PERFORMANCE REVIEWS


APPEALING PERFORMANCE REVIEWS

In 2009, the Department of Agriculture, Forestry and Fisheries: Branch Fisheries Management (the Department) initiated a performance review process of all long-term Rights Holders in most of the commercial fishing sectors.  In response to these Report Cards, in late March 2011 the Department issued Report Cards to all Rights Holders in the C & D sectors based on the Request for Information forms submitted by the Rights Holders in 2009. 

In reviewing one such Report Card on behalf of a client it became evident that certain information contained in the Report Card was wholly inaccurate to the extent that one can only assume that the information was captured in error by the Department.  

According to our instructions the procedure that was followed in  respect of the collection of data for the performance review in the C & D sectors was by way of interviewing an authorized Representative of the Right Holder.  Thus the only logical explanation that one can reach in this regard is that there must have been a breakdown in communication during the interview process and as such the data reflected in the Report Card was incorrectly captured by the Department.

ERRORS IN REPORT CARD

Nevertheless, in the Report Card under consideration there were three assessments by the Department which were wholly inaccurate.

1)            In the Departments assessment it was stated that the Rights Holder did not apply for permits to utilize its right for 2006 /2007 season and that no acceptable explanation for the failure to do so was provided.  The Department noted further that the failure to utilize the right during this season amounts to a breach of permit conditions and may be referred to the Departmental officials responsible for initiating proceedings for the revocation of rights in terms of S 28 of the Marine Living Resources Act, 1998 (Act 18 of 1998) (MLRA).  In light of the fact that the Rights Holder has a copy of their 2006 / 2007 permit to utilize the right it is clear that the Departments assertion is incorrect.

2)            Furthermore, according to the Report Card, the Rights Holder had not paid certain outstanding fishing levies and the Department stated further that they would not issue any further permits to the Rights Holder until the levies were paid.  Besides being unclear from the table in the form what amount it is alleged was outstanding, the Right Holder on most occasions paid its levy payments via EFT (Electronic Fund Transfer) and as such was never issued with an official receipt from the Department and without copies of the receipts issued by the Department it is impossible for the Rights Holder to respond to the Departments allegation of outstanding levy payments.

3)¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† Under the heading ‚ÄúAverage Turnover and Average Turnover / Kilogram‚ÄĚ, the Department noted that the Right Holders ¬†total average turnover over three years of harvesting the right was almost double what the average turnover was in the sector for the three year period.¬† The Department then reached the impossible and quite frankly illogical conclusion that the Rights Holder has an average turnover per kilo of R0.00!

RIGHT TO APPEAL

The Report Card states at page 1 that;

‚Äúthe Minister notes that the Department will not entertain any appeals against the results of the performance review under section 80 of the Marine Living Resources Act, 1998 (Act 18 0f 1998).¬† The results of the performance review are not ‚Äúdecisions‚ÄĚ taken in terms of the MLRA.¬† The results merely reflect an assessment by the Department which, in certain instances, may result in steps being taken against the right holder in terms of S 28 of the MLRA for the revocation, suspension, cancellation, alteration or reduction of the right.‚ÄĚ

Therefore, in view of the fact that the Minister does not consider the Report Card a ‚Äúdecision‚ÄĚ the Minister refuses to accept any appeals in terms of S 80 of the Act. In our view assessments are by their very nature a decision in that they involve the Designated Authority (DA) offering an assessment of the Right Holders performance based on the information provided in the RFI Form.¬†

S 1 (v) of the Promotion of Administrative Justice Act, 2000 (Act 3 of 2000) (PAJA) states that:

‚Äúdecision means any decision of an administrative nature made, proposed to be made, or required to be made as the case may be, under an empowering provision‚Ķ.‚ÄĚ

The definition as set out in PAJA is extremely broad and specifically encompasses decisions that have not yet been made but are only proposed to be made.¬† The term ‚Äúproposed to be made‚ÄĚ suggests that the term ‚Äúdecision‚ÄĚ includes administrative conduct preparatory to the making of a decision, for example reports, recommendations and other preparatory conduct leading to the making of a decision.

It is submitted that the Report Cards will be used to inform the decisions of the Department and Third Parties when making decisions that will have a direct and adverse effect on the rights of Right Holders and as such must fall within the broad definition of ‚Äúdecision‚ÄĚ in PAJA.¬† This is evidenced by the fact that it was specifically stated in a meeting held at MCM on the 28th of October 2009 between the Department and various industry association groups that the Performance Measuring Review Process and the resultant Report Cards would have consequences for Rights Holders ¬†in that their assessments of Rights Holders ¬†may be used by future delegated authorities when assessing Rights Holders ¬†for the allocation of Long Term Rights in the second Long Term Rights allocation process.

