Plan PURPOSE OF THE PRACTICE NOTE

Practice note number 6: Compilation of the Business Rescue Plan PURPOSE OF THE PRACTICE NOTE To provide guidelines to Business Rescue Practitioners ( BRP ) in drawing up Business Rescue Plans ( BR Plan ) and to produce an expected standard framework for readers of BR Plans. Adherence to the guidelines proposed in this practice note will ensure that TMA members prepare a BR Plan which demonstrates the level of professionalism and minimum standards expected in the industry. The BR plan of a TMA member is a direct reflection on the TMA itself, and should therefore be carefully prepared, in line with the prescribed standards below. Note: Elements within this framework are of a generic nature, electing to commit to the additional tier 1 and 2 disclosures should be done after counsel from a senior practitioner. A sample of a BR Plan s contents is set out in Annexure A. A. OVERVIEW To complete the successful turnaround of a business in business rescue ( BR ), it is important to produce a high quality BR Plan. A BR Plan should enable the reader/affected party to form a clear view, based on the information contained in the BR Plan, on whether they should vote for or against the BR Plan. In essence the BR Plan should articulate the reasons for a company entering into BR, the BRPs plan for the company (returning the company to health or offering a better return for creditors versus liquidation), how the BRPs plan will be achieved and the impact thereof on each affected party. Note that a successful vote by creditors, and if necessary shareholders, is required in order to approve a BR Plan and accordingly it is imperative that the necessary information is set out in the BR Plan to enable affected parties to make this decision. 1

The Companies Act 71 of 2008 ( the Act ), Chapter 6, Section 150 prescribes a number of required disclosures in the BR Plan which is contained under 3 separate headings, namely: Part A Background Part B Proposals; and Part C Assumptions and Conditions. Whilst the disclosure content set out under each of the abovementioned headings is useful and sets out the minimum statutory disclosure requirements, the TMA is of the view that there are a number of other necessary and useful disclosures that are not reflected in the Act. The BRP faces a liability of data integrity when he commences a BR, therefore the accuracy of information presented to him is an important consideration in the BR Plan. The BRP should include a disclaimer to protect him against the information presented by the directors. It is proposed that the headings and disclosure contents as outlined in the Act, Chapter 6, Section 150 is used along with the further TMA suggested disclosures as outlined in sections B to D below and as further illustrated in Annexure A. Note that each BR Plan should be considered independently and on a case by case basis, therefore all disclosures may not necessarily apply. It is recommended that use be made of Appendices as far as possible, whilst a summary of the information contained in the relevant Appendices is concisely summarised in the BR Plan. B. PART A - BACKGROUND Requirements of the Act: Section 150(2)(a) (i) a complete list of all the material assets of the company, as well as an indication as to which assets were held as security by creditors when the business rescue proceedings began; [TMA: if not presented elsewhere in the BR Plan, a full balance sheet should be presented] (ii) a complete list of the creditors of the company when the business rescue proceedings began, as well as an indication as to which creditors would qualify as secured, statutory preferent and concurrent in terms of the laws of insolvency, and an indication of which of the creditors have proved their claims; [TMA: also disclose which creditors are related parties as this affects voting in accordance with section 150(2) of the Act; Also note where a creditor s claim has been subordinated in favour of another creditor as this again affects voting] (iii) the probable dividend that would be received by creditors, in their specific classes, if the company were to be placed in liquidation; [TMA: to be supported by a dividend calculation see Annexure B] (iv) a complete list of the holders of the company s issued securities; [TMA: i.e. the shareholders and each of their shareholdings] (v) a copy of the written agreement concerning the practitioner s remuneration; and [TMA: if the remuneration agreement provides for any further remuneration, take note of the provisions in section 143 of the Act] (vi) a statement whether the business rescue plan includes a proposal made informally by a creditor of the company. 2

