Construction World January 2020

T he new Companies Act (Act 71 of 2008) introduced the provisions for business rescue. When a business enters business rescue, a registered business rescue practitioner assumes responsibility for developing and executing the business rescue plan. A key provision is that once a business enters business rescue proceedings, it is immediately protected from legal action by its creditors. “Business rescue is a highly complex process, but it can work. South African statistics indicate a success rate of around 10%, whereas the global average is half that. However, the decks are stacked against construction companies for several reasons,” he says. “Construction companies contemplating business rescue need to understand the risks.” 7KH ͤUVW FKDOOHQJH LGHQWLͤHG by Boertje relates to performance guarantees. These guarantees are common in the construction industry and, mistakenly, are often seen as insurance products. In fact, though, they are quite different because they require collateral. The extent of the

Brad Boertje, a construction risk management consultant and adjudicator on the Master Builders Association (MBA) North panel.

needs to issue performance guarantees for new contracts, which it generally can no longer obtain. Of course, a 10% retention could be used in lieu of a guarantee EXW JLYHQ WKH SDSHU WKLQ PDUJLQV FRPPRQ LQ WKH LQGXVWU\ DW SUHVHQW it’s doubtful if many construction companies could survive this GHQW WR FDVKͥRZ $ VHFRQG VHW RI FKDOOHQJHV UHODWHV WR WKH VXSSO\ chain of the company going into business rescue – essentially its suppliers and subcontractors. They will typically insist on being paid in advance for any goods or services. No contractor in business UHVFXH KDV WKH FDVKͥRZ WR GR WKLV Their insistence on cash up front will also be motivated by the fact that companies in business rescue cannot obtain the normal credit risk insurance that secures the supply chain. With no ability to procure goods and services from its supply chain, the company in business rescue simply cannot trade. Boertje emphasises the need to manage risk adequately from the JHW JR SUHIHUDEO\ XVLQJ WKH VHUYLFHV RI D SURIHVVLRQDO WR HQVXUH WKDW WKH EXVLQHVV LV IXOͤOOLQJ LWV FRQWUDFWXDO REOLJDWLRQV DQG FUXFLDOO\ WKDW RWKHUV DUH IXOͤOOLQJ WKHLU FRQWUDFWXDO REOLJDWLRQV WR LW For this reason, it is best to avoid 'pay when paid' arrangements, and also not to condone missed payments from the main contractor. Indeed, he advises subcontractors to obtain payment guarantees from the main contractor, or payment in advance. ƒ

security required will depend on a multitude of factors, including the company’s turnover, its order book, its total guarantee exposure, its balance sheet and so on. In most cases, the shareholders (and sometimes the directors) will also be required to sign personal surety for guarantees. If the company enters business rescue, it is protected against legal action by creditors – but individuals associated with it are not. This means that the guarantors can call in any personal sureties provided by shareholders and directors. And it is common for guarantees to be called post business rescue, as contractors ͥRXQGHU WR PDLQWDLQ SURJUDPPH “These sums can be large, and certainly enough to cause an individual’s estate to be sequestrated. If you are asked to sign a personal suretyship, make sure you understand the consequences should guarantees be called in, which they inevitably will be in the case of business rescue,” he advises. “It’s particularly important to JHW DQ\ EHQHͤFLDU\ WR DFFRXQW SURSHUO\ IRU KLV RU KHU ORVVHV ̰ WKH guarantee is not a jackpot, but is intended to return the guaranteed party to the position they would have been in, had a contract been fully executed. This could save a lot of money.” There is a second issue relating to guarantees. Once it is in business rescue, it’s vital that the company continues trading if it is to have any chance of exiting business rescue later on. To do so, it

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CONSTRUCTION WORLD JANUARY 2020