Home Articles ANALYSIS: Business Rescue Potential Obstacles to Employee Reduction

ANALYSIS: Business Rescue Potential Obstacles to Employee Reduction

Business rationalisation, realignment, recovery, rescues… the intention is the same, but the degree of intensity and urgency may change.

This article discusses the situation where a company has been given a lifeline of an approved Business Rescue Plan but has to balance the need for speed by having to engage in negotiation for reducing employment.

As early as 1922, South Africa, in its new Companies Act, was admirably the second country in the world to offer some recovery strategy through statute. But judicial management was never really effective and the subsequent new Act of 1973 did little to enhance business recovery.

The watershed case of Le Roux Hotel Management vs. East Rand (2001) supported a view that judicial management under previous Companies Acts was too conservative, and that a new and more progressive Companies Act was required to give failing companies a better chance of restoration.

A triumvirate of business fraternity, legal counsel and government came together to most admirably recognise the importance of a new Companies Act 71 of 2008, and regulations in 2011 which gave stressed but potentially viable businesses the time and space to recover.

Chapter 6 of this Act (Sections 128-155) is a bold attempt to emulate similar jurisdictions in sophisticated economies, like the USA, with its Chapter 11. It provides a mechanism for recovery through a Business Rescue Plan (“Plan”), to be headed up by a duly appointed Business Rescue Practitioner (“Practitioner” – most likely a registered chartered accountant or lawyer). Chapter 6 defines business rescue as “proceedings to facilitate the rehabilitation” of a financially stressed company, in the interests of affected persons, defined in S.128(1) as “shareholder, creditor, registered trade union representing employees of the company, – – – employees – – -not registered by a registered union – – ”

Section 128(1) (f) defines a stressed company as one unlikely in the next six months to pay its maturing debts, or likely to go insolvent. Six months is not a long time in any business, and such a company certainly does not have the luxury of time on its side.
Chapter 6 is a detailed embellishment of earlier-stated purposes of the Act, this being to “– provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders – -” (S.7(k). “Stakeholders” is not defined but would include shareholders, creditors and employees.

The Practitioner has considerable powers under Chapter 6. Essentially, anything that is not illegal is possible in a business plan. This is its strength, giving considerable scope to doctoring a company back to health. Apart from immediately giving a moratorium on legal action against the company (Section 133) and permitting temporary suspension of legally binding commitments (Section 136(2)(a) it also gives scope for the cancellation of any existing legally binding contract or parts thereof (Section 136(2)(b)).

However, the significant exception is in Section 136(1)(a) that notes that “ – – employees – – continue to be so employed on the same terms and conditions – – -” effectively protecting employees. For them it is business as usual – assuming the company survives.
The new Act essentially seeks to encourage employment, and any socially responsible citizen would surely have no issue with this.
If the Plan attempts to retrench employees, Section 136(1)(b) notes that this is “… subject to section 189 and 189A of the Labour Relations Act, 1995”, this being the enforced and consultative process required to change employee rights. This is a critical area where the practitioner cannot act robustly to reduce costs.

Labour dispute can notoriously drag out for months, a time-span that, in normal circumstances, could stretch well past a window of opportunity for a company to claw its way back to sustainability.

So, immediately the law – in its protection of employees – appears to hinder a potential rescue process. Chapter 6 then goes further in empowering employees. Section 144 gives employees the right to be formally consulted and it is essential that a practitioner does so, failing which, the Act is transgressed and the plan can be annulled.

Section 148 requires the practitioner to formally meet employees within ten working days of being appointed, and thereafter to consult, listen to their concerns and find common ground.

At this juncture then, let us focus attention on an apparent conflict between:
• the strongly entrenched protection of employees
• the need for fast remedial action.

How is it practically possible to reduce employee costs in a critical business rescue time frame?
One encouraging part of the Act right up front in section 5 states that “the Act must be interpreted and applied in a manner that gives effect to the purposes set out in Section 7” including 7(k) “… efficient rescue and recovery…”.

Case law supports this, for example Southern Place Investments vs. Midnight Storm, giving legislative preference in favour of the Act’s intention. The Act clearly wants the business rescue process to be acted on expeditiously with Section 129 setting some challenging time limits to get the process going. Section 132(3) alludes to a three month period being a reasonable period for plan implementation. For most business rescues, this would be extremely challenging. And then, as noted, the practitioner must meet employees within ten days of appointment, so again the Act appears to be injecting a sense of urgency.

So, we are a little closer to finding comfort in law. Whilst the Act does protect employees and insists on normal due process, it strongly encourages timely action. It is early days yet into this new paradigm, and time will tell how much weight will be given to acting fast versus due Labour Relations Act processes.

