Lending a helping hand – The role of creditors in business rescues?

December 1st, 2013

By Richard Bradstreet

In May 2013 the Supreme Court of Appeal (SCA) handed down its first judgment on business rescue in the case of Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd and Others [2013] 3 All SA 303 (SCA). This case is of significance in that it has confirmed an interpretation of the meaning of ‘business rescue’ that embraces the protection of creditors. In the light of the new business rescue regime being viewed as a shift away from more traditional creditor-oriented insolvency procedures that may be traced back to South Africa’s English law roots, this case gives reassurance to creditors that their interests, although no longer of paramount importance, are afforded protection by the very definition of what business rescue seeks to achieve.

In delivering the unanimous decision of the full bench, Brand JA held (at para 26) that ‘business rescue’ in terms of s 131(4) of the Companies Act 71 of 2008 (‘the Act’) means ‘rehabilitation’, which in turn means the achievement of either one of two goals, namely to –

  • return the company to solvency; or
  • provide a better deal for creditors and shareholders than what they would receive through liquidation.

This has implications for the role and required qualifications of business rescue practitioners, as well as for the value and utility of the business rescue procedure for creditors.

Role of business rescue practitioners in ch 6 reorganisations

It has previously been submitted (see ‘Business rescue practitioners: What role for the legal profession?’ in 2012 (July) DR 22) that the legal profession may have a somewhat limited role to play in business rescue where the practitioner comes on board to realign the internal management and strategy of the business with a view to steering it towards a profitable going concern. In recent research by Professor Marius Pretorius of the University of Pretoria, it has been suggested that the competencies required in the development and implementation of a business rescue plan (as envisaged by s 150(2) of the Act) involve a high degree of expertise in management and business strategy rather than legal knowledge, although some legal expertise is crucial, particularly in regard to issues of compliance. The research involved a sample of 47 business rescue practitioners, who were asked to give detailed instructions to a hypothetical ‘double’ who would need to be told exactly how to go about the business rescue process. On a task-by-task breakdown, it was shown that approximately 60% of the practitioners’ tasks would be managerial in nature (see M Pretorius ‘Tasks and activities of the business rescue practitioner: A strategy as practice approach’ (2013) vol 17 Southern African Business Review).

Quite the contrary, however, would be the case when the practitioner arrives on a salvage mission, seeking to slow the sinking of the business and bringing as much property as possible to shore. In this capacity, a business rescue practitioner will serve a role similar to that of a liquidator, and in spite of the criticisms that have been advanced in relation to such persons acting as ‘rehabilitation’ practitioners, the skill sets of liquidators would be invaluable where the practitioner is tasked with reorganising with a view to an effective liquidation by way of s 131.

Philosophy underlying the ch 6 definition of ‘rescue’

It is somewhat incongruous to view the latter process as a ‘rescue’ or ‘rehabilitation’ in the ordinary English sense of the words, but it is now settled that ‘section 128(1)(b) gives its own meaning to the terms’ (per Brand JA at para 26). Taking this approach in appropriate circumstances should therefore not portray the practitioner as a managerial mutineer seeking to plunder the vessel for its loot (the old maxim for this metaphor being ‘liquidation ex debito justitiae’), but rather a method of preserving value for creditors and other interested parties where the only other option would be traditional liquidation proceedings. It appears as though the absolute right of creditors to liquidate a company that has not paid debts may no longer be as strictly applicable under the Act (see Don Mahon ‘Ex debito justitiae principle liquidated?’ 2013 (March) DR 38), and I submit that the option of making use of one procedure (ie, business rescue) instead of traditional insolvency proceedings may also assist in streamlining the process of investigating a company’s affairs and ultimately deciding on the company’s future.

In conclusion, it is perhaps worth noting that South Africa’s legislative approach to insolvency may be departing from the traditional view taken in the United Kingdom and Europe where insolvent companies are treated as cursed and delinquent. Business rescue appears to be underpinned by a more pragmatic philosophy that recognises the value of both debtor and creditor in the marketplace.  In the United States, where the prototype for this kind of ‘debtor-in-possession’ procedure originates, risk-taking is encouraged, and reckless trading – for example – is not prohibited.

New York attorney, Philip Mindlin, notes that the active role played by creditors in bankruptcy cases in the United States (US) is one of the features that contribute to the success of reorganisations under the American form of corporate reorganisation (under ch 11 of the US Bankruptcy Code). Such involvement is partially through membership of committees of creditors who employ sophisticated advisers to promote their interests in court proceedings and also assist with analyses of the reorganisation case as it develops. Large creditors also play a meaningful role outside of the committees by ‘filing pleadings with the court on every significant matter and appearing to express their views’, and investors who buy claims against bankrupt companies are often able to play a role in proceedings that would not have been cost-effective for the previous holders of that debt to have played (Philip Mindlin ‘Comparative Analysis of Chapter 6 of The South African Companies Act, No. 71 of 2008’, presentation to the Company Law Symposium organised by the South African Department of Trade and Industry and the Specialist Committee on Company Law, Johannesburg, 1 March 2013; www.thedti.gov.za, accessed 31-10-2013).

If creditors become constructively involved in the business rescue process, by way of the numerous provisions that exist to facilitate their involvement during the process, particularly when creditors bring applications themselves to make use of business rescue under s 131 with the intention of being cooperative rather than hostile in the enforcement of their claims, we may see this shift in approach to defaulting debtors transferred into practice.

Richard Bradstreet BA LLM (UCT) is a lecturer at the department of commercial law at the University of Cape Town. With special thanks to Philip Mindlin (partner at Wachtell, Lipton, Rosen & Katz in New York), and Marius Pretorius (professor of business strategy at the University of Pretoria).

This article was first published in De Rebus in 2013 (Dec) DR 22.