Business rescue practitioners: What role for the legal profession?

July 1st, 2012
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By Richard Bradstreet

It has been just over a year since the Companies Act 71 of 2008 came into force and companies still appear to be finding their feet with regard to many of the Act’s provisions. In spite of this, the new business rescue procedure in chapter 6 of the Act has already been well utilised. By March this year 471 companies had made use of the procedure and 18 businesses had been successfully rescued with the help of the new legislation (information obtained from the Law Society of South Africa/University of South Africa advanced course in business rescue practice (2012)).

According to Statistics South Africa, it seems that business rescue is having a significant influence on liquidations and, although this may be because the new procedure is proving to be effective, the statistics may also reflect a willingness to make use of the procedure as a step prior to liquidation (www.statssa.gov.za, accessed 31-5-2012).

A business rescue practitioner (BRP) is appointed to oversee a company during business rescue proceedings; his role is largely supervisory and he is subject to the duties of a director of the company, with extensive powers over the pre-existing management. A BRP is distinguished from a liquidator appointed to oversee the winding-up of the affairs of a juristic person by, inter alia, collecting outstanding debts and disposing of assets; and a trustee in the context of the insolvency of a natural person, who has a similar function to a liquidator in respect of the sequestration of the insolvent estate.

The Companies and Intellectual Property Commission (CIPC) is currently entrusted with the task of regulating BRPs and appears to be keeping a tight rein on the profession. This cautionary approach is to be welcomed as a way of ensuring that chapter 6 leaves more of a legacy than a ‘flash in the pan’, doomed thereafter to gather dust along with chapter XV of the Companies Act 61 of 1973, which dealt with judicial management.

The conception of the new business rescue procedure created an expectation that there would be fertile ground for opportunity; a new area of specialisation offering the potential of significant financial reward for those who were quick to get on board. However, it appears that the expectations of many professionals have not been met, giving rise to a number of significant questions relating to who will be appointed as BRPs, who will regulate the profession, and where this leaves attorneys. This article will hopefully provide some insight to those asking these questions.

Background

The initial draft of the Companies Regulations in 2009 provided fairly extensively for a Business Rescue Regulatory Board, made up of 18 members from various backgrounds, to function ‘as an organ of state within the public administration, but as an institution outside of the public service’. The intention (as stated in then reg 132) was for this board to be ‘responsible to regulate the practice of persons as business rescue practitioners in terms of chapter 6’ by, inter alia, advising the Minister of Trade and Industry on qualifications for BRPs, accrediting persons meeting the criteria for admission, and receiving and resolving complaints concerning the conduct of BRPs.

The idea of the Business Rescue Regulatory Board was abandoned in the next draft of the regulations, published in 2010, and ‘Licensing of business rescue practitioners’ (under reg 126) was left entirely to the CIPC. The final version of the regulation inserted sub-reg 126(1)(a) to enable the CIPC to not only grant licences, but also to accredit a profession, having ‘due regard to the qualifications and experience that are set out as conditions for membership of any such profession, and the ability of such profession to discipline its members …’. The role of this regulatory board thus appears to have been somewhat decentralised, and left – at least for now – in the hands of the CIPC.

The 2009 draft regulations referred to a register of accredited BRPs to be maintained, and standards and codes of good conduct to be established. The impression created was that an applicant, once admitted, would be accredited to practise as a BRP and would be subject to removal for conduct unbefitting of the office, much like in the attorneys’ profession.

Accreditation and licensing

Presently, however, contrary to what many were expecting, a BRP will not be accredited once-off, thereafter being available to provide services under a general licence. The CIPC has initially chosen to issue only conditional licences in terms of draft reg 126(6)(b). Amanda Lotheringen of the CIPC has explained that this marrying process is to avoid having a practitioner take on a job for which he is not suited (LSSA/Unisa advanced course in business rescue practice (2012)). This is in accordance with the idea that, once a BRP is appointed to a particular company, resignation is not an option. The Companies Act provides for the removal of a BRP during the course of a business rescue, but only alludes to the possibility of resignation in s 139(3), without providing any procedure or criteria for removal.

Currently, the CIPC will only license a practitioner conditionally for a specific rescue. In doing so, it will assess whether or not the potential candidate is independent of the financially distressed company and has the capacity to oversee the rescue process with regard to the company in question, taking into account his knowledge of the particular industry. This is in accordance with reg 126(6)(b), which provides the CIPC with the option of issuing ‘a conditional licence, on terms that are reasonable having regard to the applicant’s education and experience’. Regulation 127(1)(b) further allows the CIPC to impose tighter restrictions than those set out in the ‘Restrictions on practice’ (reg 127) with regard to these conditional licensees.

