Companies will only survive by adjusting to the changing environments
Updated: Sep 8, 2020
Authors: Gareth Cremen – Director and Craig de Bruyn – Associate Designate
How business rescue proceedings can add to our troubles.
Many may link the title of this article to the philosophy as prescribed by Charles Darwin. Adjusting to external pressures is something that every company has to be aware of and be flexible to. They will be asking: what kind of corporate adjustments are necessitated by the outbreak of this pandemic?
COVID – 19 has gripped the globe more than what business leaders, world organisations or governments could have anticipated. With a receding economy in South Africa, companies have barely kept their proverbial heads above solvency waters but there is no way we could have commercially prepared ourselves for crisis.
The sad truth is that many businesses do not have contingency plans in place to effectively deal with a crisis of this scale. The strenuous short term demands on cash flow has meant that many companies cannot apply the archaic principle of capital maintenance. The shortfall of human resources to maintain production and the lower buying power of consumers has left many directors and business owners bewildered. There is however some silver lining for companies which comes in the form of business rescue.
The national lockdown as announced by our President on the 23rd of March 2020 may cause severe financial distress for many companies if a proper plan is not set in place to navigate a way to restructure their affairs. Clog the revenue pipeline and a whole set of domino effects are set in motion for our companies going forward which will ordinarily translate to a liquidation.
However, the Companies Act 71 of 2008 (the “Companies Act”) still does provide helpful tools for directors to apply in these times, one of them being the application of the solvency and liquidity test. Directors must still be satisfied that the company will be able to pay its debts as and when they become due and payable in the ordinary course of business. This test must be applied more carefully and prudently, especially now.
Although most major corporations will have no issues in sustaining themselves through this pandemic given their deep pockets, the same may not be so easy for companies who may directly rely on their corporate survival through healthy sales, debtors honouring payment timelines and other liquid assets which are kept flowing.
However, panic and chaos need not be the order of the day. Directors have a lot more power and tools at their disposal in order rescue their business in these troubled times. Enter business rescue proceedings.
Business rescue proceedings are proceedings aimed to facilitate the rehabilitation of a company that is financially distressed by providing for the temporary supervision of the company. The company is able to reorganise its affairs with the assistance of an independent practitioner with turnaround management competencies. The major benefit of business rescue proceedings is that there is a temporary stay on the rights of claimants to enforce any actions
This is not the eventuality envisaged by our state leaders and directors are therefore encouraged to consider section 129 of the Companies Act in passing a resolution to commence business rescue if it believes that the company is financially distressed (i.e that it will not be able to pay its debts as and when they become due and payable in the ordinary course of business).
Along the same lines, directors must also be warned of section 129(7) of the Companies Act provides the following:
If a board of the company has reasonable grounds to believe that the company is financially distressed, but the board has not adopted a resolution contemplated in this section, the board must deliver a written notice to each affected person, setting out the criteria referred to in Section 128(1)(f) that are applicable to the company, and its reasons for not adopting a resolution contemplated in this Section.
Our economy needs to remain anchored amidst these testing times. Companies must consider business rescue in these times in order to keep South Africans active in the labour market and continue to supplement to our nations fiscus through corporate and private taxes - all these will be impossible if companies succumb to liquidation because they are not able to adjust to the changing external environments.
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