Perhaps it requires just such a crisis to get two opposing parties to co-operate when, in more favourable circumstances, they may focus more on divergence than convergence, even dragging things out as a bargaining tool (arbitration, strikes, lock-outs etc). Assuming that both employer and employee actually do want the business to succeed, both parties must concede on at least one common point: they have to act quickly and find common ground, failing which both parties cease to exist. Too much self-interest may be self-destructive.

The convergence of interests therefore must be the focus of a rescue practitioner. The practitioner is not a servant of the employer only, even if recommended by the Board, but rather a facilitator to achieve one of the expressed purposes of the Act – business rescue.

Nevertheless, for this article I am assuming that the practitioner is synonymous with employer.

Firstly, the Board has to take a responsible and timeous decision in requesting a business rescue plan and the Act can punish individual members if they do not, by holding them responsible for negligence in not taking appropriate action in time (Sections 76-7).

Once having taking this decision, Chapter 6 kicks in and requires urgent time scales to be met in appointing the business rescue practitioner, and the notification and involvement of affected parties. The practitioner “ – – has the responsibilities, duties, and liabilities of a director of the company, as set out in sections 75 to 77” so must act diligently, failing which, the same punishment can be meted out.

Practical sense dictates that the practitioner must get a grasp of understanding the crisis as quickly as possible, come up with a plan, and submit this to the company, the Court, and to affected parties. As noted, any dismissal of employees requires strict compliance with the LRA and its due processes and there is no compromise on this.

The practitioner must therefore communicate with employees or their representatives as fast and logically as possible, giving reason for employee reduction, all alternatives considered, and show business logic why retrenchment is the best option. Section189 (2) of the LRA is very clear, dismissals for operational reasons require a “meaningful joint consensus-seeking process and attempt to reach consensus”.

It further acknowledges retrenchments for operational reasons as defined in Section 213 meaning requirements based on (1) economic, (2) technological, (3) structural or (4) similar needs of an employer.

A company in severe financial stress surely has extreme economic needs (not necessarily labour related), and the plan may create new structures that can reduce the number of people. “Similar needs” covers endless possibilities. Whatever the circumstances, fair dismissal ultimately comes down to substantive and procedural correctness and fairness.

This then requires consultation and discussion and good, honest communication around questions of why and who and when, failing which the process can be ruled as flawed.

For the employer then the Golden Rule is to be substantively (“operational” reasons) and procedurally (communication and compliance with law) correct.

Ultimately, the unique circumstances of the company and its rescue plan will present alternatives and the employer is going to have to prove beyond reasonable doubt that the plan has no reasonable alternatives but to cut out employees.

To offer a crude analogy, no one would like to have a limb amputated, and one would have to be extremely convinced to do so if the avoidance of it threatens the whole body. Hopefully this reasoning will convince labour representatives and both parties can move on in the best holistic interests of the company’s stakeholders.

Some tick-boxes for the employer could include:
• Understand the strict requirements of the law, balancing the latest statutory recognition and encouragement of business rescue with the entrenched rights and protection of labour
• Explore rigorously the alternatives for operational improvement, hopefully finding preference to trade out of trouble as opposed to pruning back the business
• If all else fails, come up with compelling reasons why the only alternative is to retrench, hopefully temporarily
• Be very clear in negotiations with employees that you recognise and have sympathy with their rights, and convey the message why it has to be in the interests of the business and hopefully surviving employees to retrench
• It will greatly assist if not only “labour” feels the pain, but so too do other stakeholders, including management
• If at all possible, go beyond minimum statutory severance pay, and find other ways to alleviate the pain for employees (alternative work within the group if this exists, counselling, generous reference letters, priority of re-employment later)
• At all times engage in dialogue in a transparent and fair manner
• Emphasise the critical time constraints and the need to avoid delaying processes that can lock in both parties and thereby prejudice the rescue
• Be pragmatic.

But even if the employer is pedantically correct and fair, it takes two to reach accord. What is the responsible action of the employee (representative, union)?

Their first objective is obvious, and perfectly reasonable, to keep their jobs. Employees have much to lose if they do not challenge the reasons why any business plan seeks to retrench for operational or “no fault” reasons when there could be some better plan.
Certainly employees have the full force of the law in fairly protecting their position, as noted above and supported in common law. For example, The Atlantis Diesel Engine ruling rejected previous bona fides and superior judgement of the employer (management), and brought into consideration things like fairness and measure of last resort.

