The Companies and Intellectual Property Commission, Department of Trade and Industry and a Pretoria University professor briefed the Committee on the legislative framework and intention of Business Rescue proceedings, the challenges and experiences, what had been included in the considerations during the drafting of the Business Rescue Status Report and the conclusions and recommendations. Due to the temporary closure of Parliament to visitors Tuesday morning, PMG was unable to capture the majority of this meeting.
The Companies and Intellectual Property Commission (CIPC) took Members through the statistical analysis of the number of proceedings commenced, continued, and the types of entities and areas making most use of this process. Not all the statistics were available at present to draw a full picture. The average time from commencement to implementation was around 17 months, but a number of proceedings did not carry on, often because entities had started the proceedings too late and were unable to avoid insolvency, whilst about 9.2% were declared null and void.
The Department of Trade and Industry noted that a study had been commissioned by the Specialist Committee on Company Law of the CIPC. The Department described how business rescue was defined, stressed that it was not intended to deal with insolvency but to provide another avenue to try to avoid it, and applied to companies in financial distress. One of its main aims was to avoid job losses. The main challenge, as noted by CIPC, was that many companies initiated the process too late. Speed was of the essence but unfortunately procedures were still taking too long. The Department described the functions of the Business Rescue Practitioner, and how the interests of the workers would be protected. Claims of workers were afforded a similar ranking to the Insolvency Act provisions. Other challenges – also noted in other countries – included post-commencement finance, negotiations, particularly where major creditors might refuse to buy into the business rescue plan and demand too much to buy them out, different interpretations still being applied by different High Courts, high fees and time taken. .
- The second major challenge related to the negotiations. Some creditors such as banks and landlords may refuse to buy in to the business rescue plan and there was a high price to buy them out.
Professor Marius Pretorius from the University of Pretoria, noted that the study was intended to evaluate the status of the business rescue industry, to help guide future actions and highlight any amendments needed to the Act. Online survey data, CIPC data, personal surveys and interviews with bankers, creditors and lawyers were used to inform the process. The key findings were that the success of Business Rescue was misunderstood, with limited creditor knowledge, that affordability remained a problem and that there were conflicts between parties, both prior to and after commencement, with limited funding available post-commencement. Since several parties highlighted problems with the Regulator, the recommendation was for an expert advisory panel to support the Regulator. Accreditation of business rescue practitioners should be done by revisiting the accreditation body, and there was also a need to review the legal procedures, and consideration of other alternative procedures for the expert panel. Inconsistencies, including the interpretation of reasonable prospect, and priorities, should be addressed. The Committee was given a briefing on the Status Quo Report, how the research was conducted, the public awareness of the process, the statistics over the last three and a half years,
the fact that 90% of those entering the proceedings did so voluntarily, and the concerns expressed over the methods used by some practitioners. It was clear that consideration needed to be given to the fee structure and whether hourly or flat fees would be most appropriate. The timescales, banks' attitudes, difficulties at the CIPC, the essential elements of the plan to present to creditors, and trends were outlined. The recommendations around regulations and future structures were outlined, including the steps of the procedure, guidelines on practitioners, licensing of practitioners, evaluation, training and education.
Members asked questions on the geographic spread of practitioners, the amendments that the Department of Trade and Industry would propose, commented on the speed and the cost of the process and expressed disquiet at some of the fees allegedly charged.
Due to temporary closure of Parliament to visitors in the morning some of the meeting was unable to be captured by the PMG.
Business rescue proceedings: Companies and Intellectual Property Commission (CIPC) briefing
Advocate Rory Voller, Acting Commissioner, CIPC, took the Committee through the attached presentation, describing how business rescue proceedings were carried out. In total, 1 911 proceedings for business rescue in the period 1 May 2011 to 30 September 2015, and a total of 838 matters were ended in that period. On 30 September 2015 there were 1 073 active proceedings, an increase from the 31 March 2015 figure of 883, and the active number of 925 on 30 June 2015. By category, the highest business rescue proceedings to date occurred in private companies, where there had been 1 186 proceedings, with the next figure being 638 close corporations. The majority of the proceedings was found in Gauteng, amounting to 710 schemes, followed by the Western Cape at 248, and those in other provinces standing at 542; the province was not always confirmed at the time of issue of the Notice to Start business rescue proceedings. The CIPC also did not always get statistics on the reason for termination because the content provided in the CoR125.2 application is limited. He also stated that not all of the entities listed under “Termination – Liquidations” resulted finally in a court order for liquidation. Only 238 proceedings were substantially implemented. The average time that it took from commencement to filing and substantial implementation was17 months. Those that were declared null amounted to 175 out of the total of 1911 commenced proceedings, which represented a 9.2% null figure.
