Coronavirus or Covid-19 needs no introduction. This virus forced itself into our lives and brought with it a few unprecedented challenges. One of the challenges every business in South Africa currently face, is cash flow uncertainties. Debtors ask for a payment holiday because they have cash flow problems and Creditors ask for payment, because they have cash flow problems. You (or rather your business), find yourself somewhere in the middle between these debtors and creditors, and unless you can print money, you need your debtors to pay you, so you can pay your creditors, otherwise you will also have cash flow problems and the cycle continues. You ultimately find yourself WANTING your debtors to pay you, so that you can break the cycle and pay your creditors, staff and suppliers, and carry on with your business. You also FEAR that your creditors will sue or liquidate your business, before your debtors pay you. If you can relate to the above scenario, then this is for you, so keep reading. We are not here to tell you about business rescue or some other form of traditional debt collection. We are here to tell you about Compromises. You see, when your business is in financial distress (as defined in the Companies Act, or simply put, have cash flow problems), the Companies Act provides for business rescue proceedings, but business rescue proceedings are expensive. At a minimum prescribed remuneration of about R15 000.00 PER DAY, business rescue proceedings will quickly turn your financially distressed business, into an insolvent business, unless you can afford an additional R300 000.00 salary per month.
You know the ins and outs of your business, and you probably already have some sort of a turnaround plan, you just need time and breathing space to implement that plan. Why would you pay some stranger R15 000.00 a day for that extra time, to take away your control over your business, and (without having the experience you have in your trade) implements his own plan, or getting paid to implement a plan that you developed.
Traditional debt collection, as an alternative, also comes at a price. Not only do you incur legal fees, it also takes quite a long time to actually see some benefits in your bank account. By this time, your creditors probably already sued you and soon you find yourself on both sides of legal proceedings, putting out fires, with your turnaround plan pretty low on the priority list.
None of the options above will successfully get you through these challenging times. All your efforts will be for nothing.
In comes "THE COMPROMISE".
Similar to business rescue proceedings, a company on its own, can develop and implement a turnaround plan without the need for a business rescue practitioner. Business rescue practitioners will not tell you this, because they live off of Sections 128 to 154 of the Companies Act. You also probably stopped reading the Companies Act just before Section 155, when you did your research how to survive this current situation. Just the next Section after the business rescue provisions, Section 155 the Companies Act, deals with Compromises. The wording of this Section will be included at the end of this post. This is your "DIY business rescue" section. If you compare the wording of Section 155 with Section 150 of the Companies Act, you will find the similarities.
So what does this all mean?
Business rescue might be a viable option for larger companies, who can absorb and afford a business rescue practitioner to steer them through these difficult times, but even then, the statistics of business rescue does not support this. Since the inception of business rescue proceedings in South Africa until June 2019, 3 298 applications were lodged. Only 17% of these were successful. And if one considers that a "successful" business rescue includes a "soft liquidation" to propose a better dividend to creditors than forced liquidation would, the success rate of actually rescuing a business to continue profitable trading, is relatively small.
We are of the opinion that the low success rate can be ascribed to the high cost of business rescue. That 17% successful business rescue proceedings mentioned in the previous paragraph, took an average of 16.18 months from commencement of the proceedings to finalisation. If the business rescue practitioner spent only one day per week in the office, that is almost 70 days at a minimum of R15 000.00 per day, totalling over R1 million. You will agree that no small or medium sized business, in financial distress, can afford this. Some don't even have this amount of debt and a loan from a bank at maximum interest will be more afordable. So for small and medium sized businesses, the high cost of business rescue dampers any prospect of success. That is why you need a DIY solution. The Compromise does not deal with debtors, so you may ask "how will this put money in my account". Your debtors ask for extensions to pay you, and the only reason you cannot agree to these requests, is because you also have payment obligations. If you agree to these extensions, you will save your debtors' businesses, at the expense of your own business. But if the extensions that you grant are coupled with a Compromise with your creditors, this relieves you in part from your payment obligations, which in turn, can saves their and your businesses. And by agreeing to a Compromise, your creditors save themselves by keeping you in business. Ultimately, you can be the hero and break the cycle. You can grant the extensions that your debtors ask for, and your creditors gets paid according to the plan they agreed to. This in turn eases the stress on your cash flow, to allow you to successfully trade out of these uncertain times. If you need assistance with the legal aspects of your Compromise, contact us. We assist all Small and Medium Enterprises with their Compromises, and ensure that the legal formalities are complied with, at a fraction of the cost of a full-time business rescue practitioner. We can also assist you in negotiating acceptable payment plans with your debtors.
