The busi­ness of busi­ness res­cue

Busi­ness res­cue has been seen as a sil­ver bullet to bring about a so­lu­tion for fi­nan­cially dis­tressed com­pa­nies. Now into its fourth year of im­ple­men­ta­tion, how suc­cess­ful has this re­ha­bil­i­ta­tion process been?

Finweek English Edition - - INSIDE - BY BUHLE NDWENI

Busi­ness res­cue is a cor­po­rate r e or ga n i s a t i on proce s s in­tro­duced in South Africa on 1 May 2 011 u nder Chap­ter 6 of the Com­pa­nies Act 71 of 2008. The process pro­vides fi­nan­cially dis­tressed com­pa­nies with tem­po­rary su­per­vi­sion of their af­fairs, busi­ness and as­sets or prop­er­ties. To con­tinue with busi­ness res­cue, proof of the abil­ity to de­liver a bet­ter re­turn than in liq­ui­da­tion ( BRTiL) must be pro­vided and a com­pro­mise must be reached be­tween the fi­nan­cially dis­tressed com­pany and its cred­i­tors.

A to­tal of 1 398 le­gal busi­ness res­cue cases have been f iled in South Africa si nce t he i ncep­tion of t he new Com­pa­nies Act just over three years ago, ac­cord­ing to the reg­u­la­tory body, the Com­pa­nies and In­tel­lec­tual Prop­erty Com­mis­sion (CIPC).

This trans­lates to 400 to 450 fil­ings a year and a pro­jected to­tal of 10 865 jobs saved in to­tal. Con­sid­er­ing that each per­son hold­ing a job on av­er­age sup­ports four to six peo­ple, busi­ness res­cue af­fected at least 40 000 cit­i­zens.

Even though JSE-listed com­pa­nies such as African Bank In­vest­ments ( Abil), El­ler­ines, Evraz Highveld Steel & Vanadium and more re­cently Glen­core’s Op­ti­mum Col­liery tend to get much of the spotlight when they file for res­cue, many pri­vate com­pa­nies use this re­ha­bil­i­ta­tion process in an at­tempt to rem­edy their fi­nan­cal sit­u­a­tions.

THE IN­DUS­TRY’S STA­TUS

De­spite suc­cess­ful out­comes to a num­ber of cases, dif­fi­cul­ties within the busi­ness res­cue in­dus­try prompted the CIPC to com­mis­sion the Univer­sity of Pre­to­ria’s ( UP’s) Depart­ment of Busi­ness Man­age­ment to con­duct in-depth re­search on the progress of busi­ness res­cue pro­cesses.

This re­sulted i n t he June 2015 re­lease of the Busi­ness Res­cue Sta­tus Quo re­port – a re­search pa­per pre­pared by Mar­ius Pre­to­rius, pro­fes­sor in strat­egy, lead­er­ship and turn­around at UP.

“In or­der to file for busi­ness res­cue, a com­pany must be un­der fi­nan­cial dis­tress and must have a rea­son­able prospect to come out of that dis­tress,” says Pre­to­rius. “The rule is clear: if that rea­son­able prospect does not ex­ist, the Act will tell the com­pany to file for liq­ui­da­tion. The Act states that if the busi­ness res­cue prac­ti­tioner (BRP) comes to re­alise that there is no rea­son­able prospect, they must file for liq­ui­da­tion.”

Says CIPC com­mu­ni­ca­tion spe­cial­ist Tshi­amo Zebe­diela: “It was deemed pru­dent to ob­tain i nfor­ma­tion on busi­ness res­cue since its in­cep­tion in or­der to in­form the CIPC and Spe­cial­ist Com­mit­tee of Com­pany Law of its weak­nesses, fail­ures, suc­cesses and chal­lenges from var­i­ous per­spec­tives, with the view to make it more ef­fi­cient, work­able and suc­cess­ful.”

The l aw com­mis­sion wanted to un­der­stand the sta­tus of the process, fol low­ing an i nf lu x of court cases around the is­sue, and de­ter­mine what worked and what hadn’t, says Pre­to­rius.

SA has a 9.4% busi­ness res­cue suc­cess rate, a fig­ure Zebe­diela wel­comes given suc­cess rates in other coun­tries.

“What is a suc­cess­ful res­cue? If I sell half of the busi­ness, it’s good, peo­ple keep their jobs, but the busi­ness con­tin­ues in t he name of another busi­ness. Is that suc­cess­ful? Suc­cess is in the eye of the be­holder,” ex­plains Pre­to­rius. “If you ask the share­hold­ers they will have their view; cred­i­tors will have another, while em­ploy­ees that keep their jobs will view it as suc­cess­ful. It de­pends on who you ask.”