Tier 1 Compulsory disclosure for TMA members Full name, any trading names, company registration number and registered address of the company filing for BR; Full group structure and all relationships across the group; List of all directors of the company and their designations (including other directorships held by each director); [TMA: which of the Directors are independent i.e neither employees, shareholders or creditors of the company] Reasons for the company entering into BR - distinguishing between strategic (external) and operational (internal) issues. Where cash flow distress is cited as a reason, the underlying reason(s) causing the cash flow distress should be disclosed; The BRP s grounds for the reasonable prospect / feasibility of this company entering into business rescue. Should this have changed since the first creditors meeting or other correspondences with creditors, information to this extent should be disclosed accordingly; The manner in which the affairs and business of the company have been managed and financed since the date of the BRPs appointment; Timeline of expected key milestones during the BR (e.g. date of filing, date of appointment of the BRP, any transaction specific dates etc.); BRP profile and CV (link it to the BRPs profile on the TMA website); Details regarding any previous interactions / relationship between the BRPs and the party who appointed the BRP (i.e. directors and affected parties) prior to the appointment date; and Tax position of the company (disputes with SARS should be disclosed to affected parties); Tier 2 Recommend additional disclosures Copy of the Directors statement of affairs of the company (i.e. detailed balance sheet including explanatory notes) as at the date of filing for business rescue as required by section 142(1)(3); The Directors suggested reasons for the company entering into distress; Where the Directors statement of affairs differs significantly from the company s most recent audited financial statements or management accounts, reasons for any significant discrepancies identified should be disclosed; A group structure where the company forms part of a complex group/structure; 3

C. PART B - PROPOSALS Requirements of the Act: Section 150(2)(b) (i) the nature and duration of any moratorium for which the business rescue plan makes provision; [TMA: see section 133 of the Act] (ii) the extent to which the company is to be released from the payment of its debts, and the extent to which any debt is proposed to be converted to equity in the company, or another company; (iii) the ongoing role of the company, and the treatment of any existing agreements; [TMA: see section 136 of the Act. The BR plan should clearly set out the key contracts and how they are being, or will be dealt with] (iv) the property of the company that is to be available to pay creditors claims in terms of the business rescue plan; (v) the order of preference in which the proceeds of property will be applied to pay creditors if the business rescue plan is adopted; (vi) the benefits of adopting the business rescue plan as opposed to the benefits that would be received by creditors if the company were to be placed in liquidation; and [TMA: also make reference to non-financial benefits such as job preservation] (vii) the effect that the business rescue plan will have on the holders of each class of the company s issued securities. Tier 1 Compulsory disclosure for TMA members The BRP s intended outcome of the BR Plan i.e. returning the company to health or resulting in a better return for creditors versus liquidation (section 128 (b) of the Act) [TMA: it is recommended to disclose the intended outcome on the cover page of the BR Plan]; How the BR Plan addresses the reasons for the company entering into BR (direct link should be made between reasons and remedies proposed); Any assets that should be excluded from the plan as well as any 3 rd party assets that should be included (including source and terms) e.g. consignment stock; Address how sureties will be dealt with in terms of the BR Plan, i.e. are they released from their accessory obligation following the implementation of the BR Plan; Disclosure of the nature, source and terms of PCF in the BR; Tier 2 Recommend additional disclosures Strategic message: why the plan is desirable and why affected parties should support it; A provision to allow for the variation of the BR Plan if the variation doesn t constitute a material/significant departure from the plan or expected outcome to the affected parties, or where the variation constitutes a material/significant departure, a meeting of creditors must be convened to vote on the matter; D. PART C ASSUMPTIONS AND CONDITIONS Requirements of the Act: Section 150(2)(c) 4

(i) a statement of the conditions that must be satisfied, if any, for the business rescue plan to (aa) come into operation; and (bb) be fully implemented; (ii) the effect, if any, that the business rescue plan contemplates on the number of employees, and their terms and conditions of employment; (iii) the circumstances in which the business rescue plan will end; and (iv) a projected (aa) balance sheet for the company; and (bb) statement of income and expenses for the ensuing three years, prepared on the assumption that the proposed business plan is adopted. Tier 1 Compulsory disclosure for TMA members Definition of substantial implementation for the specific BR Plan; Cash flow forecast (the first three months should be represented on a weekly basis, monthly thereafter for the next 9 months and annual for every year thereafter); A projected liquidation valuation including supporting calculations (preferably independently checked by another TMA member) see Appendix B: Sample Liquidation and Distribution account; Provisions for recourse (i.e. scenario planning) and sensitivity analysis to the cash flow forecast; A disclaimer should outline the limitations of the information presented in the plan. Suggested disclaimer wording is set out below: The Business Rescue Plan ( the Plan ) is formulated on information obtained from books and records recovered from the Company, the Directors, Management and interviews with relevant persons and it should be noted: - Our investigations have been limited due to the time constraints placed on us by the Companies Act. There may be certain issues that require additional investigation for an absolute determination to be formed. Where appropriate, we have highlighted these issues throughout the body of the Plan and to the extent necessary, have considered the possible impact of them when making our recommendations to creditors. It is normal for the Practitioners report to creditors to not form conclusive views in relation to all areas of investigation. Should liquidators be appointed to the Company, the Liquidators will continue those investigations should there be a perceived benefit to creditors. - We have not carried out an audit of the Company documents, nor have we had adequate opportunity to verify any of the information given to us by the Company except where expressly stated. - The statements and opinions given in the plan are given in good faith and in the belief that such statements and opinions are not false or misleading. Except where otherwise stated we reserve the right to alter any conclusions reached on the basis of any changes 5

