White knights for business rescue keep their helmets on
The economic fallout caused by Covid-19 in SA will mean a dramatic increase in corporate failures, raising the question whether these businesses can be refinanced — and if there are enough experienced business rescue practitioners in the country to help them survive.
Across SA we have seen struggling businesses run out of funds to settle with their creditors. Often creditors are not willing to accept payment holidays because they themselves are severely distressed. The constant pressure placed on distressed companies to pay overhead costs to keep their businesses going, coupled with salaries, wages and rental obligations, push these companies into a corner. They often have no choice but to seek the protection of the statutory moratorium offered by the business rescue process, as set out in the 2008 Companies Act.
Once business rescue practitioners are appointed they take control and supervise the management of the company’s affairs, engaging with all stakeholders to prepare a business rescue plan. While the plan is being drafted there is a freezing of all historical debt, providing the company with breathing space while it goes through the restructuring process. Critical to the company’s survival, especially in cases where it has already run out of cash, is the need to source financing, known as postcommencement finance. Such finance is critical since it allows the company to keep trading during the business rescue process.
The providers of such finance might be the banks or financial institutions that already “bank” the company, which are already exposed through loan or overdraft facilities. Alternatively, the company might try to source finance from a third-party financier willing to place funds in the company with the goal of either converting debt to an equity position in due course or acquiring the company or its business.
As SA slips down the slope of the Covid-19 fallout, accessing such postcommencement finance will become more and more important — and more and more difficult. Investing in severely distressed markets is not for the faint-hearted, which makes access to such financing hard to come by at the best of times. Before taking an appointment business rescue practitioners must satisfy themselves that postcommencement finance would be readily available once the rescue process commences.
How big the appetite in the domestic market is to put up such postcommencement finance will be directly linked to the provider’s risk appetite, bearing in mind that they will be putting money into what is already a distressed company. Only those with deep pockets will step up to the plate.
Key is to identify a good company that has cash flow difficulties, but where the fundamentals of the business remain sound. It is here that the providers of finance might wish to “take a punt” and make a play for the distressed company or its assets. But it is worth repeating that these financiers are getting increasingly scarce.
However, this is only one part of the equation. The business rescue process needs expert practitioners, and these too are likely to be in short supply as the number of distressed businesses increases.
Practitioners are classified into senior, experienced and junior practitioners, depending on their years of experience. It is estimated that there are only 460 licensed business rescue practitioners in SA. Of these just 97 are registered as senior practitioners, with 95 registered as experienced practitioners and 271 as junior practitioners. There is real concern that there are not nearly enough senior licensed practitioners to take on the uptick in large business rescue filings expected in the months ahead.
THE BUSINESS RESCUE PROCESS NEEDS EXPERT PRACTITIONERS, AND THESE TOO ARE LIKELY TO BE IN SHORT SUPPLY
Ultimately, practitioners must attempt to do everything in their power and expertise to achieve the statutory objectives of a successful restructuring of the company. This is to publish a plan that will allow the company to be in a position in which it is able to trade on into the future on a solvent basis; or if this cannot be achieved a position in which the business rescue process delivers a better dividend to creditors than they would have received had the company been placed in liquidation.
What needs to be avoided is a failed business rescue process where the company ultimately has to be placed in liquidation anyway. Liquidation signals the end of the company’s life, and with it the jobs of employees. It is therefore vitally important to have a skilled practitioner on board from the start of the process.
It is likely that more people with the right qualifications will join the profession in the months and years ahead.