The social impact of business rescue proceedings, which referred chiefly to the impact on employment, should be prioritised above the interests of the flailing company’s debtors, particularly given the socioeconomically challenged environment in which South Africa finds itself, University of South Africa corporate law subject head Professor Dorothy Farisani argues.

Addressing the Department of Trade and Industry’s Company Law Seminar, in Johannesburg, on Thursday, the academic encouraged a move towards business rescue regimes that ensured the maintenance of employment rather than the protection of the interests of debtors, such as banks, property owners and suppliers.

“Given the country’s socioeconomic conditions, [which are punctuated by] poverty and high unemployment, it’s no surprise that drafters of the [business rescue provisions of] the Companies Act of 2008 lean more towards the social efficacy [of business rescue rather than] financial efficacy.

“There is also a general global move towards business rescue regimes that ensure the maintenance of employment over the protection of debtors . . . and the South African legislation makes provision that companies need to be rescued in a way that balances the interests of all stakeholders,” she averred.

Farisani further argued that it could be proven that a business could recover if a business rescue process – rather than liquidation – was initiated.

“In South Africa, it’s important to have a [business] reorganisation model that recognises the negative effects liquidations [have] on society and ensures that employment contracts are protected,” she said.

Challenges to the social efficacy of local business rescue included the fact that many businesses did not file for business rescue until it was too late and they were not able to return to viability, while, in other cases, employees affected did not understand the business rescue proceedings and were unaware of their rights or roles in the process.

South African companies that had recently found themselves in the midst of business rescue proceedings included major steelmaker Evraz Highveld Steel & Vanadium – one of several companies in the local steel sector that appeared to be faltering under depressed market conditions. The company cited increased import competition, working capital constraints and reduced domestic demand as the catalysts for its entering business rescue proceedings in April.

It shortly after confirmed that it had issued a proposed restructuring notice in terms of Section 189 that could see it potentially cutting half of its 2 242-strong workforce.

Despite missing an initial three-month deadline to conclude this restructuring, the appointed business rescue practitioners (BRPs) said earlier this month that there was a “reasonable prospect” that the company would be rescued in accordance with the Companies Act.

Moreover, financially stricken coal producer Optimum Coal – hit by potential penalty claims from State electricity utility Eskom and the suspension of its mining licence – had also recently resolved to begin business rescue proceedings under joint BRPs Peter van der Steen and Piers Marsden.

Parent company Glencore stated in a media release that Optimum had been supplying coal to the State power utility at a price “significantly lower than the cost of production” for a prolonged period. Significantly worsening its situation were the penalties Eskom was seeking, which would result in Optimum supplying coal to the State utility at an effective price of R1/t.

The Department of Mineral Resources had also alleged that a previous retrenchment programme had been carried out without due regard for all the legal prescripts governing the retrenchment process.

The programme saw an initial 1 067 employees earmarked for retrenchment reduced to 359, with 267 opting for voluntary severance packages and 86 for redeployment to other Glencore operations.

However, Glencore said on Thursday that there existed a “reasonable” prospect of rescuing Optimum if the supply agreement with Eskom could be renegotiated.