in, or additional to, information which may become available to us between the date of this plan and the date of any subsequent meetings or reports. - Neither the Business Rescue Practitioners, nor [name of the BRPs company], nor any member or employee thereof undertakes responsibility in any way whatsoever to any person in respect of any errors in this report arising from incorrect information provided to us. - In considering the options available to creditors and formulating recommendations, the Business Rescue Practitioners have made the necessary forecasts with respect to asset realisations and the quantum of total creditors. These forecasts and estimates may change as asset realisations progress and claims are received from creditors. Whilst the forecasts and estimates are the result of the Business Rescue Practitioners best assessment in the circumstances, it should be noted that the ultimate deficiency and thus the distribution or outcome for creditors could differ from the information provided in the Plan. Take note of the following additional sections of the Act, not included under Part C, but which are suggested to be dealt with under Part C: Requirements of the Act: Section 150 (3) (3) The projected balance sheet and statement required by subsection (2)(c)(iv) (a) must include a notice of any material assumptions on which the projections are based; and (b) may include alternative projections based on varying assumptions and contingencies. Requirements of the Act: Section 150 (4) (4) A proposed business rescue plan must conclude with a certificate by the practitioner stating that any (a) actual information provided appears to be accurate, complete, and up to date; and (b) projections provided are estimates made in good faith on the basis of factual information and assumptions as set out in the statement. E. TIMELINE TO PUBLISH THE PLAN Requirements of the Act: Section 150 (4) (5) The business rescue plan must be published by the company within 25 business days after the date on which the practitioner was appointed, or such longer time as may be allowed by (a) the court, on application by the company; or (b) the holders of a majority of the creditors voting interests. F. ONGOING REPORTING CONSIDERATIONS Requirements of the Act: Section 132 (3) 6

(3) If a company s business rescue proceedings have not ended within three months after the start of those proceedings, or such longer time as the court, on application by the practitioner, may allow, the practitioner must (a) prepare a report on the progress of the business rescue proceedings, and update it at the end of each subsequent month until the end of those proceedings; and (b) deliver the report and each update in the prescribed manner to each affected person, and to the (i) court, if the proceedings have been the subject of a court order; or (ii) Commission, in any other case. G. LEGAL CASES Please refer to the following legal cases which outline shortcomings in BR Plans that have gone before the Court: Southern Palace 265 (Pty) Ltd vs Midnight Storm Investments 386 (Pty) Ltd the directors of the company did not initiate the BR proceedings under section 129 of the new Act. Nor was there a concrete BR plan in place - more objective and concrete details regarding the BR plan need to be provided, therefore not just speculation. No details were given regarding the factual details of the nature, source and extent of the resources that would like be available to the company to during the course of the BR. Mere speculative suggestions will not suffice in a BR plan. Koen & Another vs Wedgewood Village Golf & Country Estate (Pty) Ltd & Others the court held that the applicants fell woefully short of furnishing the court with the material required to make an assessment of whether a reasonable prospect of business rescue succeeding exists. The case was manifestly dependant on the provision of funds by the potential investor, yet the applicants failed to furnish the court with the requisite information. Therefore, further substantial evidence was to be included in the BRP. Swart vs Beagles Run Investments 25 (Pty) Ltd & Others supporting information as part of the application of the BR processes could not be provided and therefore BR was not granted. Absa Bank Ltd v Golden Dividend 339 (Pty) Ltd the court held that the BR plan does not comply with the requirements set out in s 150(2) of the Act and in particular the numbers presented by the BRP in the plan were not supported by relevant supporting calculations. The aforementioned, amongst other things, resulted in an order setting aside the BR. H. IS THE BR PLAN A PUBLIC DOCUMENT? The legal status of a BR Plan is explained below: Section 152(4) of the Act provides that "a business rescue plan that has been adopted is binding the company, and on each of the creditors of the company and every holder of the company's securities 7

