South Africa’s economic woes were brought sharply into focus on 26 February 2020 when South Africa’s Minister of Finance, the Hon. Mboweni, delivered his budget speech. Whilst there was much speculation and debate beforehand about what the Minister was going to say, I don’t think ordinary South Africans harboured any real hope that their financial lots were about to improve consequent upon Mr Mboweni’s speech. Although it was a welcomed reprieve to South Africans that income taxes were not increased, the general economic sentiment after the speech was not really any better than before it – most everyone remained acutely aware that economic growth and tax revenues were down, unemployment and national debt was up, state-owned enterprises were seemingly beyond repair and in dire need of vast sums of money if they are to survive. South Africa was (and is) in a recession and facing a likely downgrade by Moody’s of Government bonds to “junk” status – something that will worsen our economic woes if it happens.
As if South Africans and South African businesses were not already finding it difficult to make ends-meet at the beginning of 2020, in early March we fell victim to the SARS-CoV-2 outbreak, also known as Covid-19. As each day passes I, like most people around the globe, become increasingly aware of the devastation, both to our people and economy, that Covid-19 will leave in its wake. Even at this relatively early stage in the global shutdown there can be no doubt that the economic consequences of Covid-19 will be beyond comprehension and assuredly be felt long after Covid-19 has gone. With this in mind, over the past few days I have read with interest a number of articles about “force majeure” (a contractual legal remedy that protects a contracting party who is unable to perform under a contract due to some unforeseen intervening event commonly referred to as an “act of God”) and whether Covid-19 constitutes such an event. Make no mistake it is a worthy and valid legal question, although in some cases I suspect that our courts will hold that Covid-19 did not constitute a force majeure. Be that as it may, in South Africa there is another legal remedy – business rescue – that may be available to companies and which, in my view, they ought seriously to consider if they are to weather the Covid-19 storm.
Business rescue is a legal process that is available to companies that are “financially distressed”. It is different to liquidation and indeed ought to be invoked long before there is talk of liquidation. The purpose of business rescue is to try and rehabilitate a company that is “financially distressed” by providing it, and the management, with the temporary supervision of its affairs, business and property by a business rescue practitioner; a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and the development and implementation of an approved business rescue plan. Such a plan aims to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximizes 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. The Companies Act defines a “financially distressed” company as a company that appears to be reasonably unlikely to be able to pay all of its debts as they fall due and payable within the immediately ensuing six months; or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months. These are the very circumstances that many companies in South Africa will be faced with consequent upon the economic effects of Covid-19. Absent drastic intervention by the public and private sector to alleviate the devastating economic consequences that Covid-19 will have on, amongst others, companies in South Africa, it will soon be impossible for many South African companies to keep their doors open. In such circumstances, perhaps the only way that these companies will have a fighting chance at surviving the effects of the Covid-19 pandemic, is if they are afforded temporary financial reprieve under business rescue until it passes.
Experts on Covid-19 agree that the pandemic is temporary. One can debate how long it will hold South Africa hostage, but taking what has happened in China into account, and hoping that the responsible and necessary measures put in place by our Government are effective, there is every reason to hope that within the space of a few months we too will have Covid-19 under control and will then be able to begin rebuilding our economy and businesses. If this is the case then there is all the more reason for companies faced with financial ruin because of Covid-19 to act sooner rather than later. As each day passes and as the economic shutdowns around the world intensify, companies will inevitably move closer and closer to breaking point – the point at which they are no longer able to be rehabilitated and when the only objective avenue available to them is liquidation. For most companies that presently qualify for business rescue, the main form of relief will be (barring certain exceptional cases) the temporary moratorium on legal proceedings against them – in short your debts will be held in abeyance and your property will be off-limits to creditors and protected pending the approval and implementation of a business rescue plan. Employing this remedy may well be your best chance at survival. I strongly recommend that you consider it and possibly take advantage of it.
I have significant experience in the field of business rescue. Should you wish to canvas the topic, or even a related topic, please don’t hesitate to get in contact with me.