This would have thwarted the ambitions of many professionals who initially intended to obtain a permanent licence – in terms of reg 126(6)(a) – and make themselves available for rescue work. The irony is that the first BRPs will have been without any experience and would have been unable to market themselves as having either experience or a licence to practice as a BRP. When a financially distressed company files an application for business rescue, the CIPC advises that such company identify a prospective practitioner for the rescue, who will also have to apply to be accredited for working with that particular company. It would seem, in principle, preferable to issue licences on a case-by-case basis, rather than license an individual BRP to take on whatever work he likes, but this will also create the potential for additional delays in having to license a practitioner under the strict timelines imposed by chapter 6. For this reason, Professor Anneli Loubser of the University of South Africa suggests that, where there is reason to expect delays in the appointment of a BRP, a company filing for business rescue with the CIPC may wish to apply at the same time for an extension of the five-day period in terms of s 129(3) in order to prevent the resolution becoming a nullity in terms of s 129(5) (LSSA/Unisa advanced course in business rescue practice (2012)), particularly because such resolution, once lapsed, may not be resurrected (see Advanced Technologies and Engineering Company (Pty) Ltd (in business rescue) v Aéronautique et Technologies Embarquées SA and Others (GNP) (unreported case no 72522/11, 6-6-2012) (Fabricius J)).

Close corporations

Owing to the expenses involved in business rescue, particularly the practitioner’s remuneration, it is generally accepted that close corporations, although in theory they have access to the procedure, will be largely excluded. Smaller close corporations’ lack of capital, and BRPs lack of experience generally, however, appear to have fostered a mutually beneficial relationship between close corporations and BRPs, whereby the latter have been willing to charge lower fees in exchange for the benefit of experience in rescuing close corporations. However, this wider accessibility for close corporations is likely to be for a limited time only.

The argument for conditional licensing

I submit that conditional licensing is to be welcomed for two reasons in particular. Firstly, since the CIPC is able to place more restrictive conditions on the issue of a licence in terms of reg 126(6)(b), it is advisable that it limit the power of practitioners at this early stage so that the specialist body, once constituted, is able to draw from the CIPC’s experience and allow whatever further slack is desirable. It would certainly be safer to take a conservative approach rather than take risks while the procedure is still in its teething stages. Further, it makes more sense practically not to create the potential of having to withdraw and reissue BRP licences en masse if it is found to be preferable that licences are granted on different terms in the future.

Secondly, it is of the utmost importance that a positive approach to business rescue is fostered in the early stages, lest it become seen – as was the case with judicial management – as a halfway house to liquidation. If this happens, it is likely that creditor confidence in the procedure will weaken and other classes of affected persons will be disadvantaged by liquidation proceedings being requested as the more reliable alternative. The advocacy efforts of the CIPC in promoting the new procedure to judges, banks, the Industrial Development Corporation, the South African Revenue Service and others, as well as engaging with labour unions on risks and benefits of business rescue, should therefore be applauded.

Conclusion

The question that remains is where this leaves attorneys. Attorneys or firms of attorneys may be attractive to financially distressed companies – or their creditors (or other ‘affected persons’) – when they have expertise in a particular sector that is likely to contribute to the success of a business rescue. Creditors would probably consult their attorneys in most cases about the viability of applying to court to place a debtor under business rescue, and financially distressed companies are likely to have someone in mind who they would like to assist in an internally instigated rescue and restructuring. Attorneys may be particularly useful in drafting a ‘business rescue plan’ in terms of s 150(2). An analysis of available business rescue plans to date by Professor Marius Pretorius and Wesley Smith of the University of Pretoria indicates that compliance with the minimum requirements set out in the Act is very poor. Significant deficiencies include a lack of information regarding the financially distressed company’s creditors, details regarding the post-commencement financing and property available to pay creditors, and the absence of projected financial statements.

What seems likely is that BPRs will mostly be appointed on the basis of trust established in pre-existing relationships and, where a company is large enough to justify the expense of a joint appointment, it may be useful to have a specialist attorney serving alongside a member of another suitable profession. It is yet to be seen how the CIPC will go about accrediting a profession in terms of reg 126(1)(a), but, as it stands, a good example is being set by the CIPC’s prudent treatment of the regulation of BRPs.

Richard Bradstreet BA LLM (UCT) is a lecturer in the department of commercial law at the University of Cape Town. He would like to thank Amanda Lotheringen of the CIPC and Professor Anneli Loubser of Unisa for their insights on current developments shared at a workshop on business rescue held in May, as well as Professor Marius Pretorius from the University of Pretoria.

  • Last year the Law Society of South Africa (LSSA) made inquiries with the CIPC regarding a blanket application for the attorneys’ profession for its members to be accredited as business rescue practitioners. The commission subsequently advised that it would not accept blanket accreditation for any specific profession at this stage.
  • For more information on the LSSA/Unisa course, consult the LEAD website (LSSALEAD.org.za) or contact Bettie Lubbe at bettie@LSSALEAD.org.za or tel: (012) 441 4670.

This article was first published in De Rebus in 2012 (July) DR 22.