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Business rescue – a new business consulting landscape

Posted By Mwendabai Kalaluka , 29 May 2017
Updated: 21 June 2017

Disclaimer: The contents and information provided in this article are generalised and must not be acted upon as legal advice

“This article makes extensive reference to the study conducted and report written by Professor Marius Pretorius of Business Enterprises at University of Pretoria (Pty) Ltd (“the study”), undertaken for the CIPC, entitled “Business Rescue Status Quo Report”, issued and published on 30 March 2015.

Mwendabai KalalukaA not so new landscape has been created by the New Companies Act presenting lucrative business opportunity not only for the legal fraternity but business and finance and accounting professions. Business rescue has for some time now been ignored under the misunderstanding that it’s a turf for the legal profession, but this is far from true as Business Rescue above all else requires key business and entrepreneurial skills in addition to Finance, Taxation and Legal skills.

Financially distressed companies in South Africa now have an opportunity can opt to reorganise and restructure through Chapter 6 of the amended Companies Act, No 71 of 2008. This has far-reaching effects on creditors, financial institutions, shareholders, employees and restructuring specialists.

Kindly note that Section 66 (1A) of the Close Corporations Act 69 of 1984 provides that the business rescue provisions of the Act apply equally to close corporations as they do to companies.

To fully determine what causes firms to enter into business rescue and how business rescue is initiated, it’s of fundamental importance to comprehend the terms and provision including key definition, as contained in chapter 6 of the Companies Act, No. 71 of 2008, amended.

The key TEST to determine whether an entity should enter is that of financial distress which the Act has defined under section 128(1)(f), subject to two (2) conditions below, as: “financially distressed, in reference to a particular company at any particular time, means that; (i) 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 (ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months”.

It would then be safe to say for an entity to consider entering into Business Rescue (“BR”) the company must be "financially distressed". This means that it is reasonably unlikely that the company will be able to pay its debts as they become due in the next 6 months, or, it is reasonably likely that the company will become insolvent in the next 6 months. If a company is financially distressed and the directors/members do not file for BR, they can attract personal liability, according Pat Pattinson.

The ultimate goal of business rescue is to reach a commercial and viable solution, culminating in the rescue of the company as well as maximising the likelihood of its continued existence on a solvent basis.

However the following conditions are also deemed to hold:

(i) Reasonable prospect: In a decision of the South Gauteng High Court, in the case of Oakdene Square Properties (Pty) Ltd v Farm Bothasfontein (Kyalami) (Pty) Ltd 2012 JPR 0239 (GSJ), the court considered the plausibility of business rescue in an instance where liquidation was preferable. In this instance, the court dismissed the application for business rescue and held that a liquidation of the company would achieve a similar result to that of a business rescue. This judgment makes it clear that prior to a company, or an affected person being placed in business rescue, consideration should be given to the nature of the company, the extent to which business rescue is the appropriate procedure for that company and the extent to which business rescue would be more beneficial for the company than liquidation. If the answer to the latter questions is in the affirmative, business rescue proceedings are likely to be successful. If not, liquidation may be the preferred alternative. The term reasonable prospect is further defined under key terms and phrases as well as introduction of the concept of;

(ii) The company must not be insolvent in terms of the definition of insolvency under the Act and if its insolvent and proceedings have commenced or imminent for windup, BR should may only be considered if it results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company in line with Section 128(1b)iii = Better Return than in Liquidation (“BRiL”)

It is important to note that when referring to insolvency, the Act has two considerations for insolvency;

(i) Technical (factual) insolvency whereby the total liabilities of the entity exceeds the total assets and thereby reflecting negative equity;

(ii) Commercial insolvency; whereby it appears 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, regardless of whether assets exceed assets.

The measure of solvency according to the Act refers to the second definition.

The test of reasonable prospect above entails that business rescue is meant for economically viable companies only, and that economically unviable companies entering the process, when allowed, is the cause of its high failure rate overseas, as well as locally.

Note that depending on circumstances surrounding the business rescue, in terms of how the BR proceeding are instituted, whether voluntary or by the courts (in favour of affected person), the Business Rescue Practitioner (“BRP”) will be appointed by either the company or by the court. However, further note that any BRP appointment has to be ratified by the court.”

