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

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Presentation on theme: "BUSINESS RESCUE OPTIONS AVAILABLE IN SOUTH AFRICA By David Gewer Director,Werksmans Inc 1."— Presentation transcript:

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

2 INTRODUCTION 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 2

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 3

4 REASONS FOR BUSINESS FAILURE IN SOUTH AFRICA 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 4

5 WORLDWIDE TRENDS 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 5

6 BENEFITS OF WORKOUTS 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 6

7 ANALYSIS OF CURRENT PROVISIONS 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 7

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 8

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) 9

10 INFORMAL WORKOUTS 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 10

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 11

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

13 WHEN SHOULD BUSINESS RESCUE REGIMES BE UTILISED? 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 13

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

15 IMPORTANT PRINCIPLES FOR SUCCESSFUL WORKOUTS 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 15

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 16

17 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 CONCLUSION 17

18 QUESTIONS David Gewer Director, Werksmans Inc. Tel: (011) Fax: (011) Werksmans Attorneys th Street, Sandown, Sandton, 2196 Private Bag 10015, Sandton,


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