". Although the plan does not have the status of an order of court, it does have the force of law against those parties referred to in Section 152(4), namely the company, the creditors and shareholders. There are certain factual circumstances under which, and persons in respect of whom a business plan is not binding: A creditor who did not receive notice of the meeting at which the business rescue plan has been adopted, is not bound by the plan. This is fundamentally because Section 145(2) of the Act confers on creditors the right to vote to amend, approve or reject a proposed business rescue plan in the manner contemplated in Section 152, and if the plan is not published to that creditor, that right has been denied. Please note that there is no law on this point and this is merely an opinion on the matter. Any plan, even if adopted and implemented is, as the law presently stands, is vulnerable to be declared a nullity at any time under Section 129(5), should the company have failed to comply with any provision in the notice requirements in Sections 129(3) and 129(4). Persons who do not fall within the list of persons referred to in Section 152(4) are not bound by the plan. In particular, employees and trade unions are not bound by the plan, neither are debtors or customers. Whilst it is considered that the BR Plan is not a public document, TMA recommends that TMA members make their BR Plans publically available. The following benefits are apparent: - Increases transparency; - Ease of availability of the BR Plan for interested and affected parties; - Sells the plan for potential funders (especially to obtain PCF and/or a buyer of the business) who may not otherwise have access to the BR Plan; - Disclosure can be made to the extent where sensitive information is removed from the BR Plan; TMA members are able to publish their BR Plans directly on the TMA website by way of sending a PDF version thereof to the following email address: admin@tma-sa.com. Only TMA members plans will be published on the TMA website and a confirmation email, including the website link to the specific BR Plan, will be provided to the submitter as confirmation. I. Conclusion 8

Critical elements for decision making in business rescue plans by W. Rosslyn-Smith (http://hdl.handle.net/2263/43551) titled Expectations of a business rescue plan: international directives for Chapter 6 implementation, suggests that the contents of international rescue plans conform to the following core principles: - The BR Plan serves as a tool for feasibility declaration. - The BR Plan serves as a medium of communication. - The BR Plan serves as an enabler of transparency. - The BR Plan serves contractual obligations. - The BR Plan serves to attract and secure post-commencement funding. Whilst the list of information to be disclosed in the BR Plan may seem extensive, whether required by the Act or recommended by the TMA, adherence will ensure that BR Plans meet the abovementioned internationally accepted principles. The result will be that TMA members BR Plans will be held to a higher standard, readers of BR Plans will be better informed and the viability and reputation of the BR industry will be enhanced. J. Appendices APPENDIX A: Business Rescue Plan Sample contents APPENDIX B: Business Rescue Plan Sample Liquidation and Distribution account 9

APPENDIX A: Business Rescue Plan - Sample contents THE BUSINESS RESCUE PLAN CONTENTS 1 Preamble 1.1 Purposes of the Business Rescue Plan 1.2 Role of the Practitioner 1.3 Practitioners Independence 2 Executive Summary 2.1 Background and Reasons for Financial Distress 2.2 The Business Rescue Plan 2.3 The Assumptions and Conditions for the Business Rescue Plan to succeed 2.4 Offer to Creditors 2.5 The Practitioner s Opinion PART A 3 Background and Statutory Information 3.1 History 3.2 Statutory Information 3.3 Company Officers and Shareholders 3.5 List of Secured Creditors 3.6 List of claims 3.7 Liquidation Dividend 3.8 Copy of the court order/directors resolution 3.9 Copy of the Practitioner s CIPC appointment 10

3.10 Informal proposals made by Creditors 4 Reasons for Financial Distress 5 Actions taken by the Practitioners 5.1. In terms of Companies Act no. 71 of 2008-Chapter 6 5.2. Assets 5.3. Debtors 5.4. Intangible Assets 5.5. Reviewed SARS status Part B 6 Business Rescue Proposals 6.1. Introduction 6.2. Moratorium proposed 6.3. On-going role of the company 6.4. Financial interpretation of the Business Rescue Plan including priority of claims 6.5. Benefits of adopting the plan 6.6. Effect on shareholders Part C 7. Assumptions and conditions of the Business Rescue Plan 7.1. Conditions for the Business Rescue Plan to be implemented 7.2. The end of the Business Rescue Process 7.3. Projected financial statements 8. Statement of Practitioner s Opinion 9. Voting at Meeting 10. Summary Annexure 1 Business Rescue Court order 11