Section 155 of the Companies Act 71 of 2008:
155. Compromise between company and creditors
(1) This section applies to a company, irrespective of whether or not it is financially distressed as defined in section 128(1)(f), unless it is engaged in business rescue proceedings in terms of this Chapter.
(2) The board of a company, or the liquidator of such a company if it is being wound up, may propose an arrangement or a compromise of its financial obligations to all of its creditors, or to all of the members of any class of its creditors, by delivering a copy of the proposal, and notice of meeting to consider the proposal, to-
(a) every creditor of the company, or every member of the relevant class of creditors whose name or address is known to, or can reasonably be obtained by, the company; and
(b) the Commission.
(3) A proposal contemplated in subsection (2) must contain all information reasonably required to facilitate creditors in deciding whether or not to accept or reject the proposal, and must be divided into three Parts, as follows:
(a) Part A-Background, which must include at least-
(i) a complete list of all the material assets of the company, as well as an indication as to which assets are held as security by creditors as of the date of the proposal;
(ii) a complete list of the creditors of the company as of the date of the proposal, as well as an indication as to which creditors would qualify as secured, statutory preferent and concurrent in terms of the laws of insolvency, and an indication of which of the creditors have proved their claims;
(iii) the probable dividend that would be received by creditors, in their specific classes, if the company were to be placed in liquidation;
(iv) a complete list of the holders of the company issued securities, and the effect that the proposal would have on them, if any; and
(v) whether the proposal includes a proposal made informally by a creditor of the company.
(b) Part B-Proposals, which must include at least-
(i) the nature and duration of any proposed debt moratorium;
(ii) the extent to which the company is to be released from the payment of its debts, and the extent to which any debt is proposed to be converted to equity in the company, or another company;
(iii) the treatment of contracts and ongoing role of the company;
(iv) the property of the company that is proposed to be available to pay creditors‟ claims;
(v) the order of preference in which the proceeds of property of the company will be applied to pay creditors if the proposal is adopted; and
(vi) the benefits of adopting the proposal as opposed to the benefits that would be received by creditors if the company were to be placed in liquidation.
(c) Part C-Assumptions and conditions, which must include at least-
(i) a statement of the conditions that must be satisfied, if any, for the proposal to-
(aa) come into operation; and
(bb) be fully implemented;
(ii) the effect, if any, that the plan contemplates on the number of employees, and their terms and conditions of employment; and
(iii) a projected-
(aa) balance sheet for the company; and
(bb) statement of income and expenses for the ensuing three years, prepared on the assumption that the proposal is accepted.
(4) The projected balance sheet and statement required by subsection (3)(c)(iii)-
(a) must include a notice of any significant assumptions on which the projections are based; and
(b) may include alternative projections based on varying assumptions and contingencies.
(5) A proposal must conclude with a certificate by an authorised director or prescribed officer of the company stating that any-
(a) factual information provided appears to be accurate, complete, and up to the date; and
(b) projections provided are estimates made in good faith on the basis of factual information and assumptions as set out in the statement.
(6) A proposal contemplated in this section will have been adopted by the creditors of the company, or the members of a relevant class of creditors, if it is supported by a majority in number, representing at least 75 percent in value of the creditors or class, as the case may be, present and voting in person or by proxy, at a meeting called for that purpose.creditors, if it is supported by a majority in number, representing at least 75 percent in value of the creditors or class, as the case may be, present and voting in person or by proxy, at a meeting called for that purpose.
(7) If a proposal is adopted as contemplated in subsection (6)-
(a) the company may apply to the court for an order approving the proposal; and
(b) the court, on an application in terms of paragraph (a) may sanction the compromise as set out in the adopted proposal, if it considers it just and equitable to do so, having regard to-
(i) the number of creditors of any affected class of creditors, who were present or represented at the meeting, and who voted in favour of the proposal; and
(ii) in the case of a compromise in respect of a company being wound up, the report of the Master required in terms of the laws contemplated in item 9 of Schedule 5.
(8) A copy of an order of the court sanctioning a compromise-
(a) must be filed by the company within five business days;
(b) must be attached to each copy of the company‟s Memorandum of Incorporation that is kept at the company‟s registered office, or elsewhere as contemplated in section 25; and
(c) is final and binding on all of the company's creditors or all of members of the relevant class of creditors, as the case may be, as of the date on which it is filed.
(9) An arrangement or a compromise contemplated in this section does not affect the liability of any person who is a surety of the company.