Ultimately though, any employee survival is better than wipe-out, and if the business rescue plan is substantially credible and fair, it would be churlish and foolish for responsible employee representation to object for too long, thus prejudicing the extremely vital consideration of the fastest possible plan implementation.

Some suggested tick-boxes for employees:
• Recognise that an impartial court has adjudged that the company is distressed and a business rescue plan required; this was not the sole prerogative of management
• Recognise that the appointed rescue practitioner is required by law to be impartial and “balance the rights and interests of all affected parties”
• Know that this is no boss/worker conflict. It has gone beyond that
• Know that the practitioner is obliged to explore all alternatives to retrenchment so any proposed retrenchments are probably necessary, but certainly worth review
• Engage as quickly as possible in dialogue, avoid intermediaries, and immediately agree on critical time-frames
• Know that in a liquidation process, there are lesser employee rights
• Compare the potential outcome for employees of recovery vs. liquidation
• Be pragmatic.

Both Parties Recognise that:
• healthy companies employ people
• sick companies have limited time to recover
• a Business Rescue failure has no winners. ❐

Howard Cooke CA(SA) is a Financial Consultant.


When private companies become ‘regulated’

The new Companies Act has a sting in the tail for private companies, which may be ‘regulated’ in particular circumstances.

This article is aimed at company secretarial practitioners who handle company secretarial work for private companies. The Companies Act 2008 is quite different to the previous Act in regard to regulated companies and affected transactions in that a private company can now be defined as a regulated company, resulting in additional administrative requirements. There is confusion as many practitioners don’t know about these requirements and in the case of numerous smaller companies, there is probably no compliance.

The law in regard to the Takeover Regulation Panel (TRP) and all the situations requiring involvement from the panel is highly complex and in the case of private companies, somewhat of a surprise. This article does not deal with the TRP in detail, but discusses situations when private companies fall within the scope of the TRP regulations.

One needs to ask the question in regard to this part of the law – was it really necessary to apply this complex and costly compliance to the smaller company, especially as a reason given for the new Companies Act was to make the administration burden easier and quicker? The TRP charges R3 420 per hour for work done.

For more information on the Takeover Regulation Panel refer to its website www.trpanel.co.za . An extract reads: “The Companies Act 71 of 2008 (the Act) which became effective on 1 May 2011 brings about new changes in the regulation of mergers and takeovers of companies. The Act created the Takeover Regulation Panel (TRP) in terms of section 196 to replace the Securities Regulation Panel (the SRP) which was established in accordance with Chapter XVA of the Companies Act No. 61 of 1973.

The TRP will perform the same functions as those which were performed by the SRP. In terms of section 201 of the Act, the TRP is responsible to:
• Regulate affected transactions and offers (as defined in the Act);
• Investigate complaints with respect to affected transactions and offers;
• Apply for a court order to wind up a company in appropriate circumstances;
• Consult with the Minister in respect of additions, deletions or amendments to the Takeover Regulations.”

S 119 deals with the purpose of the take-over regulation panel and advises that practitioners must not consider the commercial advantages or disadvantages of any transaction or proposed transaction. They have to ensure the integrity of the marketplace and fairness to the holders of the securities of regulated companies. Practitioners must ensure that all the holders of the shares get all the necessary information to allow them to make fair and informed decisions, as well as enabling the shareholders of regulated companies to have adequate time to obtain the necessary advice with respect to offers. The take-over regulation panel must prevent actions by a regulated company designed to impede or frustrate or defeat an offer, or the making of a fair and informed decision, by the holders of that company’s securities.

S 117 to s 127 and the takeover regulations do not apply unless a transaction is an affected transaction or an offer as defined in s 117.
S 117(1)(c) is the cornerstone definition of the takeover regime. It provides that an affective transaction means:
• A transaction or series of transactions amounting to the disposal of all or the greater part of the assets or undertaking of a “regulated company” as contemplated in s 112, other than in an approved business rescue plan (See s118(3) – this disposal refers to the assets only). The assets must exclude liabilities and be greater than 50% of the assets of the company, which must be fairly valued
• An amalgamation or merger as contemplated in s 113, if it involves at least one regulated company i.e. subject to s 118(3)
• A scheme of arrangement between a regulated company and its shareholders as contemplated in s 114 i.e. subject to s 118(3). A re-acquisition of shares or buyback is included in a scheme of arrangement if more than 5% of the shares are re-purchased.

For obvious reasons, many smaller companies do a buyback of shares instead of paying a dividend. In the case of share buy backs that constitute more than 5% of a share capital class, this falls within the definition s 48 (8) (b) of an affected transaction. Therefore s 114 and s 115 kick in with full TRP compliance being necessary, despite the size of the company. The Companies Act 2008 does not differentiate between large and small companies as far as s 114 is concerned. On the face of it, it seems that even small companies have to comply with expensive administration in that they have to appoint independent experts.