Gauteng and then Western Cape had the highest number of practitioners, ranging from junior through to senior working in this field.
Review of business rescue: Department of Trade and Industry (dti) briefing
A representative from the Department of Trade and Industry (dti) took the Committee through the attached presentation on business rescue (BR), and said that there had recently been a study to review BR, commissioned by the CIPC, on behalf of the Specialist Committee on Company Law (SCCL). He said the concept of business rescue was designed to provide a rescue mechanism to a company that had financial difficulties but had not reached a state of insolvency. Business rescue was not intended to deal with insolvency but was intended to try to assist financially distressed companies from becoming insolvent. The expression “financially distressed” is properly defined, and it does not give an impression that business rescue is associated with “insolvency.”
One of the main challenges was that most companies initiated BR too late, at a stage when they were already on the verge of insolvency. The past system of judicial management had been discontinued and replaced with business rescue, because nearly all companies that had tried the judicial management route had ended up in liquidation. In business rescue, speed was of the essence. A Business Rescue Practitioner (BRP) is given appropriate powers in terms of section 140 of the Companies Act to control the process including power to suspend transactions temporarily (s136). The Western Cape and the Gauteng High Court had played a leading role in the interpretation of the principles around BR. Notably, business rescue would protect the interests of workers in various ways, as follows:
- providing access to financial statements
- recognising them as creditors of the company with a voting interest to the extent of any unpaid remuneration
- 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
- affording them, as a group, the right to buy out any dissenting creditor who had voted against approving a rescue plan.
The claims of the workers under BR are aligned with the Insolvency Act, to ensure consistency and equal treatment of those claims. Similarly, the preference ranking of employee claims was similar to the the Insolvency Act and International Labour Organisation (ILO) Convention.
There were some challenges with the BR process, which fell into the following categories:
- In relation to post-commencement finance, he explained that any remuneration, reimbursement for expenses or any other amount of money relating to the employment or to an employee during business rescue becomes “post commencement finance”. This will be treated equally through the BR process, but will take preference over all claims against the company. However, during seminars organised by the dti and the Specialist Committee in Company Law (SCCL), judges, academics and British experts highlighted that “post rescue finance” is still a problem.
- The second major challenge related to the negotiations. Some creditors such as banks and landlords may refuse to buy in to the business rescue plan and there was a high price to buy them out.
- Interpretation also remained a problem. There are different approaches in interpretation between the divisions of the High Court
- The fees for the BRP were quite high
- The adoption of the BR plan can take time due to disagreements among parties involved.
The SSCL had requested the CIPC to commission a study, and that had been based on the status of business rescue for the first three and a quarter years since inception. He noted that the study would be detailed by a consultant of CIPC. It was hoped that once the problems had been fully analysed and addressed, the business rescue mechanisms would contribute immensely to the economy.
Business Rescue Status Report: Professor Marius Pretorius briefing
Professor Marius Pretorius, Business Rescue specialist, Pretoria University, said there was a need to evaluate the status quo of the rescue industry, as more knowledge on the status would help to guide future actions when addressing business problems, and potentially guide amendments to the Act. The University of Pretoria (UP) had included data from online surveys, CIPC data, had done a a survey of knowledgeable BR people and conducted interviews with bankers, creditors and lawyers. The rescue industry research was done by answering a few questions set out the SCCA committee of the CIPC.
The key findings of the research were that the success of BR is regularly misunderstood, with limited creditor knowledge. The BRP are central to the process and therefore draw much attention for process related concerns. The affordability of BR is a limiting factor, especially so when legal proceedings are also part of the process. The research also found that conflicts exist within the BR, especially between bankers and BRPs. In addition, post rescue business investigations also report conflict between filing directors and BRPs. Post Commencement funding, which is a key determinant to the success of the whole process, is often not available.
The bankers gave various reasons for this failure. The Regulator was described as “a real bone of contention” for BRPs and affected persons alike. This was especially so for timeous response, accuracy and capacity.
Mr Pretorius recommended that there should be an expert advisory panel established to support the Regulator. This should be done in association with a professional body, such as the TMA. The accreditation of BRPs should be done through revisiting the accreditation body to assist with education, post mortem evaluation, and peer reviewing. The enhancement of the legal procedures that currently hampered BR execution, especially the time limitations set for the investigating, the ombudsman, tribunal and complaints procedures was needed. There should be consideration of more alternative procedures to the expert panel. Finally, he suggested the need to initiate a process for revising Chapter 6 issues that were identified as inconsistencies. This could include clarifications on the factual measures for “reasonable prospect” and PCF priorities in liquidation.