Annexure 2 Business Rescue Practitioners CIPC Appointment Documents Annexure 3 Business Rescue Practitioners letter of engagement / remuneration agreement Annexure 4 Approved claims Annexure 5 Tax Clearance certificate Annexure 6 Directors Statement of Affairs Annexure 7 Liquidation and Distribution account 12

APPENDIX B: Business Rescue Plan Sample Liquidation and Distribution account 13

Name: Sample company Updated: 24/02/2015 Draft Liquidation Valuation Jan'2015 % Liquidation Value Cash at Bank - Curreny account 17 188 100% 17 188 Cash at Bank - Call account 421 339 0% 1 009 Deposits 47 102 0% 0 Cash floats 0 0% 0 Amounts receiveable on contracts including retention 6 792 000 10% 679 200 Liquid Assets 7 277 629 697 397 Other Curent Assets 0 0% 0 Current Assets 7 277 629 697 397 Furniture Fittings and Office Equipment 2 200 0% 0 Computers 11 998 0% 0 Motor Vehicles 734 449 50% 367 224 Plant and Equipment 5 156 344 20% 1 031 269 Fixed Assets 5 904 991 1 398 493 Available for Distribution 13 182 620 2 095 890 Less: Distribution to Secured Creditor Liquidators costs - approx 10% 209 589 100% 209 589 Business Recue cost and related legal cost 300 000 100% 300 000 Secured Creditor 0 0% 0 - Bank Overdraft 0 0% 0 - Financial Lease Obligations 0 0% 0 Available for Distribution - Super Preferred creditors 12 673 031 1 586 301 Super -Preferred creditors Staff Salaries 0 0% 0 TAX- PAYE, SDL & UIF 0 0% 0 TAX - VAT payable on receivables not yet invoiced 925 158 9% 83 411 TAX - Income Tax 0 0% 0 925 158 83 411 Available for Distribution - Preferred creditors 11 747 873 1 502 891 Preferred Creditors Staff Leave pay and notice pay 0 0% 0 Other 0 0% 0 Available for Unsecured Creditors 11 747 873 1 502 891 Unsecured Creditors Trade Creditors 4 198 342 11% 463 214 Loan from Associated Company 9 423 118 11% 1 039 677 13 621 460 1 502 891 Shortfall -1 873 587-12 118 569 Liquidation dividend to Unsecured Creditors 11.0%

Name: Sample company Updated: 24/02/2015 Draft Liquidation Valuation Jan'2015 % Liquidation Value Cash at Bank - Curreny account 17 188 100% 17 188 Cash at Bank - Call account 421 339 0% 1 009 Deposits 47 102 0% 0 Cash floats 0 0% 0 Amounts receiveable on contracts including retention 6 792 000 10% 679 200 Liquid Assets 7 277 629 697 397 Other Curent Assets 0 0% 0 Current Assets 7 277 629 697 397 Furniture Fittings and Office Equipment 2 200 0% 0 Computers 11 998 0% 0 Motor Vehicles 734 449 50% 367 224 Plant and Equipment 5 156 344 20% 1 031 269 Fixed Assets 5 904 991 1 398 493 Available for Distribution 13 182 620 2 095 890 Less: Distribution to Secured Creditor Liquidators costs - approx 10% 209 589 100% 209 589 Business Recue cost and related legal cost 300 000 100% 300 000 Secured Creditor 0 0% 0 - Bank Overdraft 0 0% 0 - Financial Lease Obligations 0 0% 0 Available for Distribution - Super Preferred creditors 12 673 031 1 586 301 Super -Preferred creditors Staff Salaries 0 0% 0 TAX- PAYE, SDL & UIF 0 0% 0 TAX - VAT payable on receivables not yet invoiced 925 158 9% 83 411 TAX - Income Tax 0 0% 0 925 158 83 411 Available for Distribution - Preferred creditors 11 747 873 1 502 891 Preferred Creditors Staff Leave pay and notice pay 0 0% 0 Other 0 0% 0 Available for Unsecured Creditors 11 747 873 1 502 891 Unsecured Creditors Trade Creditors 4 198 342 11% 463 214 Loan from Associated Company 9 423 118 11% 1 039 677 13 621 460 1 502 891 Shortfall -1 873 587-12 118 569 Liquidation dividend to Unsecured Creditors 11.0%