Talk to the TMA end of year function;
5th November 2015.
BUSINESS RESCUE
Thank you for your hospitality this evening. I am full of admiration
at your wish to hear someone speak on business rescue at an end of year
cocktail party. Such occasions are more usually associated with a spirit of
bonhomie and a measure of relief at the thought that work may soon be
over and there will be a respite from the business grind. But the sting in
the tail for me was an sms that Robin sent me saying that, over and above
the chosen topic, he is expecting my ‘good humour and style to come
through’. That makes my task rather more daunting. Judges are not
renowned for their sense of humour. High on the Lord High
Executioner’s little list of potential victims in The Mikado, as one of the
“society offenders who would none of them be missed” is the judicial
humourist. And that is in the dubious company of people with limp
handshakes; know it all children and apologetic statesmen of the
compromising kind. But I will do my best not to spoil the enjoyment of
the evening.
Like many of you, my earlier days in commercial practice
notionally involved the possibility of judicial management as a tool to
preserve businesses that had run into trouble but were capable of being
rescued. However, it was not a successful tool. In fact I never came
across a case of a successful judicial management. At most it was a
means for holding creditors at bay while putting together an offer of
compromise under section 311 of the old Companies Act. If the company
remained in existence, usually because of a large assessed tax loss, rather
than any intrinsic value in its failed business, it would come out of
judicial management. But in most cases it was nothing other than a stage
on the road to liquidation. Not surprisingly the people who offered their
services as judicial managers also practised as liquidators. That was the
equivalent of putting the undertakers in charge of the intensive care unit.
As with many other things in South Africa, the Companies Act
2008 is intended to herald our entry into a brave new world. Having, for
other reasons, recently re-read Aldous Huxley’s dystopian novel of that
name, I can only hope that something better is intended for our company
law. Business rescue is a central part of the new scheme. But it requires
us to change our entire mind-set in regard to failing businesses. First we
need to accept that business failure is not a moral wrong, but an
inevitable accompaniment to entrepreneurship in a broadly capitalist
economic system. It is part of what the economist Joseph Schumpeter
called ‘creative destruction’ 1 although in his Marxian analysis, entirely
consistent with the categorisation of economics as the dismal science, he
foresaw it leading to the downfall of the capitalist model. There are
studies on this, but one that I read suggested that at least two thirds of
business start-ups fail. My own experience in the highly competitive
arena of the Bar was that at least that proportion of new advocates would
be unable to build a practice. So business failure is an inevitable
concomitant of an entrepreneurial society.
But if that is so, and the path to building a successful business is
likely to be strewn with failures, we need to escape from the somewhat
puritanical mind-set that regards a failure in business as a moral failing.
Of course I am not speaking of those who engage in dishonest dealings or
fraudulent conduct. That is criminal conduct no different from that of the
burglar, the confidence trickster or the sponsor of a Ponzi scheme. But
1
Capitalism, Socialism and Democracy (1942).
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the business that is misjudged or genuinely runs into difficulties should
be accepted as a normal part of economic life. In my experience that has
often not been the view that has been taken either by liquidators or
creditors and there is often a witch-hunt in an endeavour to uncover
criminality.
The approach that business failure is a normal feature of economic
life underlies the new concept of business rescue. But it is also strongly
influenced by the desperate need in this country to create and maintain
employment. Judging by experience elsewhere one of the major problems
with companies experiencing financial difficulties is perceived to be
labour costs. In South Africa there is, and has been for many years now,
an almost knee-jerk reaction to corporate financial difficulties of
instructing the HR department to reduce head count. This is debilitating,
frequently costly, often harmful if it results in prolonged industrial action,
as may very well be the case, and in many instances damaging to the
business. Asking all those who remain behind to double their workload to
take up the slack from those who have departed hardly ever results in
improved production. There are very few employers inclined to heed the
cautionary tale of Boxer the horse in Animal Farm whose efforts to work
harder, work harder resulted in his death. In Bloemfontein we are woken
by the melodic call of doves cooing “work harder, work harder’, but I
understand that the average person thinks they are urging us to ‘drink
lager, drink lager’.
As yet I have seen little indication that the business rescue process
has engaged trade unions. For that to happen there will also have to be a
shift in the approach of the trade unions, away from short term protection
of their members’ interests to a longer term perspective that, if the
business can be saved, then the jobs of their members can also be saved.
