BRP Proceedings: Introducing a New Rescue Culture in South Africa
Nick Angel, Partner, Anna Thomander, Associate, and Jonathan Keen, Associate, Milbank, Tweed, Hadley & McCloy LLP, London
In May 2011, Chapter 6 of the South African Companies Act, No. 71 of 2008 came into force, introducing a restructuring process into South African law: business rescue proceedings ('BRP'). The introduction of BRP constituted a significant change to the restructuring and insolvency landscape in South Africa, providing an alternative to the existing liquidation process aimed at allowing companies in financial difficult to restructure financially and operationally.
This article provides a brief introduction to the BRP process from the perspective of those involved in international restructurings. It identifies and highlights a number of features in the new legislation which will interest international investors involved in restructurings, or potential restructurings, in South Africa. The article also includes a practical example, a case study of how BRP works in practice.
Overview of the BRP process
BRP is a largely out-of-court restructuring process enabling a debtor in financial distress to restructure and reorganise its capital structure and business. A BRP practitioner ('BR Practitioner') is appointed who, under the protection of a court-supervised moratorium against creditor action, will take over the management of the debtor and prepare, negotiate and implement a 'business rescue plan' (the 'BR Plan'). The BR Plan needs to be approved by 75% of the creditors’ voting interests (in value), including at least 50% of the independent creditors. Once approved, it will be binding on the debtor and all of its creditors. The BRP process should generally end within three months, but this can be extended by the court on an application by the BR Practitioner.
The objective is to maximise the chances of rescuing the business and for the company to continue to exist on a solvent basis and it is intended to be a commercial process, focusing on a negotiated solution agreed between the BR Practitioner and the affected creditors and other affected stakeholders of the company.
The South African BRP regime introduces a framework for creditors to initiate and lead successful restructurings to achieve results similar to those achieved in English and some European restructurings. However, BRP remains a largely untested process and many of the key BRP provisions have not been examined by the South African courts. As a result, it remains to be seen whether BRP will be utilised as the commercial restructuring option it has the potential to be.
Noteworthy features and issues
The BRP regime provides for a quick and flexible process and contains a set of useful provisions to achieve a financial restructuring of a distressed company. Some of the more noteworthy features and issues associated with the BRP regime are described below.
– Creditor selection of BR Practitioner. If a creditor applies for BRP, they have the ability to expressly nominate the individual they would like to see appointed as the BR Practitioner. The choice of individual to act as BR Practitioner can often be critical to the strategy pursued during BRP. Creditors will want to appoint an individual who they have confidence in and who they believe will protect their interests as far as possible. By contrast, in a liquidation process only the court has the power to choose the identity of the liquidator.
– Broad scope. The scope of a BRP plan is not prescribed and is consequently very flexible. It can, for example, include a debt for equity swap.
– Cram down. Once a plan is approved by the requisite majority of creditors, it will be binding on all creditors, including any dissenting hold-outs, thus providing an English style cram down. This cram down is enhanced, by comparison with the English at least, by two things. First, the court can overturn any 'no' vote on the grounds that it is 'inappropriate', and second, there is a buy out right in respect of dissenting voters (see below).
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