

• unsecured claims of lenders or creditors before business rescue - s135(3)(a)(ii)

• Secured creditors retain their security and would benefit from the proceeds of the sale of such security or realisation of such security

• If business rescue proceedings are superseded by a liquidation order, preference conferred in terms of s135 will remain in force, except to the extent of any claims arising out of the costs of liquidation

• Liquidator’s fees and expenses will rank in priority to that of the practitioner’s fees - s135(4)


Business Rescue - Proceedings


Business Rescue – Process

Once business rescue proceedings commences the following actions are prescribed:

• the practitioner must investigate the affairs of the organisation - section 141

• within 10 business days after being appointed, practitioner must convene a meeting of creditors and employees and advise on the prospects of rescuing the organisation -s147 and s148

• the plan must be published within 25 business days after the date on which the practitioner was appointed - s150

• practitioner must convene within 10 business days of the publication of the plan a meeting of the creditors and any other holders of a voting interest for the purpose of considering the proposed plan - s151


Business Rescue – Commencement Business rescue proceedings commence – s132

• the organisation:

• files a resolution to place itself under supervision - s129

• applies to court for consent to file a resolution if a company fails to comply with the provisions of subsections (3) and (4) it must approach the court for leave to file another resolution if it wishes to do so within the three month restricted period -s129(5)(b)

• a person applies to court for an order placing the organisation under supervision -s131(1)

• a court makes an order placing the organisation under supervision during the course of liquidation proceedings or proceedings to enforce a security interest -s131(7)


Business Rescue - ProceedingsTwo main ways for instituting business rescue

• Voluntary business rescue:• the board of directors resolves by a simple majority to voluntarily commence with business

rescue and be placed under the supervision of a practitioner - s129

• Application by affected party:• affected person makes a formal application to court to place the organisation under

supervision and commencing business rescue - s131) on the basis that

(a) organisation is financially distressed

(b) organisation has failed to pay over any amount in terms of an obligation under or in terms of a public regulation, or contract, with respect to employment related matters

(c) it is otherwise just and equitable to do so for financial reasons

• There must also be a reasonable prospect of rescuing the organisation


Business Rescue – Paper Work• Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments

386 Ltd 2012 (2) SA423 (WCC) indicated the nature of the evidence:• there is a reasonable prospect that the organisation can be rescued unless:

(a) it addresses the cause of the demise or failure of the organisation’s business(b) offers a remedy therefor that has a reasonable prospect of being sustainable

• to ensure that an application for business rescue is successful• plan which is unlikely to achieve anything more than to prolong the inevitable liquidation is

unlikely to suffice• applicant must deal with “concrete and objectively ascertainable details in support of

business rescue and which facts are beyond mere speculation:(a) “the likely costs of rendering the company able to commence with its intended

business or to resume the conduct of its core business”(b) the availability of “cash resources” to enable the company to meet its daily expenses

and the nature of the funding on which the company will rel”(c) “the availability of any other necessary resources, such as raw materials and human

capital”(d) “the reasons why the proposed business rescue plan will have a reasonable

prospect of success”.


Business Rescue – Paper Work• Lack of above evidence, the court is unable to consider:

• prospects of the company continuing in existence on a solvent basis

• alternative aim of securing a better return for the creditors of the company than would arise from a liquidation.

• Court cases supporting the above:• Koen & Another v Wedgewood Village Golf & Country Estate (Pty) Ltd & Others 2012 (2) SA

378 (WCC)

• Swart v Beagles Run Investments 25 (Pty) Ltd & Others (four creditors intervening) 2011 (5) SA 422 (GNP)

• Kovacs Investments 571 (Pty) Ltd v Investec Bank Ltd & Another (unreported case no 25051/2011, 22 February 2012)

• Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 (Pty) Ltd in all business rescue applications is a matter that is debatable


Business Rescue – Paper WorkDocuments to be filed with CIPC

• In support of this (CoR 123.1) Notice, the company has attached a• sworn statement of the relevant facts upon which the resolution was founded by a director

representing the Board and• a copy of the resolution.

• In Support of CIPC Administrative process:• Letter from the distressed company on its letterhead in which they nominate a practitioner

with reasons for his nomination. No prior involvement with the company (not conflicted). CIPC will verify his or her application to make sure that the requirements of section 138 are met.

