The South African business rescue system is “slowly maturing”, with an ever-growing understanding of the roles of different stakeholders, law firm Fasken partner Haroon Laher tells Engineering News.

Added to this is an understanding that, sometimes, the return to creditors on a cents-per-rand basis is not the “critical and most important criteria” in determining whether a business rescue is successful, he says.

The success of a business rescue process is dependent on being able to balance the interests and the rights of all stakeholders, which is what the business rescue practitioners (BRPs) for embattled construction company Group Five have managed to achieve, he states.

Laher was appointed the independent chairperson of the Committee of Creditors, which was established during Group Five’s business rescue proceedings.

Considering that the procedure involving a Committee of Creditors and its independent chairperson has never been followed in South Africa before, he explains that the process finds its roots in the US bankruptcy regime, where creditors are given an opportunity to appoint an independent chairperson to lead them in the process.

“In the US bankruptcy regime, you often find an independent chairperson leading the creditors. The chairperson has a fiduciary duty to the creditors,” he says, explaining that “in exercising that duty, the independent chairperson must be balanced, fair and look at the best interests of the creditors given the circumstances”.

Through balancing the rights and interests of all stakeholders during the Group Five proceedings, Laher says, as independent chairperson, he had to consider not only the creditors but also how many contracts would be saved and what the result of the saving of these contracts would be, as well as consider risks and losses arising out of the cancellation of midstream contracts.

As a result of the business rescue process, which was headed by BRPs Dave Lake and Peter van den Steen, the vast majority of contracts have been saved, with minimal risks and losses.

About 3 500 jobs have also been preserved, at least for the duration of the completion of outstanding contracts, Laher points out.

While Laher’s role was, ultimately, to advise the creditors about the beneficial aspects of the business rescue plan, he says regular engagements with the business rescue team were key to understanding what was being done and what factors were being taken into account in determining the outcome, and whether the company had any chance of survival.

“It was around our third meeting, when we all realised that the only way Group Five could be resuscitated and brought back to life was with a severe and serious injection of capital or funding.”

With nobody queuing up to provide that funding, the only option left for the BRPs was to ensure an orderly winding down of the business, its affairs and its contracts, as well as the issues affecting the business rescue, Laher notes.

This resulted in a better outcome than what would have been the case in a liquidation, he adds.

According to Laher, the orderly winding down was “an excellent option” in the sense that the various stakeholder outcomes had been balanced.

“Jobs have been retained, [and] counterparties in construction contracts can sit with ease and hope that these contracts are now completed in the fullness of time . . . one expects everything to be completed by March next year,” he comments.

In comparison, should Group Five have gone into liquidation, Laher says, creditors would not have seen the type of projected dividend, and that the overall outcome in a liquidation case would have been “catastrophic”.

Creditors are expected to earn a project dividend return of between 9c and 20c.

In the case of a liquidation, jobs would have been lost and all counterparties in the remaining construction contracts would not have had the capacity to continue the contracts. The process would also have taken up to five years, whereas Group Five’s business rescue procedure has been in force for only a few months.

Laher further notes that by continuing with the remaining construction contracts that are in the process of being completed, creditors have the opportunity to continue providing services or goods associated with those contracts.

“Naturally, they will want money upfront because they are not going to expose themselves and put themselves at any further risk. So, what the process did was give creditors . . . an opportunity to continue to engage, supply goods and provide services, but on different terms,” he explains.

Process Recommendation

The fundamental thing, Laher advises, is that, during business rescue proceedings, creditors must take advantage of the leverage provided by Chapter 6 of the Companies Act and engage with the BRPs regularly in order to understand the process and the complexities that they are dealing with.

He says one must “understand that you cannot view a business rescue or its outcome in isolation, considering, for example, just one stakeholder’s interest above others”.

There may be a situation where creditors do not come out with the most ideal outcome, but one must look at the overall outcome, he avers, adding that stakeholders need to be protected and included to ensure they do not fear further losses and prejudice down the road.

“A business rescue must balance the rights and interests of all stakeholders.”

Through constant engagement and cooperation, a balanced outcome in a business rescue procedure is possible, Laher concludes.