Presented by the DTI in conjunction with Dr Rob Davies (MP - Trade and Industry), Mr MacDonald Netshitenzhe (Chief Policy & Legislation), Prof Michael Katz (Chairman of the Specialist Committee on Company Law) and Former Justice Myron Steele of Delaware USA.
Business Rescue is ground breaking legislation intended to help and support companies finding themselves in hard times. Before 1993 this legislation was dealt with under judicial management and the end result was that most companies were liquidated. The objective is to rescue the company even if there is a slim chance of doing so. Since the instillation of Business Rescue 1338 notices have been filed and 1228 passed with 772 active cases and only a loss of 73.
It was pointed out that it was very difficult to make new laws out of lack of precedence. The process takes 5 days to instigate and an application must precede liquidation proceedings. Many of the applications turned down currently are not terminal or chronically ill companies. To qualify the company must have a three month chance of survival.
Judge Owen Rogers of Cape Town presented two cases. One of business rescue and the same case under the liquidation act schedule 5 of 1973.
Judicial Court Order
1. The company goes to court
2. The reasonable probability survival test is put into action
3. Provisional order take 4 to 5 weeks
4. The master of the court appoints a provisional manager
5. DR and CR are dealt with first
6. Staff retrenchments and lay-offs. Integration of directors and employees.
7. Share holders more likely to loose
8. Transactions can be voidable
1. No court appearance is necessary
2. The reasonable prospect of survival test is put into motion
3. Final order takes less time thus quicker
4. The provisional manager is appointed by Business Rescue
5. Affected persons such as employees are dealt with first. CR get better returns on claim. Saves 30% of jobs.
6. Prominent to keep jobs and productivity going. Employees and Trade Unions could put up an alternative offer
7. Payment of dividends still likely
The starting point has moved for the creditors claim of liquidation to recovery. It was pointed out that judges needed to have a business understanding and be able to make informed decisions and that Judicial Prudence needs development. This is a break from the company act that only dealt with Debtors and Creditors, by including the affected persons. Judges for cases should not be tied down to provinces, districts or specialization benches so that the best judicial effort can be made. Judges are not elected but must prove merit background
Former Justice Myron Steele of Delaware USA has 85% success in court cases and is the specialist on Business Rescue which is practiced in the USA. South Africa totals around 150 judges which means the installation of business rescue will require more judges. These judges will need to be brought up to scratch in a very short time however this runs the risk of not being adequately trained. Judges need to know and have dealt with business instead of being generalists which is the case at present in High Court. The risk in un-trained persons will result in more unsolved cases. Very few cases are recorded for judges to follow or refer to so there is a need for a specialist board and access to information not readily available. Computerization of the system will help greatly.
Professor Piet Delport (Department Mercantile Law at Pretoria) heads up the Companies Tribunal explained the intricacies of the old and new law. Bringing into mind that share holders would lose authority and those meetings where a quorum was not met was impossible. He also explained how self-fulfilling business rescue was. However the danger where boards took the view that they were not financially distressed were in danger.
The DTI failed to make comment.
However the negatives to Business Rescue are
1. special committees who are independent members are empowered to act for the transaction on the board
2. Business Rescue recommends full disclosure to stake holders
3. There is an opportunity for the minority to veto proceedings
4. Business judgment differences between parties sides of the same story
5. Appraisal actions are expensive and judges don’t like them
6. Shadow directors appointed
7. Nominee directors will bring an infusion of cash but private equity funds are used for leverage
8. Two thirds of vote given to shareholders
9. The biggest poison pill is the possible under-valuation of the company
10. At current there is no program of educating judges on business rescue. Decisions are being made by specialist panels and the judiciary chancery for commercial litigation under the Supreme Court of Appeal.
11. Cost of the system is high which makes it suitable to corporate business currently.
The Positive for adopting business rescue are
1. The rescue of large companies on a basis that is already proven in the USA
2. Business Rescue meets the Social Ethnics committee guidelines by 50% compliance
3. It is innovative and a tool for short term issues
4. Offers greater efficiency
5. Must ensure integrity of the companies possibility to continue business
6. Allows for Mom & Pop business to receive institutional investors
7. No takeover or predatory opposition against board of directors
8. Looks at the best interest for the stockholders and company
9. Controlled by an entity outside the company to prevent corporate raiders
10. Directors have to show loyalty and care
11. Financial advisers are gate keepers and gives the company a higher standing.
12. The biggest positive is that the words SHALL has been replaced with MAY
13. Mediation system instead of litigation with judges
Directors have to show greater responsibility in the company and their rolls are changing from creators to one of loyalty and responsibility. Directors have to meet certain criteria that are not only financially based but also socially based such as
1. Caring the burden of leadership
2. Intuitiveness in deals
3. Responsibility to the board
4. Fairness to all parties
5. Ensure stockholders approval
6. Makes sure that they are authorized to carry out actions under the company charter
7. Build up good faith in the company
8. Creation of a board of directors gives the company a real value
9. Better inform stockholders
10. Directors can have a controlling share in the company up to 37% which will allow them to vote in their own interest.
11. Directors may not do business in competition to the board on which he serves. If the director finds that he is in competition he must disclose it. A financial constraint is then applied.
12. Board Directors should be the best person for progress who are informed risk takers in order to benefit the company.
Directors should be elected to for three years in order to carry out their responsibilities. Board of directors are elected to protect the company against fundamentally flawed decisions.
How to go about Business Rescue
1. The company needs to make application to the court. The new system eliminates court appearance by the company. A meeting is convened with statutory bodies.
2. Directors have to convene the meeting and show duties of care and diligence
3. The meeting must be approved by stockholders
4. Full disclosure to the board and stockholders through the meeting needs to be sanctioned
5. A takeover panel is formed and put into place for supervision
6. The matter goes to court if more than 15% of the vote is against the decision
7. The appraisal remedy is put into place by the court