The Constitutional Court's recent ruling in the Salungano Group matter has sparked concern about the future of business rescue in South Africa, particularly the implications for creditors who provide finance to companies after business rescue proceedings have commenced.
The court, in a well-reasoned and well-written judgment, ruled that post-commencement creditors do not have the right to vote on the adoption or rejection of a business rescue plan.
While some have warned that this could have a negative effect on the process of business rescue generally and discourage lenders from providing much-needed funding to financially distressed businesses, I am of the view that these concerns are overstated.
On the contrary, there is far more reason for reassurance than for any concern for the future of business rescue and obtaining post commencement finance.
Business rescue is here to stay
The reality is that many companies face financial distress, sometimes more than once during their existence. When this happens they generally have three options: face liquidation, enter business rescue or resolve their financial difficulties informally, including through a compromise with creditors. It will pertain to whether or not a lender of monies post the commencement of business rescue can vote on a business rescue plan.
Business rescue has been part of South Africa's legal and commercial landscape for more than 15 years. It is a well-entrenched and firmly established process that provides for financially distressed companies to restructure their affairs, recover, continue operating (the classic rescue), and failing this, pay a higher dividend to creditors than they would receive on liquidation (known as the alternative rescue).
It will prevail whether or not a post-commencement financier has a vote on the adoption or rejection of a business rescue plan. Certainly, the Constitutional Court's judgment does not, and will not, change that.
I remind all who hold different view that this is not the first court decision that has caused concern to those involved in Chapter 6 business rescue proceedings, and it will not be the last.
What really matters to post-commencement financiers?
I have yet to encounter a post-commencement financier who provided finance to a company in business rescue and expressed concern about, or even raised the question of, whether or not they would be entitled to vote on the business rescue plan, or agreed to make that loan on condition they can have a vote on the business rescue plan.
I would encourage others working in this field to ask themselves the same question. If their experience mirrors mine, why should the fact that these financiers cannot now vote on a business rescue plan suddenly affect their willingness to advance funding?
Creditors such as banks and financial institutions generally lend money to companies on the strength of security held over the company's assets. In most cases this security takes the form of mortgage bonds, special notarial bonds or perfected general notarial bonds. It is often these same creditors who advance post-commencement finance to financially distressed companies, with the additional funding secured under their existing arrangements.
Even where the bonds have been fully utilised, these institutions may advance further funding under the additional finance provisions of their bonds. This has certainly been my experience in practice. The decision to provide post-commencement finance is therefore driven primarily by commercial considerations, risk and the security available to the lender (to manage that risk), rather than whether or not a lender has a vote on the business rescue plan.
A positive development for SA business rescue
With an increasing number of foreign investors looking to invest in companies undergoing business rescue, I regard this judgment as good news. It brings South Africa's approach more closely into line with jurisdictions that are recognised for their well-respected, established restructuring and turnaround frameworks, including the US, UK, Singapore, Japan and India.
Rather than viewing the judgment as a setback, we should recognise that business rescue is and will remain an important and valuable tool used by financially distressed companies to preserve economic activity and for safeguarding employment.
To the gloom-mongers and doomsayers I say, chin up and let's continue our important work of promoting, growing and turning around financially distressed companies, preserving the jobs that depend on them and, in some cases, creating new employment opportunities. Long live business rescue.
Strime is joint CEO of Fluxmans Attorneys and head of its business rescue & insolvency department.
