Corporate Rescue - Philosophy behind restructuring legislation

1. Corporate Rescue - Philosophy behind restructuring legislation Why is South Africa Moving in this Direction? Gerald E. Meyerman, Policy Advisor USAID/Southern Africa, Financial Sector Program gmeyerman@fsp.org.za AIPSA 2ND ANNUAL CONFERENCE ON INSOLVENCY & BUSINESS RESCUE LEGISLATION & PRACTICE Cape Town, South Africa October 27-28, 2010

2. DISCLAIMER for clarity: This Presentation and supporting documents were produced by the speaker, Gerald E. Meyerman, as Policy Advisor to the USAID/Southern Africa Financial Sector Program. The views expressed are entirely his own and do not necessarily reflect the views of the United States Agency for International Development or the United States Government

3. Background FSP Relevant Policy Role FSP Primary Policy Objective – to Improve Business Environment. • FSP is working closely with CCRD within the dti providing TA to the drafting team to replace old -1973 - Companies legislation – core to business environment. • Companies Act (2008) was drafted PRIOR to USAID TA involvement. • FSP TA focuses on Companies Regulations, Forms, implementation mechanisms including business plan for the Commission.

4. Insolvency & Rescue Impacts public and private sector • Failure caused by macro economic shock and international contagion – ie East Asia crisis • Governments need to take clear policy steps to minimize damage to the productive sector • Government can put in place policies to facilitate guide business recue – ie the “London Approach” and derivatives. (for further documentation – see “Economic Crisis and Rescue Approaches” on FSP Forum )

5. FSP Policy interest in Insolvency Law & Policy • The broad area of insolvency is an essential element of a positive business environment. • Awareness that key South African Government policies are closely related to a sound insolvency regime. • Relevant Government Objectives: Economic Growth Job Creation Transformation

6. Relevant Government Objectives: Economic Growth, Job Creation and Transformation • Biggest Issue for South Africa: Unemployment and resulting poverty – economic growth is essential. • Transformation requires retaining employment and creating greater access to productive employment. • Job creation – what does it COST to create employment?? • How many jobs have YOU liquidated this year?

7. How Did we get here? • 18th century, "Debtor's Prison" or "Work House" for debtors. • Roman Dutch law – Companies, Stokvel– - foster entrepeneurship through limited liability - “Juristic Person” ..”weeskamer”. • More enlightened laws in the UK and the US followed the example with the federal Bankruptcy Act of 1898, revised in 1978 etc. and the Bankruptcy Prevention and Consumer Protection Law of 2005 • South Africa – amendments to Insolvency Act, Companies Act and National Credit Act.

8. Why Corporate Rescue? • reorganization allows the debtor corporation to preserve the business as a going concern • maximize value for creditors, • shareholders, • employees • and other stakeholders. NOTIONALLY, this allows jobs to be preserved and creditors to be paid back, at least in part.

9. Is it Worth It? - The Cost of Job Creation What does it cost to create a job? • Difficult to estimate accurately • Recent US estimates put it at between US$60K – 280K for jobs created under “Stimulus Program” by US Government. • SMEs are much more cost effective – the “Cost of Entrepreneurial Job Creation” was estimated at US$ 31,000. (for economists and other sceptics – see “Cost of Creating Employment” on FSP Forum )

10. Corporate Rescue : Designed to Safe Productive capacity and Jobs • Does it work?   • The rate of successful US Chapter 11 reorganizations is depressingly low, sometimes estimated at 10% or less. • many companies restructure without the need of further remedial action, but many require that the reorganized business restructure again through a private workout or repeat bankruptcy. • If it fails – Chapter 7 or Chapter 22 ? (for further documentation – see “Chapter 11 Bankruptcy” on FSP Forum )

11. Will Company Rescue work in South Africa? • It MUST work especially here where jobs are critical. • Difficult to forecast outcomes BUT do not pre-judge – the dti is proposing a number of critical changes to fix problems. • Companies Act will be functional but must be seen in overall insolvency framework. • Companies Regulations will define “Rescue Professional” in a flexible manner. • Experience will tell.

12. Finally... • An exciting new area of practice for Insolvency Professionals. • Different mindset, longer term work, success and failure options. Rescue, rescue and potentially liquidate. • Need to harmonize insolvency area – ability to move seamlessly from rescue to insolvency – and back – for both corporates and individuals. (for more details on FSP insolvency work – see “Insolvency Framework” on FSP Forum )

13. Thank You! For further background information, please visit the Financial Sector Program Forum at: www.fsp.org.za/blog