TURNAROUND MANAGEMENT ASSOCIATION OF SOUTHERN AFRICA - DEBATE ON BUSINESS RESCUE SUCCESS FEES – PART A

Introduction

On 17 November 2020, the Turnaround Management Association (TMA) Committee on Business Rescue Practice convened a panel for a discussion surrounding success fees in business rescue. The panel consisted of:

Ryan Smith, Webber Wentzel

Alison Timme, PWC

Lara Khan, Webber Wentzel

Alex Elliot, Black Box Law

The Committee can report to its members that the discussion surrounding success fees in business rescue was meaningful. The TMA would like to extend its thanks to all the participants for their valuable contribution towards promoting good business rescue practice. 

Debate methodology

The methodology underlying this discussion touched upon multiple subthemes that sought to align the current status quo regarding success fees in business rescue practice with the professional views of the panellists. The central theme running through the debate, however, centred around the following proposal: that practitioners' remuneration may be contractually extended to include a success fee (contingency), which must be endorsed by both the shareholders and a majority of creditors of the distressed business in question. Indeed, this proposal is derived from a strict interpretation of the provisions of the Companies Act no 71 of 2008 and served as the opening statement for the Committee’s discussion.

Panellists’ views

According to all panellists, there is an implied requirement for a success fee to be part and parcel of business rescue practice, under the current circumstances. Each rescue necessarily has a set of factual considerations that will direct a reasonable person to adjudge affordability before casting a vote. For those individuals who are disgruntled by a success fee, and elect to vote against it, they may apply to court to set aside the agreement on the grounds that it is not just and equitable, or that the remuneration provided for in the agreement is unreasonable with regard to the financial circumstances of the company. In short, the legislation allows for any set of facts relating to a remuneration agreement to be tested in court. The panellists noted that there are not many examples (case law) when a creditor pursued their rights under these provisions. That being said, the case law that does exist gives way to future matters being adjudicated on their own merits. Unanimously, the panel conceded that any success fee agreement should aim to protect all affected parties in a rescue endeavour.

It is worth noting that there does appear to be some contention over whether if a success fee is paid from the coffers of the distressed business, in the event of an approved compromise, such an agreement might infringe on the protection of the affected parties' rights. Among the panellists of the Committee, there was no clear consensus over what constituted a fair interpretation of this point. The panellists suggested that the test for deciding an appropriate success fee might best be gauged by the likelihood of a meaningful return to creditors. In any event, panellists agreed that practitioners should be conscious about transparency and the conditions attached to any agreed upon success fee.  

Another subtheme identified of the debate dealt with the issue of timing: when should a business rescue practitioner (BRP) present a success fee agreement? Lara argued that a BRP invests a great deal of time and effort to draw up a business rescue plan and should, therefore, have clarity on the issue of a success fee before this process commences. Alex, by contrast, was of the view that a creditor can only be in a position to gauge the fairness of a success fee if the business rescue plan presented tenders a meaningful return to creditors and, therefore, suggested that a success fee should be voted on with the approval or rejection of the business rescue plan itself. Alex further argued that the risk to creditors could be assessed before the practitioner accepts the appointment, whereas Lara's rebuttal argued that certain rescues are too complicated to evaluate the risk presented before accepting an appointment. Both arguments are strong in presenting the unique difficulties associated with assessing risk and reward, and the balancing of rights of the affected parties—including those of the BRP.

On the one hand, the practitioner needs to be incentivised to get a plan published timeously; on the other hand, the industry requires skilled professionals who are attracted by the practices of business rescue. In the case of the former, emphasis is placed on understanding the inherited risk of the profession; in the case of the latter, emphasis is placed on promoting fair remuneration in the face of considerable associated risk. These conflicting (and equally valid) viewpoints are both worth taking seriously. Both describe how risk and reward – as opposite or contrary forces – may be complementary, interconnected, and interdependent. Integrating both points of view into a single perspective would appear to be beneficial for business rescue practices going forward.

All things being equal, the panel agreed that there are not many successful rescues and, in the face of this reality, a business rescue practitioner ought to be properly remunerated when they are successful. Alison argued that these factors are probably immaterial when considering a suitable level of remuneration. There are instances where a success fee should be aligned to the "success story". The aim, however, remains somewhat different. Business rescue is about maximising the recoveries process. It is an all-encompassing and holistic approach to rescuing distressed businesses when compared to its alternative—liquidation. By way of example, Alison raised the issue of an accelerated disposal of assets, stating: “it hardly requires a skill that justifies a success fee”. However, Alison also acknowledged that each matter has its own unique set of facts and even the disposal of certain assets might, at times, be deemed convoluted.

