South Africa’s new corporate restructuring regime – known to many as business rescue – came into operation in May 2011. In it, the provision in chapter 6 of the Companies Act, 2008 provide a business in financial distress with an opportunity to preserve its goodwill. Under the formal chapter 6 business rescue process, breathing space through a moratorium is provided to enable the business to address any temporary liquidity issues, repayment obligations and capital raising. This is a type of inorganic or external restructuring process that allows a qualified restructuring practitioner to step in and deal with all the issues faced by a business – including those arising from the recent fast-moving events in our country. It is therefore important that the advice is sought from a qualified professional so that the events are viewed in a proper context and the fundamentals of the business affected by the recent events are understood.
It is critical that businesses do not rush into business rescue or even liquidation in terms of the Companies Act, 1973 – particularly without mapping the endgame in the case of business rescue and weighing all options in the case of liquidation. In other words, businesses must understand what they wish to achieve as an outcome from a restructuring process. At the end of the day, no purpose will be served from a chapter 6 business rescue process if there is nothing in the end to rescue and salvage.
A formal chapter 6 business rescue process provides a platform for the business to engage in negotiations with debt providers, key suppliers and employees, and also the opportunity for a partial sell-off of the business or possible merger or amalgamation of the business. These negotiations and engagements will result in key stakeholders taking an effective and critical role in the future of the business so as to eliminate the consequences of value-destruction or a liquidation which will be disastrous for stakeholders like lenders, creditors, employees and shareholders.
What is clear is that corporate restructuring must be carefully considered – and aimed at all the different objectives that can be achieved through a restructuring process. The events of the recent past will create a wide range of challenges for businesses and each of these challenges must be balanced so that an equitable and balanced outcome is achieved for all the stakeholders of the business.
In addition to the former inorganic or external restructuring process under chapter 6 of the Companies Act, 2008, section 155 provides a wide scope for an organic or internal restructuring to be concluded by a business in financial distress. It allows a board of a company to propose an arrangement or a compromise, or both, of its financial obligations to all its creditors or to all of the members of any class of its creditors. This is an organic or internal restructuring process in the sense that it is driven by the board of the company. There are various options available under this restructuring regime in order to bring about a complete and total recalibration of all financial obligations faced by the company and viewed into the future given the events of the recent past.
The section 155 process is a lot more streamlined than the chapter 6 business rescue process – the one key difference is that a company does not enjoy the protection of an automatic statutory moratorium in a section 155 process. We are of the view that lenders, creditors, employees and other stakeholders will view such a process more positively given the events of recent weeks.
In our view, and in given situations, it could be a more friendlier, less expensive and simpler approach for a company to propose a compromise and/or arrangement and thereby deal with the obligations and financial situation arising from the recent events.
The final, and often destructive option, is for a financially distressed business to apply for liquidation. This should, and must, be a last resort when a company, given the recent events, will be unable to recover from the distress caused by those events.
It is critical that any business in distress engage with restructuring experts to identify and determine the most successful outcome in a distressed situation.