With thanks to Adam Harris and Moneyweb…

Interesting article from Adam Harris of Bowman Gilfillan on Moneyweb’s website…

MYBUSINESS

Author: Bowman Gilfillan|

27 November 2012 16:46

Business rescues surge, liquidations decline

Sharp decline in company liquidations as business rescue applications rise

The pace at which company liquidations are decreasing accelerated again in October when liquidations dropped by 35.3% year-on-year, after a 28.5% decline in September and a fall of 20.2% in August, according to figures released by Statistics SA recently.

Adam Harris, director of the litigation department at corporate law firm Bowman Gilfillan, said this indicated that more companies are benefitting from business rescue laws that came into effect in May last year under the Companies Act of 2008. “The fact that the decrease in the number of liquidations has been driven mainly by voluntary liquidations is indicative that the business rescue procedure is taking hold and that there has been an increase in the number of companies seeking assistance.”

Adv Rory Voller, deputy commissioner at the Companies and Intellectual Property Commission (CIPC), recently advised that to date there have been more than 740 entities, including close corporations, private and public companies, that have either filed a notice to begin business rescue proceedings after passing a resolution, or that have approached a court to request to be placed in business rescue.

Harris commented: “It is significant that according to CIPC figures, in the majority of cases, some 82%, it was a voluntary decision by the officers of the entity concerned. In other instances the affected parties (the bank, employees, shareholders or a creditor) approached the court.

“It appears that there is still a high degree of skepticism in the lender community. This is not assisted by the fact that of the 25 or so cases which have been before the courts, in the overwhelming majority there have been irregularities which have been highlighted to show that the courts should rather stay away from granting business rescue orders”.

1time Holdings subsidiary 1time Airline applied for business rescue, which was short-lived, while one of the first companies to undergo business rescue was Pinnacle Point Group. The latter failed after Pinnacle Point’s bankers declined to provide the necessary financial support. Another high-profile business rescue case that failed was construction company Sanyati Holdings. There have, however, also been some significant successes, including Blyvooruitzicht Gold Mining.

The CIPC reported a success rate of approximately 55% of all businesses that have concluded their rescue operations. The act prescribes a three-month turn around but it does leave room for extension. Many of the rescues reported to CIPC have not yet been concluded. The average time-period reported is five months. The Companies Act envisages that the entire business rescue process should be completed within a matter of months. Once a notice of business rescue has been filed with the commission, it appoints a business rescue practitioner who has to produce a rescue plan.

“Business rescue aims at avoiding liquidations and job losses by providing businesses with protection against creditors who may want to apply for liquidation. It is an opportunity to reorganise and restructure distressed but viable companies in order to avoid liquidation,” explained Harris.

Applying for business rescue can provide companies with the opportunity to access interim liquidity to fund their operations while a rescue package is being formulated. It is important for a rescue package to be implemented as soon as possible.

Harris commented that, “Business rescue offers an alternative to liquidation for financially distressed companies, allowing them to be stabilised and restructured. However, business rescue always depends on there being a source of funding, which means companies will also need buy-in from their banks and creditors for an application to be successful.”

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Commisioner for SARS v Beginsel NO, a contrary view – by Don Mahon

I recently posted an article relating to voting rights afforded to creditors in Business Rescue. In that article, I concluded that normal unsecured, concurrent creditors would only be afforded voting rights to the extent of the value which they would receive if the company were being liquidated.

The Western Cape High Court has recently handed down a judgment in which Fourie J, expressed a different view.

In Commissioner for SARS v Beginsel N.O. SARS contended that all preferent creditors, as contemplated by section 92 to 106 of the Insolvency Act were to be categorised as unsecured creditors under section 145(4)(a) of the Companies Act, while all other concurrent creditors, as envisaged by section 103 of the Insolvency Act were concurrent creditors who would be subordinated in liquidation. This accords with the view expressed by me in my previous article.

However, Fourie J found that the reference to “concurrent creditors who would be subordinated in a liquidation” does not attach to all concurrent creditors, but only to those concurrent creditors who have subordinated their claims in a liquidation in terms of a subordination or back-ranking agreement and that on the plain wording of section 145 ( 4) (b) of the Act, the intention was to refer to a particular category of concurrent creditors, namely, those who have agreed that their claims can only be enforced if and when the value of the company’s assets exceeds its liabilities.

In conclusion, the learned Judge held that: “In the result, I conclude that, in terms of section 145 ( 4) of the Act, each concurrent creditor, save for the category of concurrent creditors who would be subordinated in a liquidation by virtue of a prior existing subordination agreement, has a voting interest equal to the value of the amount owed to that creditor by the company. Therefore, in my view, SARS would enjoy no greater voting interest than the other concurrent creditors of the company”.

It is unclear whether the judgment has been taken on appeal and it accordingly suggested that Business Rescue Practitioners adopt the approach of Fourie J.

A copy of the Judgment is attached.

THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE v MARK BRADLEY BEGINSEL N.O.