BUSINESS RESCUE OPTIONS AVAILABLE IN SOUTH AFRICA

1. 1 BUSINESS RESCUE OPTIONS AVAILABLE IN SOUTH AFRICA By David Gewer Director,Werksmans Inc

2. INTRODUCTION 2 • Many reasons for business failures in South Africa • Worldwide trend towards rescues, turnarounds and workouts • Possibilities of increased returns for creditors and stakeholders if turnarounds successfully implemented • Limited possibility of rescues in terms of current legislation. Analysis of limitations of • judicial management procedure • section 311 of Companies Act which provides for schemes of arrangement and offers of compromise

3. 3 • Possibilities of informal workouts within current legal framework, with particular emphasis on the rights of secured creditors • Problems currently experienced in implementing informal workouts • Need for new initiatives and legislation in South Africa • Analysis of viability and prospects of success of proposed amendments to South African Insolvency Law; and timing thereof

4. REASONS FOR BUSINESS FAILURE IN SOUTH AFRICA 4 • Shortage of working capital • Factors related to interest rates and the volatility of the Rand • Mismanagement and/or fraud • Discussion of circumstances in which businesses may be capable of being rescued

5. WORLDWIDE TRENDS 5 • Global move towards business rescue • Realisation of effect that liquidations may have on financial institutions and even national economies • Advantages to be gained from co-ordinated response by creditors to debtors in financial difficulty • Recognition of need for appropriate legal, regulatory and governmental policy framework

6. BENEFITS OF WORKOUTS 6 • Facilitates the rescue and rehabilitation of businesses • Preserves employment • Enhances value of businesses, maximises long-term returns for stakeholders and ideally ensures greater dividends than would accrue on insolvency • Reduces detrimental impact on economy • Enhances commercial certainty and expedites recovery

7. ANALYSIS OF CURRENT PROVISIONS 7 • Judicial management • Analysis of section 427 of the Companies Act which provides for judicial management • Consequences of judicial management – • directors replaced by judicial manager • no concursus creditorum (freezing of claims) • Requirements for judicial management • Problems which may be experienced in obtaining judicial management order which may include having to satisfy the court that adequate financial resources will be available to the judicial manager

8. 8 • Other problems experienced in practice including • the inevitable liquidation of companies placed into judicial management • the expense associated with judicial management • the lack of expertise in respect of specific industries • absence of benefit to creditors whilst company is under judicial management • stigma attached and resultant deterioration of goodwill • reluctance of creditors to continue to supply the company • complexity

9. 9 • Section 311 of the Companies Act • Examination of provisions of Section 311 and relevant cases • Problems including – • delays in convening meetings and having compromises prepared and sanctioned by a court • inability of distressed companies to survive such delays • the possibilities of creditors defeating compromises prior to sanction by applying for winding-up of companies • the practical consequence that often companies are placed into liquidation prior to compromises being effected • no provision for interim period (while compromise is being effected and sanctioned)

10. INFORMAL WORKOUTS 10 • Only effective if all creditors support same (any creditor can block informal compromise by bringing application for liquidation) • Practical difficulties in achieving when there are numerous creditors (who would all be required to support the proposed compromise). This results in inordinate delay • Failure to deal with contingent or prospective creditors • Discussion of subordination agreements

11. 11 • Problems associated with compromise being implemented in the absence of the sanction of the court – • possibility of liquidation ensuing • possibility of dispositions made subsequently being set aside • uncertainty as to whether further claims will arise

12. NEED FOR NEW INITIATIVES IN SOUTH AFRICA 12 • Self-evident having regard to the aforegoing • Business rescue regime requires active participation of creditors

13. WHEN SHOULD BUSINESS RESCUE REGIMES BE UTILISED? 13 • Business rescue provisions should be available in the following circumstances: • Where a business is not yet insolvent but is experiencing/expecting financial difficulties • Where a business is in fact insolvent but has not yet been placed into liquidation • Where the business is in fact insolvent and has been placed into liquidation

14. ANALYSIS OF PROPOSED AMENDMENTS TO SOUTH AFRICAN INSOLVENCY LAW 14 • The Daly proposal – interim measure • Draft Insolvency and Business Recovery Bill

15. IMPORTANT PRINCIPLES FOR SUCCESSFUL WORKOUTS 15 • Statement of principles as compiled by Insol International – • Co-operation of creditors • Agreement by creditors to refrain from taking steps to enforce claims • Debtor to refrain from taking action which may prejudice creditors • Co-ordinated response of creditors • Creditors to be allowed access to information relating to the business in order to enable a proper evaluation to be made

16. 16 - Arrangement between creditors relating to any standstill should reflect applicable law and relative positions of creditors - Information to be made available to all relevant creditors and to be treated as confidential - Repayment of additional funding provided during standstill period should be accorded priority status

17. 17 CONCLUSION • South African law-makers can choose from a wide variety of available rescue procedures • Keep positive elements of our insolvency laws (including anti-fraud provisions of the Companies Act and Insolvency Act; and enquiry provisions) • Consolidate into one statute • Acceptance required by financial institutions and other creditors of benefits of business rescue regime

18. 18 QUESTIONS David Gewer Director, Werksmans Inc. Tel: (011) 535 8135 Fax: (011) 535 8600 Email: dgewer@werksmans.co.za Werksmans Attorneys 155-5th Street, Sandown, Sandton, 2196 Private Bag 10015, Sandton, 2146