This will be difficult and one can readily understand why. Workers have
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been so badly treated for so many years by employers, which treat them
as both an irritant and readily dispensable, that expecting their trade
unions suddenly to shift focus from protecting workers to preserving
businesses is not easy. But it will need to be done if business rescue is to
succeed. In that regard I wonder how many of you who have an interest
in this field come from a commercial background and how many have a
background in labour relations. That may be something to ponder.
Perhaps the TMA could contemplate inviting a trade unionist to address it
on their approach to business rescue as a way of avoiding retrenchments?
It is too early to express a definitive view from the Bench on
whether business rescue is a success or a failure. But there is a concern.
My sense and that of my colleagues – and I accept that we are usually
seeing instances where the business rescue scheme is contested – is that
in many instances business rescue is being used, not to save a business,
but to stave off creditors and, in some cases, strip the business of assets or
creditors or both. In other words, instead of it being one of the tools for
saving the company, it is being used as a further refuge for the
shareholders and others standing behind the company, to avoid paying
creditors. The cases that have come before the SCA in this area have
almost uniformly been cases where the business rescue plan was doomed
to failure from the outset.
Even more disturbing have been the arguments advanced before us
in regard to the structure of the relevant provisions of the Companies Act.
Recently I wrote a judgment in a case where the shareholder, a trust,
acting through its trustees, resolved to commence business rescue in
respect of a property-owning company with a single major creditor, the
bondholder, where the bond was massively in arrear. Two years later,
when every attempt by them to find the funds necessary to resolve the
company’s difficulties had failed and the inevitable sale of the company’s
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immovable property had occurred, they brought proceedings in which the
trust claimed that because it had failed to take certain steps timeously in
the course of the business rescue the entire exercise in which they had
been willing participants was a nullity. Another case was based on an
argument that once the creditors had voted against a business rescue plan
they could be deprived of their interest by the expedient of an offer to
acquire their shares for an indeterminate price to be paid at an
indeterminate time in the future. In other words rather than asset stripping
there was creditor stripping. These are arguments that are not only
technical but undermine the spirit of business rescue.
In almost all the cases that have come before the SCA the
arguments have been directed at using business rescue to defeat the
claims of large creditors, frequently financial institutions. But that, in
itself, should sound a warning. The almost universal problem that brings
a company to the brink of liquidation is a lack of finance to continue the
business. If it is to be rescued then the co-operation of one or other
financial institution is a necessity. Yet we have a picture of shareholders
fighting to defeat the interests of the very institutions whose aid they need
if they are to overcome their difficulties. In those circumstances business
rescue cannot succeed.
My sense of the underlying reason for this is that the resort to
business rescue is coming far too late in the day for it to be effective. If it
continues to be invoked solely by and at the instance of the company and
its shareholders, in the Micawber-like hope that something will turn up, it
will be no more successful than its predecessor, judicial management. I
suggest that this was not what was intended. For business rescue to be
successful I suggest that it needs to become a more important tool in the
armoury of accountants, banks and other financial institutions and the
lawyers who advise them. It is a remedy that should be invoked far earlier
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in the company’s slide downhill. It is hopeless expecting it to work when
the company has already fallen off the financial cliff. To call for a
parachute at that stage is almost certainly too late. What is needed is to
stop the slide towards the brink. And that, as with its labour relations
aspects, involves a change in mind-set. Business rescue cannot work if it
is invoked too late. In that regard some attention should be given to the
definition of ‘financially distressed’, as that is the trigger for the
invocation of business rescue. I wonder whether it is too narrowly
defined for it to be truly effective and whether the time period within
which business rescue can be invoked is too short.
In my view what is needed is for business rescue to become part of
the advisory and remedial armoury of bankers, accountants, business
advisers and attorneys. They are often better placed than the company’s
directors and shareholders to see the problems on the road ahead and can
advise that remedial steps be taken. Very often when a business is sliding
downhill the shareholders and directors will press on doing the same
things that caused the problems in the first place. Often you will hear
them say: “Just give it another couple of months.” As if a couple more
months of doing the wrong thing will remedy the situation. Indeed it is
very often in that situation that one finds PAYE not being paid, VAT
being collected and not remitted to SARS and general activities that
amount to robbing Peter to pay Paul. And then there is not only
insolvency, but also criminality.
All these are points to ponder. But from where I sit unless there are
significant changes in the approach to business rescue, its practitioners,
like judicial managers in the past, will merely be acting as undertakers
and mortuary assistants to ailing companies, not the doctors and nurses
that were intended.
Thank you very much.
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