Section 138 of the Act regulates the qualifications required for a business rescue practitioner. In order to qualify as a business rescue practitioner a person must be –

• a member in good standing of a legal, accounting or business management profession accredited by the CIPC (section 138(1)(a)); and

• be licensed as such by the CIPC (section 138(1)(b)).

From this it appears that a person must satisfy both the above requirements for appointment. But Regulation 126 of the Act states that a person who is part of an accredited profession need not be licensed by the CIPC (Regulation 126(2)). The CIPC has further indicated that it is, at least for the meantime, accrediting certain professions for the purposes of business rescue appointments and instead is appointing and licensing business rescue practitioners on an ad hoc basis in accordance with section 138 (1)(b).

There is now a drive by the CIPC to transfer the responsibility and regulation of BRPs including licensing/ accreditation to Recognised Professional Bodies (“RPBs”). This means CIPC will accredit RPBs for purposes of issuing accreditation to their members as well as monitoring and ensuring compliance as well as adherence to approved codes of conduct. IBASA as a professional body intends to proceed with an application for the RPB accreditation by the CIPC and once accredited will provide IBASA members with the business opportunity of acquiring accreditation/ licence to operate in the Business Rescue space. I would personally encourage all our existing and potential members to consider this field and exploit the opportunities it presents.

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Key success factors in cross border trade

Posted By Prof Shephard Dhliwayo , 29 May 2017
Updated: 29 May 2017

The export and import of goods and services by small, micro and medium enterprises (SMMEs) usually referred to as cross border trade (CBT), is an important form of trade in many developing economies of the world. Unfortunately it is largely ignored by governments, economists and researchers. This is surprising given the importance of the trade in many economies, for example, the value of CBT in the SADC region averages US$ 17.6 billion annually[1], and contributes 30 to 40%[2] of intra-SADC Trade.

Recent research shows some interesting facts. It was based on data collected from 146 cross border traders from 8 SADC countries. The aim was to identify key success factors and constraints faced by traders.

The study yielded the following results:

• It is just a portion of the more successful small and medium enterprises (SMMEs) that go into the import and export business while the less successful ones, operate in the local market or close shop. The risk of failure of an export business is highest in the first 5 years and that only 25% of the business last for over 10 years.

• Support interventions by governments tend to be under-utilized. Only less than 13 % South African SMMEs were aware of the different export incentive schemes available to help them. The reasons advanced for this include, the programmes being irrelevant or the SMEs not being aware of the existence of such programmes. There is also evidence of very low accessibility to loans by SMEs.

• The top three ranked key skills needed to succeed in CBT were identified as: (1) the sourcing of markets and supplies. (This is the ability to identify potential suppliers and customers, and be able to establish and sustain business networks). (2) financial management skills (This is the ability to source funding for the business as well as to optimally apply funds in the running of the business. This includes skills in working capital management). (3) the knowledge and management of border issues (This includes knowledge of import and export duties and tariffs as well as knowledge of the rules, regulations or incentives that apply to cross border trade).

The top three forms of assistance required to succeed in CBT were identified as: (1) The sourcing of markets and supplies, (2) funding and (3) general business management skills. [3] •

The three most inhibitive constraints faced were identified as the (1) sourcing of markets and supplies, (2) funding and (3) border restrictions. The traders lack formal protection due to the nature of their operations which borders on informality. The lack of recognition of cross border trading as a form of business results in the criminalisation of trade which leads to harassment and abuse by authorities. This should be addressed by the respective authorities and one stop border permits and licences issued. Access to government assistance programmes as well as sector formalisation should be improved.

 Sources Cited:

[1] Southern Africa Trust. 2008. Informal Cross-Border Trade in SADC. Consultation and Planning

[2] 2010. Unleashing the Potential of Women Informal Cross Border Traders to Transform Intra-African Trade -

[3] Chiwara, L., & Ndiaye, T. 2010. The contribution of women informal cross border traders to transform SADC economies. UNDP.

The full research article; Export experience and key success factors in cross-border trade: Evidence from Southern Africa, is published in Acta Commercii 17(1), a383. (This is an open access journal)


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