The national coronavirus-related lockdown has put many companies into financial distress, but recent notices from the Companies and Intellectual Property Commission (CIPC) are delaying the business rescue process and in fact fall to be set aside on review, according to law firm Knowles Husain Lindsay Inc.

Many industries including construction, building and civil engineering were already in poor financial shape by the start of 2020, and the sudden lockdown has pushed hundreds of businesses over the edge. Sectors like tourism and hospitality have also seen trading halt almost completely, putting thousands of small enterprises at risk and needing to look to business rescue as a possible means of survival.

“The CIPC wants to suspend and extend certain time periods relating to voluntary business rescue until after the lockdown ends, but it is actually not legally entitled to do that,” says Gavin Schär, director at Knowles Husain Lindsay Inc. “The timeframes are stipulated within the Companies Act, and with good reason; companies affected negatively by the lockdown need to act quickly and without delay when applying for business rescue.”

The notices state that business rescue applications that were lodged at the CIPC before the national lockdown but which were not completed  at the time of the lockdown may not be completed until after the national lockdown has ended. Neither may any new proceedings be started until after the lockdown.

“In our view, the CIPC acted ultra vires in publishing the notices as it lacks the authority to extend or suspend the time periods contemplated in section 129 of the Act,” Schär says. “Under these circumstances, the notices are unlawful and fall to be set aside on review.”

Schär says that section 129 of the Companies Act clearly sets out the process for commencing voluntary business rescue. This includes the  resolution by the board of a company to be placed into voluntary business rescue to be filed with the CIPC and also to the appointment of a business rescue practitioner within five days thereof – of which the CIPC must be notified within two days. These filings may be done by email, and do not require the physical delivery of hard-copy documents, he says.

“Section 223 of the Act states that only the Minister of Trade and Industry, in consultation with the CIPC and by notice in the Gazette, may make regulations concerning the functions of the CIPC, including those relating to the time periods,” he says. “The authority of the CIPC to issue regulations and policy directives does not extend to any time periods that are already set out in the Act.”

Referring to the special regulations related to the lockdown, section 27 of the Disaster Management Act (DMA) allows the Minister of Cooperative Governance and Traditional Affairs to make regulations or issue directives to address a disaster – which was done in March and April. Regulation 10 to the DMA makes provision for the Minister of Trade and Industry to issue regulations and directives.

“However, the Minister of Trade and Industry has not issued any regulations or directives relating to the operation of the CIPC during the national lockdown,” he says. “In our view, despite the notices from the CIPC, companies who want to be placed into business rescue are entitled, during the national lockdown, to proceed to file the necessary section 129 documentation via email with the CIPC. The CIPC may not refuse to accept any documents which are filed in this manner.”

Schär warns that unfortunately it may now be necessary for companies wanting to apply for  business rescue to launch an urgent application to Court to set aside the notices.

“A company that is financially distressed because of the temporary national lockdown is a prime candidate for business rescue and must act without delay in applying for business rescue if it wants to increase its chances of being rescued and precisely the type of company that the business rescue provisions are aimed at,” he says. “With the CIPC notices effectively depriving companies of this lifeline at present, we are of the view that there is a legitimate basis to urgently apply to court on an urgent basis to set aside the notices.”

Another construction icon topples

Another construction icon topples

The firm’s construction division has for some time been experiencing difficulties.

The iconic South African construction firm Basil Read Holdings announced in June that it had applied to the Johannesburg Stock Exchange for the voluntary suspension of the listing of its shares after a key unit started business rescue proceedings. This report Nqobile Dludla of Reuters continues:

The cash-strapped company announced that Basil Read Limited, its wholly owned subsidiary which houses its construction unit, had started business rescue proceedings after it failed to secure bridge funding from lenders.

Its shares at the time plunged more than 90% from a high of 22 cents to close at 1 cent.

Basil Read appointed Siviwe Dongwana of Adamentem Chartered Accountants and John Lightfoot of Matuson and Associates as business rescue practitioners.

Basil Read was awarded the design construct and operate contract for the St Helena Airport in November 2011. The project was funded with UK aid at an estimated cost of £250M GBP

“There is uncertainty in terms of the impact of the voluntary business rescue proceedings instituted at Basil Read Limited, on the Basil Read Holdings Limited Group as listed on the JSE,” it said in a statement.

It added the suspension would be until such time as the effect on the listed group could be quantified.

The firm’s construction division has for some time been experiencing cash flow difficulties stemming from, among other reasons, mismatched cash inflows and outflows, it said on Friday.

To mitigate this, it sought to raise bridge funding from a consortium of lenders in order to complete construction contracts, but was advised on June 14 that a majority of lenders was not prepared to make the funding available to it outside of a business rescue process.

Throughout 2017, Basil Read struggled to obtain money to pay creditors, provide working capital and reduce debt. In the year to the end of March, it reported a net loss of 743 million rand ($55 million), while its order book plunged from 12.3 billion rand to 4.5 billion rand.

The firm is trying to implement a turnaround strategy that involves cutting costs and exiting loss-making contacts and assets.