Furthermore, it is very likely that the Report Cards will be utilized as a means for third parties to evaluate the performance of individual Rights Holders and will undoubtedly have an impact on the decision of future investors and financiers on the viability of future financing arrangements and is therefore a prime example of the direct affect that the Report Card will have.

Section 80 (1) of the MLRA states that ‚ÄúAny affected person may appeal to the Minister against a decision taken by any person acting under a power delegated in terms of this Act or section 238 of the Constitution.¬† The very fact that, as is directly quoted from the Departments report card, the results contained in the report ‚Äúin certain instances, may result in steps being taken against the right holder in terms of S 28 of the MLRA for the revocation, suspension, cancellation, alteration or reduction of the right‚ÄĚ is a clear example of the potential direct adverse effect that the Report Card may have on the rights of certain Rights Holders.

Thus in light of the above it is clear that the Report Card will clearly have a direct effect on the rights of individual Rights Holders  and will feature significantly in the future decisions affecting the rights of individuals and as such there can be no doubt that the Report Cards, in our opinion, amount to a decision in terms of the broad definition in PAJA and especially in light of the fact that the definition of decision in PAJA must be interpreted widely to give effect to one’s constitutional right to administrative justice. 

It must also be noted that although the Department has allowed Rights Holders to submit formal objections to the Report Card this informal procedure is wholly unsatisfactory and cannot deprive Right Holders of the right to address the Department in terms of the formal procedure as set out in S 80 of the MLRA and remains the only remedy open to Right Holders  to correct errors in the Department.

It was on the basis of the argument as set out above that an appeal was submitted by our firm on behalf of our client.¬† While the Department noted our appeal they still maintained the view that the Report Card does not represent a decision but that they would nonetheless respond to our ‚Äúletter‚ÄĚ once investigations had been concluded.

 This is particularly concerning in light of the fact that Report Cards are apparently due for clusters A & B in the next few weeks.

 



A BRIEF OVERVIEW OF BUSINESS RESCUE


A BRIEF OVERVIEW OF BUSINESS RESCUE PROCEEDINGS (S 128 ‚Äď 154)

In terms of the new Company’s Act 71 of 2008 the existing regime of judicial administration of failing companies is replaced by the business rescue regime which is largely self-administered by the company under independent supervision and subject to Court intervention from time to time.

The Chapter recognizes the interests of shareholders, creditors, and employees, and provides for their respective participation in the development and approval of the business rescue plan.

 

COMMENCEMENT OF BUSINESS RESCUE

There are two methods of commencing business rescue proceedings 1) By the board 2) by order of court.

 

Commencement by the Board (s 129)

One of the main objections against judicial management has been that it may be commenced only by an order of Court thereby making the procedure extremely expensive and complicated.  Thus one of the major advantages of the new business rescue provision is that it may be commenced by a resolution of the board of directors without any approval from the shareholders at a general meeting.

The board of directors may pass a resolution commencing business rescue proceedings if the board has reasonable grounds to believe that:

a)    The company is financially distressed

b)    There appears to be  a reasonable prospect of rescuing the company (s 129(1))

¬†A company is financially distressed if ‚Äúit appears to be reasonably unlikely that the company will be able to pay its debts as they become due and payable within the next six months; or if it appears to be reasonably likely that the company will become insolvent (i.e. its liabilities will exceed its assets) within the next 6 months‚ÄĚ

The company must file the decision with the Commission and within five business days after filing the resolution, appoint a business rescue practitioner to oversee the company and its rescue proceedings.  The business rescue practitioner must provide his / her written consent and must meet the requirements as set out in s 138.

To protect affected persons from abuse of this procedure by the board, section 130 provides that the court may, on application, set aside the resolution, appoint another business rescue practitioner or order the practitioner to provide security.   In terms of S 128(1)(a) an affected person includes shareholders, creditors, trade unions  and any employee who is not so represented.

In terms of Section 129(7) if the board of directors believes that a company is in financial distress but nonetheless decides not to proceed with business rescue proceedings, a notice must be delivered to every affected person explaining why they believe the company is in financial distress and why they have taken the decision not to commence business rescue proceedings.