• Letter on the letterhead from the recommended practitioner in which he or she declares that he is not disqualified or has a conflict of interest

• Independent from the company• Sufficient capacity exists to undertake the project


Business Rescue – ConclusionBusiness rescue proceedings end – s132

• court sets aside the resolution or order that began the business rescue proceedings

• court converts business rescue proceedings into liquidation proceedings;

• practitioner files a notice (Form CoR125.2) of termination of business rescue proceedings with the CIPC

• the plan has been proposed and rejected and no affected person has acted to extend the proceedings in any manner

• the plan has been adopted and the practitioner has subsequently filed a notice of substantial implementation of the plan - Form CoR125.3


Business Rescue Practitioner - RemunerationRemuneration and expenses – prescribed by s143

• basic remuneration is determined at the time of the appointment and may not exceed:• R1,250 per hour (maximum of R15,625 per day) (inclusive of VAT) for a small company;• R1,500 per hour (maximum of R18,750 per day) (inclusive of VAT) for a medium company; or• R2,000 per hour (maximum of R25,000 per day) (inclusive of VAT) for a large company

• contingency agreement for further remuneration if:• the plan is adopted• it is adopted within a certain period of time • any particular result or combination of results is attained.• binding if it is approved by at a meeting called to consider the agreement:(a) the majority of creditors present and voting(b) the majority of equity shareholders - right to residual value winding-up (c) creditor voting against such an agreement may make application to court within ten business

days setting aside the proposed agreement (d) the agreement is not just and equitable or not reasonable having regard to the financial

circumstances of the company.

• reimbursed for the actual costs of any disbursements of expenses incurred to the extent reasonably necessary to carry out his functions


Business Rescue Plan - Objectives

Qualitative characteristics of Business Rescue Plan:

• provide information that facilitates effective and informed decision-making by the affected parties

• provide evidence that can be used affected parties to decide whether they should vote for or against the plan

• articulate the reasons for the organisation entering business rescue,

• plan for returning to health or offering a better return for creditors versus liquidation

• how the plan will be achieved and the impact thereof on each affected party


Business Rescue Plan – Legal StatusThe legal status of a business rescue plan [s152(4)]

• legal status - binding nature of the plan:

• "a business rescue plan that has been adopted is binding the company, and on each of the creditors of the company and every holder of the company's securities

• plan does not have the status of an order of court

• does have the force of law against those affected parties

• exceptions:

(a) creditor who did not receive notice of the meeting at which the plan has been adopted - right has been denied [s145(2)]

(b) is vulnerable to be declared a nullity at any time if the organisation fail to comply with any provision of the notice requirements – [s129]

(c) employees and trade unions are not bound by the plan, neither are debtors or customers [s152(4)]


Business Rescue Plan – Legal StatusThe legal status of a business rescue plan [s152(4)]

• public document

• recommended that the plan be made publically available – benefits:

(a) enhances transparency

(b) availability for interested and affected parties

(c) promotes the plan for potential funders - PCF and/or a buyer of the business

(d) disclosure the extent where sensitive information is removed from the plan


Business Rescue Plan - ContentBusiness Rescue Plan – s150 of Companies Act

• Background [s150(2)(a)]• set of financial statements • detailed list of all material assets – indicating those held as security by creditors• detailed list of the creditors - indicating the following:

(a) secured, preferred creditors (b) who have proved their claims(c) list of creditors who are related parties - affects voting s150(2)(d) creditor’s claim has been subordinated - affects voting s150(2)

• probable dividend that would be received by creditors if liquidation occurs – provide basis of dividend calculation

• detailed list of the holders issued securities - shareholders and each of their shareholdings• copy of the written agreement concerning the practitioner’s remuneration – consider s143 • statement whether the business rescue plan includes a proposal made informally by a

creditor of the company.


Business Rescue Plan - Content

• Proposal [s150(2)(b)]• nature and duration of any moratorium • debt compromise should state the following:

(a) extent to which the company is to be released from the payment of its debts(b) extent to which any debt is proposed to be converted to equity

• details of key contracts s136 – following should be provided:(a) ongoing role of the company(b) treatment of any existing agreements (c) plan of action – how they will be dealt with

• property that is to be available to pay creditors’ claims in terms of the plan• order of preference in which the proceeds of property will be applied to pay creditors• benefits (financial and non-financial) to affected parties of adopting the plan as opposed

liquidation• effect that the plan will have on the holders of each class issued securities.



