Company Announcement - According to a recent report by Statistics South Africa (download full report here beta2.statssa.gov.za , South Africa’s manufacturing industry recorded the third consecutive quarter-on-quarter contraction in 2014, shrinking by 3,4% in the third quarter of 2014.

According to Gareth Cremen of Ramsay Webber Attorneys, the knock-on effect of recent adversity faced by industries such as mining, electricity, gas and water causing contraction has people whispering of a “tsunami of closures” among South African businesses, while still hoping that 2015 will bring better times. We have seen an increase in business rescue proceedings, especially over the past few months; and more so in the furniture, safety clothing and the manufacturing sector. Notably, though, company management and boards are currently paying attention to Business Rescue – and so they should.

Introduced through the enactment of the Companies Act 71 of 2008 (“The Act”), Business Rescue is designed to “provide for the efficient rescue and recovery of financially distressed companies in a manner that balances the rights and interests of all relevant stakeholders.” Business rescue proceedings aim to aid a company in financial distress by allowing it to reorganise and restructure its affairs, assets, equity, debts and liabilities. The first goal of effective business rescue proceedings is to rescue a company from financial distress and avoid liquidation. If this is not possible, then the implementation of a business rescue plan should result in a better return for the creditors or shareholders than immediate liquidation would.

“Business rescue” is defined in the Act as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
The temporary supervision of the company, and of the management of its affairs, business and property;
A temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

When is a company financially distressed?
Only a company that is “financially distressed” can be placed under Business Rescue. A company is "financially distressed" if at any particular time -
a. it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or
b. it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.
The business rescue process should be implemented at the earliest possible time, when a company is showing signs that it is unable to pay all of its debts, including salaries/wages, as they become due and payable within the immediately ensuing six months; or it may soon become insolvent within the immediately ensuing six months, but has not yet reached the stage of insolvency.

All Directors and prescribed officers should be applying the solvency and liquidity test in the day-to-day running of the companies they serve. For any purpose of the Act, a company satisfies the solvency and liquidity test if, taking into account all reasonably foreseeable financial circumstances of the company at that time:
(a) the assets of the company or, if the company is a member of a group of companies, the aggregate assets of the company - as fairly valued - equal or exceed the liabilities of the company; or if the company is a member of a group of companies, the aggregate liabilities of the company, as fairly valued; and
(b) it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the date on which the test is considered; or - in the case of a distribution - 12 months following that distribution.

The sooner a company is placed in business rescue, the greater the chance of that company being successfully rehabilitated. This is especially true if it is placed in the hands of the right business rescue practitioner. Proceedings may be implemented by a court, creditor, company director or other interested party. Once proceedings are implemented, there are certain responsibilities the company’s directors must undertake.

It is also important to note that an affected person - which include shareholders, employees and trade unions - may apply to court at any time for a court order to commence business rescue proceedings, and place the company under supervision and commence Business Rescue proceedings.

Director's duties and responsibilities
The main features of the The Act include high standards of corporate governance and stricter provisions governing directors’ duties and liability. Non-compliance with the Act by a Director or prescribed officer will result in personal liability. Section 218(2) of the Act renders a person who contravenes the Act liable for the other parties loss or damages.

The test enunciated in Da Silva and Another v Coutinho 1971 (3) SA 123 (A) at 140 E-F, quoting McKerron with approval, is: -

"To entitle a person to sue for breach of a statutory duty he must show that

(1)   the statute was intended to give a right of action;

(2)   he was one of the persons for whose benefit the duty was imposed;

(3)   the damage was of the kind contemplated by the statute;

(4)   the defendant's conduct constituted a breach of the duty; and

(5)   the breach caused or materially contributed to the damage."

In PHILLIPS AND OTHERS v VAN DEN HEEVER NO AND ANOTHER 2007 (4) SA 511 (W), a matter determined on appeal, the court restated the general principle in respect of costs de bonis proriis at [46]: -

“Where, however, such a fiduciary appointee acts in an improper or unreasonable manner or with lack of bona fides, costs may be awarded against such person in his or her personal capacity. 'The basic notion is material departure from the responsibility of office. . . .'  Costs for the own account of the fiduciary (whether curator, executor, trustee) have been awarded on findings of negligence, unreasonable conduct, abuse of trust, acting without care, fraud, want of honesty, wilfulness, vexatiousness, acting in one's own interest and not that of the estate concerned, want of bona fides, and mala fides.  In the case of a curator appointed in terms of POCA it would appear that the exclusion from liability applies in all cases, save where there is an absence of good faith.”