            Commencement by Order of Court (s 131)

In the event that the company has not taken a resolution as per S 129 an affected person may apply to court for an order placing the company under supervision and commencing business rescue proceedings.  The court may grant such an order of it is satisfied that:

a)    The company is financially distressed; or

b)    The company has failed to pay an amount due to a government authority in terms of a statutory obligation in respect of its employees, such as unemployment insurance or money due in terms of a contractual obligation; or

c)    It is otherwise just and equitable to do so for financial reasons; and

d)    There is a reasonable prospect of rescuing the company

Such an applicant must then serve a copy of the application on the company and the commission and notify each affected person of the application in the prescribed manner.

EFFECT ON SHAREHOLDERS AND DIRECTORS (S 137)

During proceedings any alteration in the classification or status of any of the issued securities of the company ‚Äď other than by way of transfer of securities in the ordinary course of business is invalid, except if the court otherwise directs or such alteration is contemplated in and approved in the business rescue plan.

Directors are not relieved from office by business rescue proceedings but must continue to exercise their management functions subject to the authority of the business rescue practitioner, in accordance with his reasonable instructions or direction.  Directors must cooperate with the business rescue practitioner, deliver books and records of the company and within five business days of after the commencement of business rescue proceedings provide the commissioner with a statement of the company’s affairs.

Once a company is under supervision, no legal proceedings may be commenced or continued against the company in respect of its property or property lawfully within its possession, for the duration of the proceedings.  There are however a number of exceptions to this rule:

a)    The business rescue practitioner may provide written consent to commencement or continuation of the action

b)     If the court proves its consent.

c)    If the legal-proceeding is a set-off against a claim made by the company in legal proceedings which  commenced before or after business rescue proceedings began

d)    If the proceedings are criminal proceedings against the company, its directors or officers

e)    If the proceedings concern property or rights held by the company as a trustee.

Business rescue also have two other effects which have become issues of contention.  Firstly, S 135 states that any claims for remuneration or other payments to employees will take preference over all other claims, even those of creditors who provided post-commencement financing to the company. This will make it extremely difficult for a company to obtain any sort of financing during business rescue proceedings. An employee is thus a preferred unsecured creditor in regard to any monies which become due and payable by the company

Secondly, S 136(2), if interpreted literally, would mean that a business rescue practitioner may cancel or suspend any clause in a contract to which the company is a party.  For example the practitioner may cancel a clause in a contract which requires payment by the company in a contract of sale but may still require that the seller to deliver the goods. One can only hope that this was not the intention of those who drafted the legislation and it is thus likely that a court will have to pronounce on this aspect before we can be sure.

 

THE BUSINESS RESCUE PLAN

One of the main reasons why the judicial management procedure has been considered a failure is because it did not provide for the drafting and execution of a rescue plan.  The Act now prescribes highly detailed and complex requirements for business rescue plan and its approval by the creditors, a great deal of which seems unnecessary and will in all likelihood add significantly to the cost of the procedure.

The business rescue practitioner must convene a meeting of the company’s creditors and other holders of voting rights to consider the rescue plan.  Note that as is the position in insolvency law, secured creditors also have voting rights for the secured part of their claims and not just for the unsecured part. It will be preliminary approved if supported by the holders of 75% of the creditors voting interests that were voted and the votes in support of the plan included at least 50% of the independent creditors voting interests.

If adopted the plan is binding on the company and on all of the creditors and holders of security whether they were present at the meeting or not.

If a business rescue plan is rejected by the creditors the practitioner may either seek approval from the relevant meeting to prepare a revised plan, or inform them that the company will apply to court to have the result of their vote set aside on the grounds that the majority decision was inappropriate.  If the practitioner fails to do either of the above any affected person present at the meeting may ask for approval from the person who have voting rights that the business rescue practitioner be  required to follow one of the above two courses of action.  In the alternative, one or more of the affected person may offer to purchase the voting interests of any of the persons who opposed adoption of the plan.

THE END OF BUSINESSS RESCUE

Business rescue proceedings are brought to an end in one of three ways:

1)    A court order setting aside resolution or order that commenced rescue proceedings or application by practitioner that there is no reasonable prospect of rescue or no financial distress

2)    A notice of termination filed with the Commission because there is no financial distress or rescue plan has been rejected

3)    A business rescue plan has either been implemented (as confirmed in a filed notice) or rejected without any further steps taken.

CONCLUSION

The structured procedure in the Act is not dissimilar to the informal negotiated rescue proceedings conducted by creditors of a distressed company when they act together to reach a commercial solution to rescue the company and of course there are obvious advantages to such a negotiated rescue plan. How effective these new provisions are ,only time will tell, but from experience I predict they will perform better than the previous judicial management procedure.