• Assumptions and conditions [s150(2)(c)]• statement of the conditions that must be satisfied for the plan to:

(a) come into operation

(b) be fully implemented

• effect that the plan contemplates for employees

(a) number of employees

(b) terms and conditions of employment

• circumstances in which the plan will end

• projections for three years based on the assumptions of the plan:

(a) statement of financial position (balance sheet)

(b) statement of financial performance (income statement)


Business Rescue Plan - Content• Additional Information – Background

• company details:

(a) registered and trading names

(b) registration number

(c) registered address • group details:

(a) group structure

(b) relationships across the group• list of all directors

(a) their designations

(b) other directorships held by each director

(c) independence - neither employees, shareholders or creditors of the company

• reasons for the company entering into business rescue:

(a) distinguishing between strategic (external) and operational (internal) issues

(b) underlying reason(s) causing the cash flow distress



• Additional Information – Background (continue)• grounds for business rescue:

(a) reasonable prospect/feasibility of into business rescue

(b) disclose extent of changes since the first creditors’ meeting or correspondences with creditors

• post appointment management:

(a) management of affairs and business

(b) management of financed

• timeline of expected key milestones - monitoring & evaluation plan, e.g. date of filing, any transaction specific dates

• details of practitioner:

(a) profile and CV

(b) any previous interactions/relationship with the party responsible for appointment

• tax position - disputes with SARS



• Additional Information – Background (continue)• directors ‘statement of affairs’:

(a) Latest setoff management accounts including explanatory notes s142(1)(3)

(b) reasons for entering into distress

(c) reasons for significant difference from most recent annual financial statements or management accounts

(d) reasons for any significant discrepancies identified

(e) group structure where the company forms part of a complex group/structure;



• Additional Information – Proposal• outcome of the plan:

(a) operating plan for returning the organisation to health

(b) resulting in a better return for creditors versus liquidation [s128 (b)]

• remedial action plan:

(a) address the reasons for entering into business rescue

(b) link between reasons and remedial proposed

• details of assets:

(a) excluded from plan

(b) 3rd party assets that should be included - source and terms e.g. consignment stock

• Details of securities :

(a) dealt with in terms of the plan

(b) released from their accessory obligation

• nature, source and terms of PCF in the business rescue



• Additional Information – Proposal (continue)• motivation for plan

(a) why the plan is desirable

(b) why affected parties should support it

• variation of the plan:

(a) if the variation doesn’t constitute a material/significant departure from the plan

(b) expected outcome to the affected parties,

(c) where the variation constitutes a material/significant departure

(d) meeting of creditors must be convened to vote on the matter;



• Additional Information – Assumptions and conditions• materiality - definition of “substantial implementation” for the plan

• basis of cash flow forecast:

(a) months 1 - 3 on a weekly

(b) months 4 – 12 on a monthly

(c) Years 2 -3 annually

• projected liquidation valuation:

(a) including supporting calculations

(b) preferably independently checked

(c) Liquidation and Distribution account;

• provisions for recourse - scenario planning and sensitivity analysis of forecasts

• disclaimer outlining the limitations of the information presented in the plan



Sample of a disclaimerSuggested disclaimer wording is set out below: “The Business Rescue Plan (“the Plan”) is formulated on information obtained from books and records recovered from the Company, the Directors, Management and interviews with relevant persons and it should be noted: -Our investigations have been limited due to the time constraints placed on us by the Companies Act. There may be certain issues that require additional investigation for an absolute determination to be formed. Where appropriate, we have highlighted these issues throughout the body of the Plan and to the extent necessary, have considered the possible impact of them when making our recommendations to creditors. It is normal for the Practitioners’ report to creditors to not form conclusive views in relation to all areas of investigation. Should liquidators be appointed to the Company, the Liquidators will continue those investigations should there be a perceived benefit to creditors.

We have not carried out an audit of the Company documents, nor have we had adequate opportunity to verify any of the information given to us by the Company except where expressly stated.


Business Rescue Plan - ContentThe statements and opinions given in the plan are given in good faith and in the belief that such statements and opinions are not false or misleading. Except where otherwise stated we reserve the right to alter any conclusions reached on the basis of any changes in, or additional to, information which may become available to us between the date of this plan and the date of any subsequent meetings or reports.

Neither the Business Rescue Practitioners, nor [name of the BRP’s company], nor any member or employee thereof undertakes responsibility in any way whatsoever to any person in respect of any errors in this report arising from incorrect information provided to us.

