By Brad Boertje
With the promulgation of the new Companies Act 71 of 2008 and the introduction of Business Rescue provisions, thousands of companies have used these proceedings to try and save themselves from liquidation. And so they should. The success rate of South African business rescue proceedings is said to be just under 10%, which is probably not too bad in the South African fiscal environment of recent years.
In this article I will be looking at two aspects which must be carefully considered by any construction company contemplating entering business rescue proceedings.
Performance and retention bonds
With the advent of the JBCC suite of contracts, the concept of construction guarantees was introduced. These instruments generally replaced the withholding of cash retention and in my opinion had a negative impact on already small contractor margins.
It is common for insurance companies (as opposed to banks) to issue these guarantees although they do not operate like traditional insurance policies. I have come to understand that not many people know this. Although it is an insurance company’s business to take risk for a premium, the provision of construction guarantees is not without security. The amount of security required by an insurance company from a contractor is unique to that contractor and depends on various factors including whether the contractor is public or private, the state of its order book, its total guarantee exposure, the health of its balance sheet etc. In addition to the company providing security, it is common for shareholders and to a lesser extent Directors to provide personal sureties.
The issuing of a guarantee creates a contract between the guarantor and the beneficiary of the guarantee, the Employer. Should a company fail to execute its obligations while under business rescue proceedings and a demand is made on a guarantee, the guarantor does not enjoy the same protection offered to the company in business rescue, and will be obliged to pay if the demand is valid (which it invariably is)
A key element of business rescue is the protection of legal action from creditors. Whilst a company iin business rescue proceedings is protected from guarantors calling on the securities it provided, individuals aren’t. Guarantors will pursue these individuals. The amounts can be significant and can easily lead to their sequestration. If you have signed personal sureties, make sure you understand your consequences in the event of a call on a guarantee.
In order to trade out of business rescue, it is mandatory for the company to secure new work. This necessitates having guarantee facilities. However, securing new guarantee facilities is nigh impossible, for good reason. The withholding of cash retention in lieu of providing a guarantee might seem like a viable alternative. However, margins are generally too low for contractors to part with up to 10% of their turnover.
I have seen Employers placing themselves in much better positions than they would have been in, had the original contract been duly fulfilled. Most guarantees contain a requirement for beneficiaries to account for their losses. If your personal surety is on the line, getting a beneficiary to account properly could save you a lot of money.
Suppliers and Sub-contractors
Except for employees, the parties that are most impacted by a construction company going into business rescue are its suppliers and sub-contractors, it’s supply chain. Although the supply chain receives preferential creditor status post the commencement of business rescue proceedings, most of these entities refuse to supply goods and services unless they are paid for in advance.
The supply chain generally has credit insurance cover to protect them from bad debt. Commensurate with the filing for business rescue is the withdrawal of credit insurance cover. No business is going to supply goods and services on credit to a company in business rescue without having credit insurance.
If your supply chain won’t supply, you cannot trade.
If you are considering entering business rescue proceedings, make sure you thoroughly understand the position of your supply chain.
Business rescue proceedings can work if they are commenced at the right time. Educate yourself on all aspects in advance.
Brad has 25 years of local and international experience working for prime contractors and is a Fellow of the Association of Arbitrators. For all your building project commercial requirements, contact Brad on firstname.lastname@example.org or via his company’s website – www.borconza.co.za