Sanchia Temkin
4 December 2008
Johannesburg — DIRECTORS of companies that are in financial distress and are considering applying to court for business rescue under the new Companies Bill, should first consider a prepackaging plan and obtain bank and creditor approval before applying to court, says a legal expert.
The Companies Bill controversially seeks to address the business rescue of companies in financial distress, but it contains flawed provisions on how to continue funding the business as it trades out of danger.
Chapter 6 of the bill provides that a company may pass a resolution applying to court to be placed under business rescue . The courts will appoint a practitioner to conduct the rescue, after which no creditor can apply to court for the company's liquidation.
The practitioner is commissioned to assess whether the company can be rescued, and to design a plan to effect the rescue.
Eric Levenstein, a director at Werksmans Attorneys, said yesterday that this mechanism would work only if creditors agreed to continue financing the business during this period.
The best way to achieve this was to prepackage a deal and get their endorsement.
"Throughout this time, the business has to continue trading, or it will collapse notwithstanding the rescue plan," he said.
This finance was called post-commencement financing, and its ranking in terms of security was tightly defined.
Although banks were key to the success of the new law, Levenstein said he was not entirely convinced they would be keen to continue funding businesses in trouble under the legislation as drafted.
"The problem for banks is that the security over their post-commencement finance ranks behind practitioners' fees and direct costs of the rescue plan, followed by the claims of employees."
There was also a strong possibility the company had no assets at all to offer as security.
Levenstein said more than likely the company's book would be ceded and its property mortgaged.
"In this twilight zone of a company descending into insolvency, all stakeholders will have been protecting their interests -- creditors with general bonds would have perfected them."
The regulators clearly had not thought the issue through, Levenstein said. It was a fatal weakness in an otherwise laudable attempt to encourage business rescue.
The only way a business rescue would work was if a rescue package was prearranged before the plan was begun, Levenstein said.
Should the Companies Bill be approved in its current form, a new market in "distress debt" was likely to evolve in SA, as it had in countries such as the US, where its Chapter 11 process had been a success in business rescue. "This could be a division of banking, or venture capitalists," he said.
Levenstein said despite the bill's failings, it could be made to work. "However, it is imperative that directors become sensitised to the nuances of this bill."
Directors should also seek sound legal advice as early as possible when a company gets into financial difficulty. "Timing is critically important."
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