Business rescue offers 10% chance of survival and better benefits to creditors

The construction industry is unique in that developers, manufacturers, suppliers, contractors and sub-contractors are all in the same cash stream, and when a company at the top end of the chain becomes financially distressed it has a knock-on effect on the rest of the industry, declares Databuild CEO Morag Evans.

Over the last year, no fewer than five local construction companies, all of them large enterprises, have been placed under business rescue. This has not only led to the loss of thousands of jobs and the demise of hundreds of sub-contractors, but also negatively impacted contractors’ cash flow due to non-payment of outstanding invoices.

Introduced in 2011 under Chapter Six of the Companies Act, business rescue offers an alternative remedy to liquidation for financially distressed companies that are unable to meet their financial obligations.

“While commencing with business rescue doesn’t absolve a company from having to settle its debts, it does offer a breather to delay paying pre-existing debts, such as interim payments due under a construction contract,” Evans explains. “In the meantime, creditors are required to continue supplying goods or services to the company, just as they did before business rescue proceedings commenced.”

“It’s imperative that suppliers and contractors know and understand their rights and obligations around business rescue, so that they can take the correct and appropriate action to claim what is owing to them,” she adds.

The process to begin business rescue proceedings is simple. Any affected person (i.e. directors, shareholders, registered trade unions and employees) may apply to the courts to place a company in business rescue. Alternatively, the company directors may file for voluntary business rescue with the Companies and Intellectual Property Commission. As soon as a company enters the business rescue process all claims against it are frozen, in accordance with the Act.

Once a notice to initiate business rescue proceedings has been filed, a business rescue practitioner (BRP) is appointed within five days to temporarily take over management of the company.

“Acting independently and in the best interest of creditors, the BRP’s primary function is to reduce the company’s debt burden so that it can continue to trade,” says Evans. “This entails drawing up a business rescue plan which includes restructuring the business and formulating a payment scheme with creditors.”

Before submitting their claims to the BRP for consideration and inclusion in the business rescue plan, Evans strongly advises contractors to ensure their documentation is in order, so as to secure the best financial outcome.

“Make sure all dealings around work done or goods supplied is recorded in writing. Do not rely on verbal agreements or ‘good relationships’ to see you through the process,” she stresses. “Creditors who are unable to quantify and prove outstanding amounts will not receive the maximum benefit of the payment scheme.”

It is also important to note that creditors only have one opportunity to submit their claims. “Additional claims will not be considered and any other outstanding monies will have to be forfeited.”

The business rescue plan must be successfully voted in by the creditors before it is implemented. “Should creditors reject the proposed plan, the BRP will revise it and if it is rejected for a second time, the chances are good that the company will be liquidated.”

While the Act stipulates that business rescue proceedings should last for three months, Evans says that six months is more realistic, and some may even drag on for up to a year.

“Our business rescue workshops play an integral role in helping suppliers, contractors and sub-contractors better understand the process and the impact it can have on their business. This is just one way in which Databuild, as the knowledge hub of the construction and related industries, strives to empower all players with the information and tools they need to best run their companies,” Evans concludes.