He noted that the CIPC data had recorded that 63% private companies, 32% close corporations and 5% public companies used the BR process. A survey which was conducted indicted that 36% of these companies reported that they had gone into BR because of pressure from creditors, 13% indicated that it was due to a lack of management capabilities, 20% reported the reason as profitability problems and 4% cited capacity problems.
Business Rescue Status Quo Report: Professor Marius Pretorius briefing
Professor Marius Pretorius then gave another briefing on the Business Rescue Status Quo Report. He noted that Chapter 6 of the Companies Act No 71 of 2008 had introduced the BRP, and although, since its introduction, the business rescue process had been quite widely used, this was still not an easy process.
The Companies and Intellectual Property Commission (CIPC) reported that there had been over 1 500 filings for BR over the first 36 months, with an apparent steady annual increase. The CIPC reported that there may be a number of teething problems; or signs of deeper underlying flaws but at this stage it would be difficult to determine what caused the 1 500 filings to be made in the first place. In order to determine the status quo of the BR, research has been conducted on the different companies and company investors.
Prof Pretorius outlined the process which was followed for the research. Stage 1 of the process involved data collection from the CIPC, conferences and questionnaires. Stage 2 involved the collection of data from companies, bankers, investors, specialists and creditors. Before making any interpretation of the data, it was necessary to note that amendments had been made to the Companies Act, and so several clarifications were needed before reaching the final date. Section 128 (1)(b)(i) stated that re-organisation of the business was the ultimate goal when it came to BR. However, the Act made provision for an alternative should this not be available, such as liquidation. The research would also show that in order for the business to move in the right direction it had to have people who were competent in decision-making, sense-making, integration and collaboration. The research also showed that many of the public, unsecured creditors, directors and even some BRPs had no sound knowledge of the BR system.
The research reported that 1 398 companies had gone into BR filing in the past 3.5 years, which meant an average of 430 companies filing each year and 35 companies filing in each month. In addition, the research showed that 90% of companies went into BR filing voluntarily, by decision of the Board of Directors, while 10% were done as a result of court applications. The court applications were initiated by shareholders or creditors. It was reported that banks and creditors often found it difficult to determine whether businesses which had gone into BR had come out successfully, as this was not recorded at the time. However, 45% of the BR terminations records gave no specific reason for termination. 31% indicated that liquidation was the reason for termination, and 8% of the terminations were due to plans not being accepted.
Bankers had reported that when directors filed for BR they were usually under pressure and stressed, and therefore agreed to almost everything proposed by the BRP. Banks were also concerned with BRPs who were charging fees also in respect of the subsidiary companies within a BR scheme, thereby escalating the overall cost without supplying the corresponding services.
On the other hand, BR practitioners believed that the fee prescribed in the Act was too low because the legal battles currently took too long and that had an effect by pushing up the number of hours that they were to claim. The general view on affordability was that businesses could not afford the cost of the BR, and this was often cited as a major factor for many of them ending up in liquidation eventually anyway. This could also be linked to conflicts between banks and practitioners.
Another major issue which was highlighted was that firms took too long to file for the BR. The research showed that many business owners and managers were unaware of the BR as an option to pursue. Shareholder disagreement was a potential reason why firms were not accepting business rescue as an assignment. Shareholders directly influenced management’s decision making as they could withhold information from management.
Banks were most reluctant to finance companies after they had gone into BR; 71% of companies received funding and 29% could not secure funding. In the beginning, banks were unwilling to finance business that went into BR and would only support the business if there was enough evidence of reasonable prospect and the BRPs' competency was shown. Banks were often outspoken on poor BRP performance, and this was one of the reasons why banks preferred to not finance firms which had gone into BR. Some directors who had lost all their powers after filing for BR would blame the BRPs if the BR efforts failed. Some believed, however, that BR had saved a lot of jobs. Public opinion suggested that they supported the BR as a job saving mechanism. A sample survey was taken of 87 businesses. 16% were reported as not having any employees at filing, and 84% reported employment of 7 443 jobs at date of filing.
From the side of the CIPC, the main challenges for the Br process included the staff constraints, feedback from creditors in terms of their role and experience, and landlord experiences. Landlords were often put in a difficult situation as BRPs were able to cancel contracts during the moratorium although the landlords cannot evict tenants.
