Business Rescue (BR) is an exciting new addition to the tools available to company directors in escaping from their mistakes, keeping their jobs, and perhaps some of their employees’ jobs too.
It’s a wonderful idea.
Except a lot of other small business owners are going to get screwed by people using the provisions in the new Companies Act. It’s that simple. Close on 1,000 businesses will by now have been “placed in BR”. A few dozen have been rescued. The balance have either been liquidated, or are languishing in BR, waiting for someone to complain.
The biggest problem is that too few attorneys and other professionals have been exposed to the provisions to know when they are being had.
There are many restrictions governing exactly how the BR practitioners can behave. I bet few of them accurately understand the provisions properly, and many of them are going to be paying for their lack of knowledge by digging into their own nest eggs.
If a BR practitioner acts outside the provisions of the Act, he may be held personally liable by creditors. Ask me how. I have been involved in a number of these things in the last eighteen months or so.
It is only a matter of time before a BR Practitioner is taken to task by a creditor, for not following the law closely. It is also only a matter of time before a business rescue is declared a nullity, also because the rules were not followed properly.
If you intend to take your own business into BR in the near future, you should plan for it properly.
Mark
Good article!
Regarding BR, one crucial aspect is to ensure that a company’s ‘new’ MoI addresses the topic of a possible future BR process, especially in relation to the powers of the BR Practitioner vis-a-vis shareholders. Shareholders can incorporate provisions in the MoI to ensure that the very wide powers of the BR Practitioner are limited to some extent and that they are more involved. All too often, the BR process has just enabled attorneys and BR practitioners to earn some nice fees when there is little (if any) prospect of a BR process actually succeeding, to the detriment of shareholders because the BR process is funded by company funds!
I’m not sure that you’re right, David.
It is the directors who have to decide whether or not a company is placed into BR, and not necessarily the shareholders (although shareholders, employees or creditors can bring an application to place the company in BR).
Shareholders’ funds are always at risk in a limited liability vehicle. It is the risk they take to enjoy the upside in happier times.
Once a company is in BR, the BR Practitioner is king, and if the company is trading in insolvent circumstances, he is duty bound to ask the shareholders to subordinate their loan accounts in favour of other creditors. Their refusal to do so would lead to an immediate liquidation, and their certain loss anyway.
I agree that the process is subject to abuse by incompetent, dishonest and/or sharp practitioners. This is why it is important to have a consultant help keep tabs on what the BRP is up to.
But I don’t think that a company can MOI itself out of legislation.
Hi Mark,
Recently got stung (along with numerous others) by a PMB company who went this route.
It struck me that BR has noble intentions but is rapidly becoming a means of
company owners simply buying time to allow the 6 month reversal of transaction rule by the master to expire and in so doing facilitating stripping out of assets and paying concurrent creditors preferentially !
Another observation is that BR practioners are prefferential creditors…I wonder, if say 50% of their fee was to become concurrent, if they would still still take so much time on “due dilligence ” and if they would reach the same conclusions ! 🙂
Kind Regards
Gerald Berlyn
Gerald, a few observations. In a case we were recently involved in, the six month thing came up, and BR does not help the “stripping of assets”. The confusion may come in as a result of the “switching around” of the order of payment pre and post BR. As soon as BR is declared, the post BR creditors are all ranked to be paid ahead of the pre BR creditors, regardless of their ranking.
The pre BR creditors need to be on their toes at the first meeting, ten days into BR. The problem is that small business owners are so shell shocked and confused at that meeting, that they will vote on almost anything in the hope of getting something out of the mess.
When the BR practitioner publishes his rescue plan, that document should be interrogated very carefully, and some awkward questions asked, if at all possible. Make the bugger work for his money, and make sure he sticks to the rules. These things are very difficult to unwind.
Hi Mark
As a management liability specialist, focussing on directors and officers liability insurance, BR is the one area thats making directors very nervous. If they get the rescue wrong, or time it badly, the personal liability consequences can of course be grave. It’s interesting to note your comments that the BR practitioners are not pulling their weight – maybe they are the ones that should be buying insurance..
Teri, I have to agree with you. I went to a business rescue symposium a few months ago where all the registered BRPs were gathered. The day took the form of some Powerpoint slides being read to us, before all the BRPs had their say about concerns, experiences and opportunities.
One bloke in particular stood out, almost in tears as he told us all about the threats to his pension plan that he was faced with. He had missed a trick, and this error had been pounced upon by one of the creditors, who was making a meal of it.
I see a time in the near future where BRPs will be required to furnish guarantees before taking on rescues. Certainly, I also see professional indemnity insurance becoming quite expensive.
I know exactly how to tackle BRPs when I advise creditors, and it is not with candy and flowers. All the more reason to plan your rescue very carefully before going to CIPC with your forms. Once that form has been stamped, things happen very quickly.
Hi, just came upon this. Am no expert, but suddenly our one and only client is in a BRP and this is threatening my own livelihood. They absolutely just don’t pay. Only stuff currently on trucks get paid suddenly C.O.D. There’s not a mention of the mother load of money I’ve been trying to get over more than 2 years. I still supply to them, but it’s put me in a precarious position. It seems to be a new law where creditors have to shut up and take it on the chin.
Chloe
If your customer is in business rescue you are entitled to a copy of the business rescue plan.
That will give you a good idea of where you stand with respect to the other creditors and the chance of getting your money paid out. You should know that in terms of the companies act you are entitled to payment for post BR supplies before any of the other pre BR creditors. Hence the sudden COD payments.