The panellists viewed determination and risk as tangible factors. Firstly, the practitioner must make a determination against the weight of the objective (in the form of milestones) in the business rescue plan. Lara viewed this risk as untenable in practice, stating: “it is difficult for a practitioner to manage a rescue for months, and in some instances, years, at the set tariff.” Lara's measurement is simple – horses for courses. In other words, each business rescue comes with its own considerations and complications, making it questionable whether total standardisation within the industry is possible (or even desirable). This is a debate, in and of, itself.

Ryan stated that although measures against competing views can be taken, any approval of a success fee is reliant on voting outcomes. The balance of rights is measured equally by tangible voting interests and it is primarily by this measure that the rights of affected parties are balanced. 

On the issue of what constitutes best practice, Alex viewed the timing for consideration as measurable only against the existence of a business rescue plan. Business rescue risk is not automatically measured or valued; risk must be analysed and measured practically, which requires time. Although Alex drew a proverbial line between these dualistic discords, Lara emphasised that the difference lies in the personal liability that is incurred by the BRP.  

In keeping with her views expressed above, Lara viewed the actual publication of a preliminary plan as “challenging”. Her perspective was that any delay regarding the certainties of an outcome in respect of remuneration might demotivate skilled BRPs to take on, or pursue, a career under Chapter 6. Given the current passé tariff, Lara viewed the profession of a BRP as relatively unattractive and suggested that timeous and appropriate remuneration could help to resolve this problem.

According to Alison, moving from a commercially accepted rate to a rate that is in line with the inherent risk associated with specific business rescue operations, is difficult in practice. Unlike traditional directorships, in which a director can resign from their role and ultimately end their responsibilities, a practitioner cannot resign out of choice. For that reason, the payment of a success fee is acceptable in the marketplace, and under our current status quo, should also be a standard practice for BRPs. During an M&A transaction, for instance, financial advisors are remunerated predominately by way of their success.  

Conclusion

The committee met in an attempt to canvass opinion regarding success fees in business rescue. The ultimate aim of this debate was to gain a spectrum of viewpoints and a potential consensus about what ought to be considered objectively fair and reasonable practice for levying a success fee. A success fee may be perceived as an insult in the face of a proposed compromise, by those who are compromised, but there remains larger objective: the task of restoring struggling companies to solvency.  Whatever the parameters are, the process of approving a success fee is subject to a vote. However, the calculation of this vote is subjective, as it is valued against a creditor's tangible interest in a rescue.

Business rescue proceedings should not be clouded by the opinions expressed in Herbert Robert’s New York Times article in 1998: i.e. that “as long as money talks, justice won't be equal”. Business rescue is not to be confused with a process that serves justice. Business rescue is sine qua non approach that relies on compromises and concessions. In the event that a success fee is unjust and inequitable, the aggrieved party can approach the court for relief.

In the realm of business rescue, it is imperative that risk and reward are kept in balance. While the committee’s panellists did not agree upon all of the details pertaining to this equilibrium, upon this point, the panellists were in agreement. This is an important foundation to bear in mind during any future debates regarding business rescue practice, of which there are likely to be many.

Abstract

Practitioners are permitted to charge a success fee. The quantum and timing of this success fee, however, remain open to subjective interpretation. Any practice directive should refrain from establishing a fixed criterion, since each matter has a unique set of parameters. The legislator made provision for just and equitable treatment of affected parties. Under the current regime, the set tariff that regulates business rescue fees, is archaic and not in line with international best practices in the turnaround profession. Practitioners should be cautious not to offend affected parties but rather promote transparency throughout their practice.

Report prepared by Caitlin Gottschalk and Tiaan Herbst, members of the TMA Committee on Business Rescue Practice. Caitlin the principal at Gottschalk Attorneys. Tiaan is a director at Eripio Business Rescue Consultants.

*Disclaimer: The opinions provided herein do not constitute a legal opinion. This article draw on the views and professional opinions (only) of the panellists during an online debate held on 17 Nov 2020.