King III - Chapter 10: Business rescue
Overview
Chapter
In determining the role and function of the board, King III is keen to emphasise the importance of the board acting as both the focal point and custodian of corporate governance. In the context of business rescue, King III recognises that this is both a change of culture and a significant change in legislation.
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The importance of this is to ensure the board (and directors individually) recognise their new obligations both to conform with chapter six, Business Rescue, proceedings in the Companies Act and to accept that this is emerging legislation and requires a change in culture from corporate liquidation to commercial renewal and recovery. Additionally, the board and directors must understand the risks and abuse that could arise, given the absence of precedents to support actions and early stages of the legislation and its supporting regulations.
Key provisions of the Report - click here
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Boards (and individually directors) will need to understand how crucial it is to act independently, quickly and decisively, in line with the obligations and regulations of the Companies Act in distressed trading situations.
It is paramount that the board (and directors) recognise that early intervention and action protects against exposure to reckless trading allegations and also, crucially, demonstrates the fulfilment of their obligations to all stakeholders.
The board and directors must explore all turnaround opportunities proactively, prior to the company being financially distressed (as per the Act) and recognise that business rescue proceedings (and decisions around commencement thereof) offer a final and formal consideration after other avenues have been vigorously pursued prior to this.
The board and directors must be fully conversant with both their obligations to commence business rescue proceedings and conversely, the actions required of them if other ‘affected parties’ (shareholders, creditors, unions and employees) instigate such proceedings first, or if liquidation proceedings have already been commenced.
They must also be cognisant of the role and authority of the ‘business rescue practitioner’, including their own responsibility in the selection of this individual and/or right and obligation challenge of this individual’s appointment (if proceedings were commenced by other affected parties).
The board and directors must fully understand the need to co-operate with the practitioner in the fulfilment of their duties in preparing and executing a ‘business rescue plan’. In so doing, they must recognise and support the practitioner’s authority (as a court official within the context of the Act) and control of the company in substitution for its board and pre-existing management.
The board must understand the fundamental aspects and intentions of the business rescue proceedings. These include, but are not limited to:
It is paramount that the board (and directors) recognise that early intervention and action protects against exposure to reckless trading allegations and also, crucially, demonstrates the fulfilment of their obligations to all stakeholders.
The board and directors must explore all turnaround opportunities proactively, prior to the company being financially distressed (as per the Act) and recognise that business rescue proceedings (and decisions around commencement thereof) offer a final and formal consideration after other avenues have been vigorously pursued prior to this.
The board and directors must be fully conversant with both their obligations to commence business rescue proceedings and conversely, the actions required of them if other ‘affected parties’ (shareholders, creditors, unions and employees) instigate such proceedings first, or if liquidation proceedings have already been commenced.
They must also be cognisant of the role and authority of the ‘business rescue practitioner’, including their own responsibility in the selection of this individual and/or right and obligation challenge of this individual’s appointment (if proceedings were commenced by other affected parties).
The board and directors must fully understand the need to co-operate with the practitioner in the fulfilment of their duties in preparing and executing a ‘business rescue plan’. In so doing, they must recognise and support the practitioner’s authority (as a court official within the context of the Act) and control of the company in substitution for its board and pre-existing management.
The board must understand the fundamental aspects and intentions of the business rescue proceedings. These include, but are not limited to:
- Temporary supervision of the company
- A temporary moratorium on the rights of claimants
- The development and implementation of a plan to rescue the business.
PwC believes that good corporate governance, as supported by the principles and practices of King III, will ultimately bring about the improvement and development of best practice within South African corporate enterprises. This approach builds a robust foundation for avoiding distressed trading situations.
As with all ventures, there are unavoidable and unforeseen situations – financial distress is one of the most significant consequences arising from such circumstances. If avoidance of these risks has not been achieved despite following corporate governance best practice, one can be certain that adherence to the guidelines in provision 2.15 on business rescue, underscored by the sound foundations created, means a dramatic increase in the likelihood of being able to recover from distressed trading circumstances. Best practice and timely action preserves the longevity and value of a company for all stakeholders and ultimately the economy by maximising the strength of a company.
The obligation of boards and directors starts well in advance of the decisions required for a company in financial distress (as defined in the Act) – it starts with behaviours and actions surrounding corporate renewal and turnaround to maximise the chances of successfully changing the fortunes of a company in distress (as a general definition, including non-financial distress factors).
As with all ventures, there are unavoidable and unforeseen situations – financial distress is one of the most significant consequences arising from such circumstances. If avoidance of these risks has not been achieved despite following corporate governance best practice, one can be certain that adherence to the guidelines in provision 2.15 on business rescue, underscored by the sound foundations created, means a dramatic increase in the likelihood of being able to recover from distressed trading circumstances. Best practice and timely action preserves the longevity and value of a company for all stakeholders and ultimately the economy by maximising the strength of a company.
The obligation of boards and directors starts well in advance of the decisions required for a company in financial distress (as defined in the Act) – it starts with behaviours and actions surrounding corporate renewal and turnaround to maximise the chances of successfully changing the fortunes of a company in distress (as a general definition, including non-financial distress factors).
- Are there signs of a future potential need for business rescue and can we act sooner to avert this and seek assistance to turn the company around?
- Is the company financially distressed?
- Are there reasonable prospects of rescuing the company?
- Is the company or its directors trading recklessly?
- Should we commence business rescue proceedings?
- Who should we appoint as the business rescue practitioner?
- Is this person independent and sufficiently experienced to rescue the business?
- What are the board’s obligations to stakeholders, the courts and appointed representatives?
- Are we aware of and fulfilling our obligations as a board and individual directors in line with the requirements of the business rescue proceedings?
PwC has developed a range of services designed to assist businesses in distress. Our view is that while business rescue proceedings herald a welcome change to preservation of companies previously liquidated, it is nevertheless the last chance for such businesses to survive. We have invested in skills and services to support companies to maximise their options for and speed of recovery.
These skills are centralised in our Business Recovery Services (BRS) team. However, we are able to draw on the full range of services and expertise within the firm to ensure specific business issues are resolved, collectively aiding recovery well before insolvency or business rescue proceedings need to be contemplated.
Our services include:
- Independent business reviews
- Turnaround/interim directors
- Cash management
- Financial restructuring
- Lender and debt advisory
- Operational restructuring
- Accelerated M&A – optimised exits
- Working capital management
- Crisis stakeholder management
- Recovery planning and implementation.
Of further interest