As South African businesses are left reeling in the wake of the escalating coronavirus crisis and the imposition of a 35-day lockdown , we look at the implications for South African companies and how those in financial difficulty may find some relief under the Companies Act 71 of 2008 (Companies Act).
On Friday, March 27 2020, South Africans began a 21-day nation-wide Government-imposed lockdown aimed at slowing the coronavirus pandemic sweeping across the nation. This initial lockdown was extended by South African President, Cyril Ramaphosa, on April 9, 2020 for a further period of 14 days.
As consumers are forced to stay home, and with many businesses being forced to keep their doors shut, business revenues and cash flows will plummet, in some cases to zero (see our article on which South African businesses can operate during the nation-wide lockdown). While there has been a very gradual easing of the lockdown restrictions for some businesses during the extension of the lockdown, most businesses remain fully shut. This stagnation in economic activity will permeate the country as companies wrestle with the reality of laying off workers, potentially defaulting on their payment and contractual obligations, and closing their doors for good.
In addition to navigating the indirect effects of the anticipated global recession, South African companies will need to take into account their already fragile local economic environment. The recent news that rating agency Moody’s had cut South Africa’s sovereign credit rating to sub-investment grade (with a negative outlook) or “junk” is a further blow to business confidence. The collapse in consumer and business spending, domestic policy uncertainty, increasing borrowing costs, Rand volatility within a downward trend, and a significant decline in export demand have many companies rethinking their financial viability. Edcon Holdings, South Africa’s second-largest clothing retailer, which has been in financial difficulty for some time and already undertaken numerous restructurings in an attempt to reestablish its competitiveness in the market, recently announced that it would only have sufficient liquidity to pay salaries and wages in the near-term and would be unable to discharge its payment obligations to other creditors. This announcement came after the retailer found itself unable to meet its March sales target in the wake of Covid-19’s accelerating spread across South Africa, coupled with an expected drop in debtor’s book collections.
SA Express, the second and smaller of the state-owned airlines which was placed in involuntary business rescue on 6 February 2020, saw its business rescue practitioners launch an urgent application at the Johannesburg High Court on 25 March 2020 in an attempt to have the airline liquidated due to them being of the view that the airline had no reasonable prospect of being rescued. Moreover, the future of SAA, South Africa’s National Airline, which was placed into voluntary business rescue on 5 December, 2019, appears in doubt after the South African Department of Public Enterprises announced over the weekend that the South African Government cannot support SAA’s request for further funding of R10 billion or provide any future funding to sustain the business rescue process.
Similar headlines are unfortunately likely to continue hitting the market in the coming days and weeks. Numerous other retailers have followed suit in announcing that they would be unable to discharge their rental obligations for at least the period of the lockdown. As recently as last week Wednesday, South Africa’s e-commerce giant Takealot announced that it is likely to take a R350 million revenue hit during the lockdown, leaving the company in distress.
Chapter 6 of the Companies Act allows financially distressed South African companies an opportunity to reorganize and restructure their financial affairs through the business rescue process. The Companies Act considers a company to be financially distressed if, within the immediately ensuing six months: (i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable; or (ii) it appears to be reasonably likely that the company will become insolvent.
Business rescue proceedings aim to facilitate the rehabilitation of a financially distressed company by providing for, amongst other things: (i) the temporary supervision and management of the company’s affairs, business, and property by a business rescue practitioner; (ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; (iii) the ability for the company to obtain post-commencement financing, which may be secured to the financier by utilizing any asset of the company that is not otherwise encumbered; and (iv) the development and, if approved, implementation of a business rescue plan to restructure its business, debt, property, equity, affairs, and other liabilities.
A company’s board of directors can initiate voluntary business rescue proceedings by resolving that the company is financially distressed and that there appears to be a reasonable prospect of rescuing the company. A company can be placed into involuntary business rescue proceedings by an affected person (shareholders, creditors, employees or registered trade union representatives) making a formal application to court where: (i) the company is not already in voluntary business rescue; (ii) the company is financially distressed; (iii) the company has failed to fulfill a payment obligation under or in terms of a public regulation or contract, with respect to employment related matters; or (iv) it is otherwise just and equitable to do so for similar financial reasons, and there is a reasonable prospect of the company being rescued. Business rescue provides a moratorium on insolvency or legal actions against the company, affording it much needed “breathing space” to reduce its debt burden and deliver the best possible outcomes for business owners, creditors, employees, and shareholders alike.
As the economic shock of the coronavirus pandemic devastates local businesses, companies will need to consider how to best navigate these truly unprecedented times. Business rescue, and the opportunity it affords companies to restructure its financial affairs, may provide a much needed safety net for companies being battered by the prevailing local and global economic storms.