Con­flict be­tween cred­i­tors and BRPs lead to the CIPC’s se­ries of work­shops aimed at ad­dress­ing con­cerns. Cred­i­tors

blame BRPs for their in­abil­ity to de­ter­mine rea­son­able prospect and at­tempt­ing to pur­sue BRiL when a rea­son­able prospect for busi­ness res­cue suc­cess was not ev­i­dent. Banks, on the other hand, are blamed for pre­fer­ring liq­ui­da­tion since it mostly se­cures the re­turn of the money owed to them.

Is busi­ness res­cue a stalling tac­tic for avoid­ing liq­ui­da­tion?

Pre­to­rius be­lieves it’s pos­si­ble: “There are con­cerns re­gard­ing the abuse of busi­ness res­cue and un­for­tu­nately there have been such cases. Good BRPs wouldn’t en­gage in that.”

THE COST OF BUSI­NESS RES­CUE

Busi­ness res­cue is per­ceived as costly and in­deed, cost has been pin­pointed as one of the rea­sons why com­pa­nies un­der busi­ness res­cue are even­tu­ally liq­ui­dated.

Pre­to­rius’s re­search shows t hat cred­i­tors (mostly banks) be­lieve BRP fees are too high. BRPs dis­agree – they are of the opin­ion that the fee struc­ture pre­scribed in the Act is too low. Re­search shows that tar­iffs pre­scribed in the Act were de­ter­mined be­fore 2008 and did not make pro­vi­sion for ba­sic inf la­tion­ary ef­fects.

The avail­abil­ity of post com­mence­ment fi­nance (PCF) poses lim­i­ta­tions on t he busi­ness res­cue process. Data from Pre­to­rius’s re­search in­di­cates that BRPs could only ob­tain PCF in 29% of the cases.

In t he case of Highveld Steel ’s busi­ness res­cue, the group’s latest re­port on the process states that on 29 May the IDC granted it a fa­cil­ity of R150m as part of its PCF, which was made avail­able as a se­nior se­cured re­volv­ing credit fa­cil­ity un­til the end of Au­gust.

The group says this is used to fund the work­ing cap­i­tal re­quired to ful­fil the pur­chase or­ders placed by cus­tomers.

Ac­cord­ing to the re­port, com­pany di­rec­tors who lost ev­ery­thing un­der the BRPs who were han­dling the process sub­mit­ted com­plaints ac­cus­ing t he prac­ti­tion­ers of mis­ap­pli­ca­tion, ne­glect, and abuse, in­clud­ing charg­ing ex­or­bi­tant fees.

“Dur­ing the in­ter­views with share­hold­ers, the ob­ser va­tion was made that fees are rea­son­able in some in­stances while oth­ers are ex­or­bi­tant. Some sub­jects re­ported monthly fees as high as R130 000 to R200 000 per month. This ex­cludes bonuses, costs of ex­pert ad­vi­sors and suc­cess fees…” states the re­search.

BUSI­NESS RES­CUES – A GAP FOR OP­POR­TUNISTS?

Some par­ties in the busi­ness res­cue in­dus­try have been iden­ti­fied as op­por­tunis­tic; en­ter­ing the in­dus­try to take ad­van­tage of fi­nan­cially dis­tressed busi­nesses.

“Banks re­fer to t hese BRPs as a cat­e­gory that doesn’t at­tempt to re­or­gan­ise the busi­ness at all – they pur­sue BRiL from the start and ex­tend the process to ben­e­fit fi­nan­cially for as long as pos­si­ble,” the re­port states.

Zebe­diela says com­plaints against BRPs re­late mostly to their un­avail­abil­ity; lack of proper feed­back to in­ter­ested par­ties; not pub­lish­ing the busi­ness res­cue plan in time; not ad­her­ing to the busi­ness plan and ig­nor­ing the pre­vi­ous di­rec­tors’ or man­agers’ in­put.

“In terms of sec­tion 140 (3) (a) of the Com­pa­nies Act, a BRP is an of­fi­cer of the court and should the prac­ti­tioner be un­scrupu­lous, any in­ter­ested party can open a case with the SAPS to in­ves­ti­gate the prac­ti­tioner and can also ap­proach a court to re­move the prac­ti­tioner – see sec­tion 130 and 129 of the Com­pa­nies Act,” she says.

Zebe­diela adds that con­sid­er­a­tion is be­ing given to the var­i­ous find­ings and rec­om­men­da­tions made in the Busi­ness

Res­cue Sta­tus Quo re­port to iden­tify what needs to be done to im­prove the busi­ness res­cue regime.

Mar­ius Pre­to­rius Pro­fes­sor in the Fac­ulty of Eco­nomic and Man­age­ment Sciences at UP

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