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The downturn in world economies has placed business under severe pressure in the last few years. In South Africa, the knock-on effect has been felt, with several businesses going out of business, filing for liquidation and with many turning to the South African business rescue procedure as a possible lifeline.

Chapter 6 of the Companies Act No 73 of 2008 (the 2008 Companies Act) introduced intervention mechanisms to rescue companies that are in financial distress. The test set out in the 2008 Companies Act is that if it appears to the board of a company that it may be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable (commercial test) within the immediately ensuing six-month period; or if it appears to be reasonably likely that the company will become insolvent (factual test) within the immediately ensuing six-month period, then such company would be “financially distressed”.

A business rescue practitioner would be appointed to supervise the company on a temporary basis, with the aim to develop and implement a rescue plan for such company.

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The outcome of a plan would be to ensure that the company could continue to exist 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, then would result from the immediate liquidation of the company. When a South African company is in financial trouble but the potential still exists to rescue it, various rescue options can be considered other than a formal liquidation process.

If management recognises the signs of financial distress early enough, it is possible to negotiate with the company’s creditors in an attempt to reach some kind of informal compromise that would assist the company in overcoming its financial difficulties.

Generally accepted

The business rescue process has provided South Africans with the opportunity to move corporate restructuring from a “pro-creditor” system to one of “pro-debtor”. The need for a sustainable recognition of creditors’ claims being compromised and being forced (if in the minority) to take “the restructured deal” has now been generally accepted by creditors.

For many years, South Africa was left in the doldrums of an archaic judicial management system, with few alternatives other than liquidation. Drawing from the best that international restructuring regimes had to offer, Chapter 6 found its way into the South African Company Law Statute in 2011.

There is a recognition that companies that are already insolvent must be placed into liquidation, and those capable of being rescued must be saved. Clearly, if there is no chance of rescuing the company, then there is no need to continue to “flog the proverbial dead horse”. If liquidation is the only alternative, then the practitioner and the creditors must release the company from its rescue proceedings and place it into liquidation.

Modern rescue culture supports the notion that there is always a need to save debtor companies that are candidates for rescue and which have genuine recovery prospects.

The fact that the voluntary entry into business rescue occurs by the mere passing of a board resolution, reflects the South African legislature’s intention to make rescue and restructuring an easier mechanism to secure a “fresh start”, and supports a shift to a more debtor-friendly (company-focused) approach.

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This is in line with the modern trend in rescue regimes. It attempts to secure and balance the opposing interests of creditors, shareholders and employees.

The mind shift remains work in progress. Most South African companies, directors and bankers need to resist the temptation of “sinking the Titanic”. However, as time goes on and we continue to see significant companies being rescued, confidence in the process will increase. The banks will play a significant role here.

South Africa has embraced the opportunity to resuscitate companies in distress that, without Chapter 6, would have been placed in liquidation with all of the negative outcomes flowing therefrom.

Dr Eric Levenstein is the head of Insolvency, business rescue and restructuring practice at Werksmans Attorneys.

BUSINESS REPORT