Jan 18,2010 / News / Legal Brief

Although South Africa’s new business rescue regime is a shift away from the current creditor-friendly focus of liquidation, it will not leave banks and other corporate creditors in the lurch. They will however need to be especially vigilant in safeguarding their interests in business rescue proceedings, says Eric Levenstein, a business restructuring and insolvency expert at corporate law firm, Werksmans.

He says debt rescheduling and reduction are key elements of business rescue, which will be introduced to the South African business environment when chapter 6 of the new Companies Act comes into effect in the first half of 2010. The aim of the new business rescue regime is to preserve jobs and avoid economic disruption by enabling financially distressed companies to trade themselves out of their predicament instead of being liquidated.

“With business rescue, the emphasis is on giving troubled companies a second chance. Because of the strong focus on how creditors can collect debt from companies undergoing business rescue proceedings, the banking sector is a major stakeholder in the new regime,” Levenstein says.

He points out that banks and other lenders are directly affected by a number of different provisions of the new business rescue framework, including those covering contracts and agreements.

SUSPENSION OR CANCELLATION OF AGREEMENTS

“One of the most significant changes is that any loan, lease or overdraft agreement can be wholly or partly suspended, or even cancelled, by the business rescue practitioner appointed to supervise the company during business rescue,” says Levenstein. The business practitioner will have the power to take these steps if he or she is of the opinion that an agreement unduly prejudices the company concerned. The lender’s only recourse then will be to issue a claim against the company for damages.

“But this is not to say that the banks will have to stand by helplessly while a business rescue practitioner summarily cancels their agreements. The law makes it clear that the practitioner can only suspend or cancel agreements if this was part of the original business rescue plan,” he says.

“Hence, any proposed suspension or cancellation of an agreement would first have to be included in the business rescue plan and then put to the vote by creditors. If creditors believe they are being unfairly dealt with, they could simply vote against the adoption of the business rescue plan.”

For a business rescue plan to be adopted, the holders of more than 75 percent of the creditors’ voting interests must be in favour of the plan. In the case of independent creditors, meaning any creditor who is not related to the company, 50 percent of the holders of their voting interests must be in favour of the business rescue plan.

This underlines the importance of banks taking an active interest in all business rescue proceedings affecting them, Levenstein says. “It will be critical for banks and similarly creditors to ensure they are properly represented throughout the business rescue process. From the moment a resolution is passed to begin business rescue proceedings, the banks should make sure they are part of every step of the process.”

MORATORIUM ON DEBT ENFORCEMENT

Another business rescue provision with a significant impact on the banking sector is the mandatory moratorium placed on debt enforcement during business rescue proceedings. “When a business rescue is in progress, creditors are prohibited from enforcing any debt owed by the company. The only exceptions are if debt enforcement is provided for in the business rescue plan or has court approval.”

Levenstein says banks and other financial institutions should also note that:

  • No creditor can apply for the liquidation of a company undergoing business rescue proceedings.
  • The business rescue practitioner is required to consult with the creditors, shareholders, employees and trade unions of a company in business rescue but is not obliged to follow their instructions.
  • The business rescue process is court-driven and so may become cumbersome unless specialised business rescue or recovery courts are introduced.

Yet another business rescue matter likely to affect banks is that of post-commencement finance. This is funding sought for the company after business rescue has formally begun.

“In the United States, where post-commencement finance is known as ‘debtor in possession’ finance, this is a huge industry,” Levenstein says. “In South Africa, the question is: will the banks be willing to provide this finance during business rescue? Considering that many of the company’s assets might already be encumbered when proceedings commence, it will be interesting to see the appetite of South African banks for post-commencement financing.”