S 48 (8) (b) says that subject to the requirements of s 114 and s 115, if considered alone or together in a series of buyback transactions, which amount to more than 5% of any particular class of share capital, then this transaction has to be conducted in terms of s 114 and s 115. This means that it falls within the definition of an affected transaction, which also means that a private company could be classified as a regulated company.

We need to understand the definition of a regulated company. The takeover provisions in sections 117 -127 only apply to a regulated company.

A regulated company is defined in terms of s117 (1) (i) as a company in which Part B, Part C and the Takeover Regulations apply as determined in accordance with s 118(1) and (2). This means that in terms of 118 (1) and 118 (2), various types of company are specified as a regulated company and under certain conditions a private company falls within the definition of a regulated company.

Section 118 (1) states that the provisions of the Companies Act and the takeover regulations will apply with respect to an affected transaction or an offer involving a profit company or its securities if the company is:
• A public company
• A state owned company
• A private company, only if its MOI expressly provides that the company and its securities are subject to Part B and Part C of the Takeover Regulations and if more than the prescribed percentage currently (10%) of its issued securities have been transferred (other than between related or interrelated persons) within the 24 month period before the date of a particular affected transaction or offer.

The definitions of ‘related’ and ‘interrelated’ in s 2 of the Act have a major bearing on whether a private company becomes regulated or not. It is important that we understand what related and interrelated means. With regard to individuals, a related party would be a relationship within two degrees of consanguinity or relationship steps. As examples, brothers are considered related, but cousins are not, as there are more than two relationship steps between the cousins.

With regard to the shares being held by a company, close corporation or trust, one would need to look at who in effect controls the voting rights of these entities and determine what the relationship is. If they do not fall within two relationship steps, they are outsiders. If the transaction in question is ‘affected’, it would make the company a regulated company.

In a private company, if securities of 10% or more were transferred within the last 24 months to an unrelated party, this does not necessarily make the company a regulated company. It only becomes a regulated company if there is an offer or proposal for an affective transaction in terms of s 112 s 113 and s 114. It is at this point that the company becomes a regulated company and has to comply with all necessary requirements and make the relevant applications to the TRP.

S 121 clearly and directly applies the takeover provisions of the Act to affected transactions and offers by providing that any person making an offer:
• Must comply with all the reporting or approval requirements as set out in Part B and Part C of the Takeover Regulations (except to the extent that the panel has exempted them from any requirement)
• Must not give effect to an affected transaction unless the panel has issued a compliance certificate with respect to the transaction (or granted an exemption for the transaction).

The question that arises in this situation is: what happens if a private company falls within the definition of a regulated company and does not make the necessary application to the TRP due to ignorance. What now? In terms of s 121 (b) any person making an offer or proposal cannot give effect to the transaction unless the TRP issues a compliance certificate or an exemption. There could be dire consequences if compliance has not taken place and parties wish to get out of their obligations. This area poses a grave potential risk for secretarial practitioners and company secretaries who do not advise companies correctly.

The panel in terms of s 119 (6) may wholly or partially and conditionally or unconditionally exempt an offeror or an offer to an affected transaction from the application of any provision of Part B and Part C or the Takeover Regulations if:
• There is no reasonable potential of the affected transaction prejudicing the interest of an existing holder of a regulated company’s securities
• The cost of compliance is disproportional, relative to the value of the affected transaction
• If doing so is otherwise reasonable and justifiable in circumstances having regard to the principle and purposes of Part B, Part C and the Takeover Regulations.

There is a process whereby a smaller company can make application for exemption and all the shareholders need to sign a waiver. The TRP will consider the application and levy a cost of R3 420 per hour. In all likelihood the exemption will be granted, but at an exorbitant cost.

I believe that this new legislation affecting private companies is ‘overkill’ and places a huge burden of administration onto both companies and regulators. A better solution needs to be found.

Perhaps what should happen is that, provided all the existing shareholders of the private company agree, they should sign a document or form to the effect that no shareholder is prejudiced by the affected transaction. There should be no cost or perhaps only a nominal cost associated with this filing. Once the form is filed, then automatic exemption is granted to the private company and the TRP won’t need to spend unnecessary time on it. ❐

Author: Mark Silberman CA(SA) is Managing Director, Accfin Software.


Are you contravening the FAIS Act?

