Group 5 entered business rescue recently after persistent cash flow problems brought the construction giant to its knees. It's one of a growing list of well-known companies to seek rescue over liquidation.
However, Faith Ngwenya, technical and standards executive at the South African Institute of Professional Accountants (SAIPA), warns that business leaders tend to be unprepared for their "loss of control" when business rescue begins.
The wrong end of the stick
Companies may seek business rescue as a way to buy time to get back on their feet while enjoying protection from creditors’ claims. They might also assume they will drive the recovery process, and their assigned business rescue practitioner will merely act as a consultant who will guide them through the proceedings.
“This couldn’t be further from the truth,” says Ngwenya. “Management must understand they have been thrown a lifeline and must, therefore, adhere to the strict conditions of the accompanying legislation. The first is to completely surrender their management control/power to the business rescue practitioner.”
According to the Companies Act 2008, Chapter 6, the business rescue practitioner assumes total control of the company during the entire business rescue period.
Section 140 (1)(a) says the practitioner “has full management control of the company in substitution for its board and pre-existing management.” In other words, the practitioner doesn’t assist the company’s leadership on the road to recovery; instead, they become the leader. Also, subsection (3) asserts that, during the business rescue proceedings, the practitioner “is an officer of the court” who reports to the court in accordance with its rules or orders. The practitioner also has the responsibilities of a director of the company.
In fact, the practitioner may “remove from office any person who forms part of the pre-existing management of the company” or “appoint a person as part of the management of a company, whether to fill a vacancy or not”. This means, in theory, that the practitioner could reshape or even replace the board or management in its entirety.
Further, the practitioner may decide after their initial investigation into the company’s status, or at any time during the business rescue process, that the company cannot be rescued, and must apply to the court to have it liquidated.
Ngwenya says the full extent of the practitioner’s authority usually hits home in simple ways: “For example, when the practitioner orders the directors to surrender their company credit cards.” The initial shock of realising they are no longer in charge may cause directors to rebel against the practitioner’s instructions. However, Ngwenya warns that the practitioner can dismiss any director who impedes them in their duties, by court order if necessary, and may even have them declared delinquent.
It is vital that company leaders about to embark on business rescue familiarise themselves with their obligations as set out in the Companies Act. “SAIPA encourages them to comply for the sake of their organisation and its employees,” concludes Ngwenya.
SAIPA awards a business rescue practitioner designation to its qualifying members and is therefore able to offer advice on this important subject.