Business Rescue – Positives

Business Rescue – Positives

Background

Chapter 6 of the Companies Act no 170 of 2008 deals with business rescue and was promulgated in 2011 similar to Chapter 11 in the USA. The main purpose of business rescue is to save economically viable businesses that are facing financial distress. The avoidance of liquidation, saving of jobs and returning the business to sustainable solvency are the main objectives of the process. A better return must be achieved for affected parties than compared to the immediate liquidation.

The company is protected from any legal action instituted against it allowing for it to return to solvency. The turnaround can be effected while under protection and under supervision of an external party being the business rescue practitioner.

Viewpoints regarding the process

The culture in South Africans in general is to view business failure very negatively and believe that the only way out is to liquidate. “The banks in particular take the stance that the first loss is the best loss” and that businesses cannot be saved once they start having problems. A mindset change is required to one of being more “forgiving” of what is deemed failure and supportive in this scenario. Findings have shown that a number of very successful entrepreneurs have had failed businesses in their past. The best learning we can get is from experience rather than theoretical textbooks.

Positives of Business rescue

Despite the negative connotations associated with business rescue there can be a number of positive outcomes for the business, employees and shareholders if the practitioner takes a pragmatic approach to saving the business rather than liquidating immediately.

  • The practitioner takes over the supervision of the business and thereby carries more authority to restructure the business than if appointed as a turnaround consultant by the management or shareholders.
  • It takes courage to file for the board of directors or owners of the companies to file for business rescue proceedings and cannot be undertaken very lightly.
    • Directors must comply with their fiduciary duties and avoid action taken against them for reckless trading.
  • The management do not have the ultimate control any longer and decisions have to be made in consultation with the practitioner.
  • Cash flows are more controlled and payments are usually on made on approval by the practitioner.
  • Restructuring of the business happens while protected from legal action and claims from creditors allowing the focus to be the on the development and implementation of a plan.
  • Acquisitions can be finalised quickly usually at a discount but not forced sale value:
    • The practitioner is obligated to reveal the reasons for the distress and to report any undue or irregular activities;
    • The business has been reviewed by an external party – due diligence is limited;
    • The practitioner has to state at the first meeting of creditors that they believe there is a reasonable prospect for the company being rescued;
  • Risks can be mitigated and limited due to the fact that all the information about the performance and potential of the business is in the public domain.
    • This is in particular where tenders are being awarded to businesses in rescue the future employer has the knowledge about the prospects of the business.
  • Business can be wound down in business rescue providing a better result for the creditors than if the company was immediately liquidated. This is particularly relevant in the construction industry where retentions are kept for a period after completion of the project. In a liquidation scenario the retentions are usually lost because the company ceases to operate.

Conclusion

It is vital that negative mind-sets must change towards businesses in rescue, particularly from funders and suppliers of materials in order for the businesses to obtain post commencement funding.  There is always a chance to turn the business around with the correct attitude and perseverance. The practitioner needs to become involved and effectively manage the business.