Great Basin Gold Ltd. (fka GBGLF)

[goldenpolarbear]

Restoring a company is not the only route to business rescue in South Africa ( omas, 2014). Trade sales of companies as a means of repaying creditors are gaining ground in South Africa (Moosa cited in omas, 2014). Southgold Exploration Pty Ltd (Southgold) is one example of a company which was rescued by a trade sale.

SOUTHGOLD AND THE GOING CONCERN ASSUMPTION2
Southgold is a South African mining and exploration company that voluntarily entered business rescue proceedings on 14 September 2012 when the board of directors determined that Southgold was nancially distressed.

SOUTHGOLD OPERATIONS AND BUSINESS RESCUE
Southgold was a wholly-owned subsidiary of Great Basin Gold Ltd, a public company which was listed on the Johannesburg, New York and Toronto Stock Exchanges. Southgold’s principal asset was the Burnstone mine (the Mine) located in the Mpumalanga province. Southgold had been awarded a renewable licence during 2009 by the Department of Mineral Resources and commercial mining and production of gold ore commenced in 2011.

During August 2012, operations at the Mine were suspended due to Great Basin Gold Ltd’s review of the liquidity position of the company. e parent company decided to dispose of the Southgold operations in order to settle the various amounts owing to creditors. In an attempt to seek protection from its creditors, Southgold was placed into business rescue. is was especially important for Southgold as, if the company had been liquidated, the mining right would revert to the South African government. e licence to mine was substantially the entire value of Southgold and without the licence there was no operation of which to dispose.

At a board meeting on 14 September 2012, the directors concluded that Southgold was nancially distressed and voluntarily commenced business rescue proceedings in terms of Chapter 6 of the Act. Shortly after commencing business rescue proceedings, the parent company obtained a loan for USD35 million to service working capital requirements of the Burnstone mine and Hollister mine (a mining operation in the United States of America); of which USD11 million was utilised for the orderly suspension of the Burnstone operations and the placement of Southgold’s assets under care and maintenance.

During the last quarter of 2012, JP Morgan was appointed as a transactional advisor and the process for locating a buyer for Southgold or the Mine was commenced. Of the numerous pre- bid letters submitted, ve potential buyers were identi ed but it was ultimately Witswatersrand Consolidated Gold Resources (Wits Gold) that was identi ed as the buyer in the business rescue plan released by the parent company on 8 July 2013.

The business rescue plan incorporated the sale of the entire share capital to Wits Gold. e initial capital outlay required by Wits Gold amounted to USD7.5 million which was described as a ‘magic deal’ by the CEO of Wits Gold at an e ective 10 cents-to-the-dollar (Creamer, 2013). e business rescue plan also provided for the settlement of the amounts owed by Southgold to secured and unsecured creditors prior to the sale to Wits Gold.
SOUTHGOLD AS A GOING CONCERN From the date that the board made the decision to cease operations at the Mine, they intended to sell the operations of Southgold. e loan acquired by the parent company and allocated to Southgold was to maintain the Mine, rather than to continue operations at the Mine. When the business rescue proceedings commenced, the process of nding a suitable buyer for either Southgold or the Mine, presumably whichever would fetch the highest amount, was immediately initiated. Business rescue was initiated by the board because they were avoiding being liquidated before any sale could occur due to the dismal liquidity position of Southgold. It is evident from the facts identi ed that there was never any intention to salvage the operations of Southgold but rather to generate a better return to creditors in the ultimate winding-up of the operations at the Mine. While Southgold acted in accordance with the Act when ling for business rescue, the economic reality was that if the company had not led for business rescue, it would have been liquidated.

The going concern assumption in the Conceptual Framework speaks both to intention and the need to curtail operations. Southgold has suspended operations and the parent company intended to dispose of the operations. Therefore, the underlying assumption of going concern that the company would continue in operations in the foreseeable future was not satisfied.

While Southgold is used as an example, the conclusions drawn cannot be said to apply to every company entering business rescue. However, Southgold was acting in accordance with the secondary objective of the definition of business rescue contained in the Companies Act in entering business rescue, as other businesses have done, yet there was never any intention to continue operations in the foreseeable future.

CONCLUSION
It has been argued that when a company commences business rescue, there needs to be close consideration of whether the company is, in fact, a going concern and whether the company should apply IFRS when presenting nancial information. Southgold entered business rescue to seek protection from its creditors but the intention to dispose of operations at the Mine were not actually a ected by the decision to enter business rescue proceedings. Southgold is only one example of other cases that provide evidence of the use of business rescue as a prolonging of the ultimate winding-up of operations of the company, a glori ed liquidation. Companies applying business rescue in accordance with the second objective should not be applying IFRS, as the ultimate intention of the objective is to wind-up operations rather than continue operations.

The fact that current business rescue legislation allows for this to occur indicates aws in the system. However, as business rescue becomes more established and more Court orders are handed down, it is hoped that the system will be used more for what it is actually intended to do: rescue a company from ceasing operations due to financial turmoil and enabling the company to continue as a going concern.

It is incorrect to suggest that business rescue will never nd success in South Africa. The legal regime is still new and as practitioners become more experienced, it is probable that the dismal success rate will start to increase and statistics will show more companies coming out of business rescue proceedings as successfully rescued businesses. However, until this time, companies entering business rescue cannot indisputably stipulate that they satisfy the going concern assumption.

As there is currently no IFRS which sets out the accounting for a company that does not satisfy the going concern assumption, each company needs to establish what the information needs of the users of the nancial statements are in order to know what information to present. The company should aim to present the economic reality of being in business rescue proceedings that is largely influenced by the business rescue plan, the future of the company..."

http://www.accountingperspectives.co.za/Docs/vol3.pdf

How can they refer to this as a business rescue?