The Act required the BRP to formulate a plan to be presented to creditors for a vote. The plan should consider three key issues to enable the creditors to make an informed decision. The key issues were: reasonable prospect, post commencement finance, and causality, strategic reasons and operational reasons. Some trends had been identified and these would need to be monitored. Businesses were continuing to request BR and firm formations. However, the affordability and industry conflicts had often led to firms not filing for a BR after the initial research into it. The industry conflicts mainly were between the creditors and banks. This conflict was due to the fact that banks preferred liquidation because the banks' role as secured creditors would be stronger and the banks' main aim was to minimise their risk and increase profits. The Act had now removed the rights of the directors to place the creditor as the new principal when filing is done.
Prof Pretorius recommended that there should be a series of regulations introduced into the BR system. He said that the regulation of the BR should at least have one of the following steps: Complaints procedure, Tribunal council, Ombudsman, BR Court or an Expert Advisory Committee for the CIPC. Other recommendations included a suggestion that the appointment of BRPs should be made by the directors or the courts, in line with section 131 of the Companies Act. Guidelines for the resignation of a BRP should be addressed. The Act should be amended to make provision for the licensing of BRPs with such licensing to remain the role of the CIPC as Regulator, although in the meantime accreditation should be addressed urgently to support the process. He added that accreditation should remain as an absolute CIPC decision-making power, although there was a need to specify who would evaluate the BRPs, what form of evaluation should take place and how evaluators should be remunerated. Prof Pretorius concluded by saying that training and education for BRPs was vital, but training for directors, employees, creditors and banks should also be considered. Certain sections of the Act also needed to be amended.
Mr A Williams (ANC) said that it seemed that most rescue practitioners were in the Western Cape and Gauteng and asked what was the position in the Northern Cape. Mr Williams further said : "I think that the Department should seriously look at the professors’ recommendations in his presentation: I think that they are very good".
Mr D Macpherson (DA) asked what amendments the Department of Trade and Industry was proposing for the Companies Act. He commented that he was concerned to hear that the quality of some BRPs was not good, but urged that there should not be confusion between the work of BRPs and administrators. A BPR need not be at the business everyday, whereas an administrator would need to be. He commented that the reasons for failure of so many businesses during the BR process were complex. He wondered why creditors would want to renegotiate the debt owed to them during business rescue. .His major concerns were with the speed and the cost of the process, where there had been particular focus in the United Kingdom, and that needed also to be a focus area for the dti. He agreed with the principle of avoiding liquidation as that would not help to preserve the tax base.
The Chairperson asked the presenters to respond in turn.
Adv Rory Voller, CIPC, agreed that it would be necessary for a business in the Northern Cape to ask for assistance from a BRP in another province. The reputation of practitioners spread far and wide and the finest practitioners were over-used. The CIPC had made many suggestion already to both the wording and the policy issues in the Companies Act, which the dti was currently considering. He agreed that, in order to speed up the process, the dti would need to look again at some of the timeframes to assess how realistic they were. Speed was important, but there was a need to be realistic, especially in respect of large companies. BRPs also supported a call for realistic rather than overly-short timeframes. The dti needed to make sure that the legislation was adhered to and to enforce punitive measures through licensing practices. It had been difficult, initially, to get used to the regime of business rescue, but now that it was better known, and entrenched, stronger enforcement was needed. On the cost, he said that he had heard of one practitioner who charged R600 000 in two weeks for such procedures.
The Chairperson commented that if that was true, it was shocking.
Adv Voller agreed. Many BRPs would contract for a set fee instead of charging by the hour or day; and some were taking advantage of the desperation of owners of failing businesses. If there was a contract it was very difficult for dti to challenge it.
Prof Pretorius explained that many people would enter into a contract for a flat fee in order to earn more. The Companies Act provides for a Creditor Committee. He did not think that the timelines should be extended, as the BRPs could approach the Creditor Committee already for an extension. Internationally, there were discrepancies in negotiation processes.
Ms Evelyn Masotja, Deputy Director General: Market Research and Trend Analysis, dti, acknowledged that there would always be teething issues with new legislation. The dti had indeed received the suggestions for amendments and was studying them, with input from the CIPC. It would report back on the timelines in due course.
The Chairperson noted the challenges with the law of contract and said that CIPC needed to engage further on how this might be overcome. The meeting would continue on the following day, and she commended the Committee for what it had achieved today under difficult conditions.
The meeting was adjourned.