The Financial Advisory and Intermediary Services (FAIS) Act, promulgated in 2002, stipulates who is permitted to give financial advice, what capacity they may give advice in, as well as what advice may be given and the terms the advice is given in.
Since then many ‘advisors’ are knowingly or unknowingly offering financial advice in contravention of the Act. In this article, I highlight the most significant criteria to be complied with to legally offer financial advice.

What is financial advice?
The definition of financial advice in the FAIS Act is very broad and includes: “any recommendation, guidance or proposal of a financial nature furnished by any means or medium to any client or group of clients… irrespective of whether such advice is furnished in the course of, or incidental to, financial planning in connection with the affairs of the client or results in any such purchase, investment, transaction, variation, replacement or termination, as the case may be, being effected”.

It is therefore clear that even if there is no conclusion of business, non-compliant advisors will be contravening the Act if giving ‘advice’.

Requirements for a Financial Service Provider (FSP) license
Many people are offering financial services without having being licenced by the Registrar. In terms of Section 7 of the FAIS Act, a person may not act or offer to act as a financial services provider (FSP) unless they have been issued with a licence in terms of Section 8 of the Act. Therefore unless you are an authorised FSP or representative and have been issued with a licence, you may not give advice or render an intermediary service to any client or group of clients.

In order to be issued with a licence by the registrar in terms of Section 8 of the Act, applicants applying to the registrar for authorisation must comply with the fit and proper requirements in respect of:
• Personal character qualities of honesty and integrity
• The competence and operational ability to fulfil the responsibilities imposed by the Act, and
• Financial soundness.

Key Individual
To obtain a financial service licence, businesses are required to have a ‘Key Individual’ that has been approved by the Financial Services Board (FSB). The key individual must meet the ‘fit and proper’ requirements before such appointment and may only assume key individual responsibilities after approval by the FSB. If the FSP is a sole proprietor, the owner will need to be both the key individual as well as the representative.

The key individual is responsible for the management and overseeing of activities of the FSP relating to the rendering of any financial service and must ensure that all activities are performed in accordance with the provisions of the FAIS Act.
• Among others, the key individual is responsible for the following:
• Managing and overseeing the appointment of representatives
• Managing and rendering of services under supervision
• Managing and overseeing the ongoing development and employment of representatives
• Debarring representatives that have been found to have acted fraudulently, or committed any other act that gives rise to debarment
• Continually being aware of the regulatory environment in which the FSP functions
• Being aware of the specific obligations in terms of the relevant Code of Conduct and all other subordinate legislation
• Overseeing and managing the compliance function as required by the FAIS Act
• Maintaining of the licence of the FSP, including the management of the licensing conditions
• Taking necessary action if the FSP’s licence lapses
• Verifying that proper record keeping activities are carried out
• Managing and overseeing/participating in the setting up and/or managing the infrastructure
• Managing and overseeing the requirements that auditors/accounting officers must adhere to
• Managing and overseeing the FSP’s adherance to the requirements of FICA and other relevant anti-money laundering legislation, as these apply to the FSP
• Managing any process required in the event of an investigaion by the FAIS Ombud.

A simple example of whether advice has been given or not can be seen in the following three situations:

A client approaches you, wanting to ensure he is making the most of his tax deductions. He asks the following questions – which of these will be considered as financial advice?
Q1. Will my contributions to a retirement annuity be tax deductible?
A. The answer to this question is factual and objective – yes or no. In terms of the Act this will not be seen as advice.

Q2. How much of my contribution is tax deductible?
A. The answer to this question requires judgement on your part as well as some guidance. You will also need to do a financial analysis after taking the client’s affairs into account.

Q3. Which company’s Retirement Annuity is the best?
A. Again this will require judgement, guidance and recommendation as well as a financial needs analysis for the client. In terms of the FAIS Act the answer to this will also fall squarely in terms of the Section 1 definition of advice, which inter alia states that advice will be: “… any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients
• in respect to the purchase of any financial product
• in respect of the investment of any financial product…”.

The second two examples (Q2 and Q3) will constitute advice and, as such, the person giving such advice will either need a licence to provide the advice or be a registered representative of an FSP.

I have highlighted just a few provisions of the Act, but it is clear that it has a far-reaching impact on the financial advice landscape. FSPs and financial advisors must therefore ensure that they are not giving advice in contravention of the FAIS Act.

Consolidated is a national financial planning practice with offices in Western Cape, Johannesburg, Tshwane, Eastern Cape and KwaZulu-Natal. Bruce is based in the Western Cape. ❐

Author: Bruce Fleming CFP, BCom, LLB, Adv Grad Dip (Financial Planning) is Executive Head: Private Clients at Consolidated Financial Planning (PTY) Ltd.