The Tourism, Hospitality and Leisure sector is battling the most in terms in terms of the players in the property sector in South Africa. This is according to Gasant Orrie, Managing Partner at Cliffe Dekker Hofmeyr in Cape Town.

“A lot of the hardship in this sector has to do with the oversupply of accommodation after the World Cup in 2010. Because of the oversupply of accommodation, four and five star hotels are offering accommodation at three star prices and it’s just not viable, a lot of the luxury hotels are struggling,” he says.

Orrie says that a number of South African hotels are under extreme pressure, but that this has also created opportunities for hotel to enter the distressed hotel market and restructure the hotel’s management and funding systems to create successful businesses. For example, Protea Hotels recently announced that they were looking at taking over a couple of underperforming hotels and turning them around into profitable operations.

“This is where much of our legal expertise is being implemented in this sector at present,” he says.

“Any increasing number of projects we are involved in this sector at the moment involve distressed hotels being bought out by other companies. There are many opportunities in this sector for hotel groups who have the funding and the experience to make it work.”

Orrie explains that one of the reasons for the downfall of hotels as well as resort and golf/ leisure type developments is that the banks may have advanced too much money to the developers originally and with the amount of money owing to the banks, the projects may not be salvageable.

“Developers of distressed companies in this sector now have the option of implementing the business rescue procedure introduced by the new Companies Act. Pinnacle Point is the first business rescue case under the new Companies Act. If granted, it will give developers some breathing space and business rescue practitioners will be brought on board to see if the company is salvageable.”

Orrie explains that the business rescue procedure is a formal process involving an application to court and, if the requirements are satisfied, a practitioner is appointed to investigate the affairs of the company and make recommendations to court on how the company can be turned around. The whole procedure should be quicker than normal liquidation proceedings, and could possibly be completed in a few months. However, it remains to be seen if in practice the new procedure will be more time and cost effective.

“Sometimes all that the business needs is some breathing space. Normally, when a company is battling, the banks will step in first, whereas the new procedure will allow a business rescue practitioner to step in and keep the business operating while he or she assesses the continued viability of the business. The practitioner has to be a qualified professional in the sector in which the company operates.

Orrie notes that the business recues procedure might have saved some businesses from closing down, if that option had been available to them in the past.

“The judicial management procedure in the old Companies Act was better known for its non-use than anything else. An attempt has been made in the new Companies Act to considerably simplify the procedure and make it more practical.”

Orrie further notes, “The new Companies Act’s emphasis on directors and their fiduciary duties means it might now be prudent for directors, when their businesses land up in these situations, to initiate the business rescue procedure at an earlier stage than they may have been inclined to under a liquidation scenario. The directors now have the option of an intermediate procedure and may therefore be more inclined to take that step. This would be consistent with the exercise of prudent judgment required of a director in terms of the “business judgment” rule introduced by the new Companies Act.

“They would then consult their financial and legal advisors and options discussed. As legal advisors, we would advise clients on their business rescue procedure applications to court,” he adds.

For more information:
Gasant Orrie
Cape Managing Partner
Tel: +27 (0)21 481 6300
Email: gasant.orrie@dlacdh.com
Cliffe Dekker Hofmeyr business law firm