In considering the options available to creditors and formulating recommendations, the Business Rescue Practitioners have made the necessary forecasts with respect to asset realisations and the quantum of total creditors. These forecasts and estimates may change as asset realisations progress and claims are received from creditors. Whilst the forecasts and estimates are the result of the Business Rescue Practitioners best assessment in the circumstances, it should be noted that the ultimate deficiency and thus the distribution or outcome for creditors could differ from the information provided in the Plan.”

[TMA]


Business Rescue Plan – Adoption/Rejection

• Approval of plan:• supported by the holders of more than 75% of the creditors’ voting in support of

the proposed plan• included at least 50% of the independent creditors’ voting interests, if any, that

were voted (section 152(2)

• Adoption of plan:• binding on the organisation, creditors and every holder of securities • whether or not such a person was present at the meeting, voted in favour of the

plan or proved their claims - s152(4)).• once the plan is implemented in accordance with its terms, a creditor will lose its

right to enforce the relevant debt or a part of it on the basis that it has acceded to the discharge of the debt – s154

• creditor will also be precluded from enforcing a debt that arose prior to business rescue unless the business rescue plan provides otherwise.


Business Rescue Plan – Adoption/Rejection

• Rejection of plan:• if the plan is rejected 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 an application to court to set aside the result of the vote on the grounds that it was inappropriate

• practitioner does not take the aforesaid action, an affected person may take such action (s153(1)(a) and (b)), failing which the practitioner must file a notice of the termination of the business rescue

• any or group of affected person may make a binding offer to purchase the voting interests of persons who opposed the adoption of the plan which resulted in the rejection of the plan - at a value independently and expertly determined or a fair and reasonable estimate of the return to on liquidation - s153(1)(b)(ii)


Causes for Financial Distress


Business Rescue – CIPC’s Functions

• Manage and record the filing of relevant notices as prescribed in the Act.

• The accreditation of professional bodies and

• Licensing of individuals that meet the criteria of the Act

• Monitor patterns of compliance

• Promotion of BR provisions of the Act

• Advisory role and raise awareness


Business Rescue - Summary

Business rescue involves rehabilitation of a company by ………

1. Appointment of a business rescue practitioner

2. Temporary supervision and management of the company: the practitioner has full management control of the company in substitution for its board and management

3. Temporary moratorium on the rights of claimants including on guarantees and suretyships

4. Development of a business rescue plan


Business Rescue - Summary• Business rescue proceedings begin when the Board passes a resolution that the

company voluntarily begin Business rescue proceedings, (s129) or an affected person (shareholder, creditor, employee or organised labour], s31 applies to court for business rescue – Form CoR 123.1

• No liquidation proceedings must have commenced against the company

• Within five days after passing resolution, company must appoint a Business rescue practitioner and publish and file the notice as prescribed in the regulations on - Form CoR 123.2 within two days with the CIPC and inform all affected parties of the appointment


Business Rescue - References

1. Chapter 6 of the Companies Act No. 71 of 2008 || CRS Business Rescue

www.business-rescue.co.za/pdf/Chapter-6-of-the-Companies-Act-No.-71-of-2008.pdf

2. PDF]Basics of Business Rescue guide - Werksmans Attorneys

www.werksmans.com/wp-content/uploads/.../Basics-of-Business-Rescue-guide.pdf

3. Companies Act - Business Rescue - Mazars - South Africa

www.mazars.co.za › News › Articles

4. Business rescue: problems and pitfalls

https://www.chartsec.co.za/documents/2011SpeakerPresentations/EricLevenstein.pdf


http://www.business-rescue.co.za/pdf/Chapter-6-of-the-Companies-Act-No.-71-of-2008.pdf

http://www.werksmans.com/wp-content/uploads/.../Basics-of-Business-Rescue-guide.pdf

https://www.chartsec.co.za/documents/2011SpeakerPresentations/EricLevenstein.pdf

Business Rescue - References5. Business Rescue Plan - Turnaround Management Association of South Africa

www.tma-sa.com/info-centre/practice-notes/108-tma...business-rescue.../file.html

6. Understand Business Rescue as a Business Owner | Entrepreneur

www.entrepreneurmag.co.za › Growing a Business › Business Survival

7. The new companies act explained

enewsletter.ukzn.ac.za/Story.aspx?id=38&storyid=430

8. Basics of Business Rescue guide - Werksmans Attorneys

www.werksmans.com/wp-content/uploads/.../Basics-of-Business-Rescue-guide.pdf


http://www.tma-sa.com/info-centre/practice-notes/108-tma...business-rescue.../file.html

http://www.werksmans.com/wp-content/uploads/.../Basics-of-Business-Rescue-guide.pdf

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