Business rescue is proving its value for distressed companies
• Despite the naysayers, it is a robust mechanism to restructure and give a firm a fresh start
After the pandemic, the riots in KwaZulu-Natal, power and infrastructure issues, supply chain challenges emanating from conflict in Eastern Europe, an economy that is struggling and with enormous pressure on the rand, financial distress is a reality for many SA companies.
With liquidations on the increase, restructuring and turnaround professionals (particularly business rescue practitioners) have a lot to do in helping these companies avoid collapse into liquidation.
Business rescue was placed on the SA restructuring map in 2011. Before that, all directors of distressed companies could do was place their struggling entities into liquidation. A liquidator would in effect wind up the company, terminate employment and distribute liquidation dividends (often at fire sale values) to creditors.
It was frequently a negative and disastrous outcome for suppliers to that company, the shareholders and the economy.
Over the past 10 years we have seen the development of a new profession, that of the business rescue practitioner. From the outset we were faced with a new way of running the restructuring of a financially distressed company, where a business rescue practitioner could be appointed by the board. They could assist with holding off creditors, where the muchneeded “automatic moratorium” (stay of claims) provided the company with breathing space to run a meaningful and focused restructuring process when it was one step away from fullblown liquidation.
SA now has a fully developed rescue profession, in line with international jurisdictions, where the ultimate objective of restructuring a failing company through a business rescue plan has become an imperative.
The process is not for everyone. In certain instances failing companies must consider liquidation and the termination of an unsustainable business. Zombie companies — those that trade on a continued unprofitable basis on the cusp of insolvency, remaining highly geared and reliant on loan finance — should be put out of their misery and placed into liquidation.
Directors and management sometimes hang on too long because they are emotionally tied to the ongoing operation of their companies.
As the company goes into a slow spiral of decline and lossmaking, directors sometimes have to make hard decisions and look for independent assistance from outside. Either they need to consider a restructuring mechanism like a business rescue, or file for liquidation.
The business rescue mechanism allows directors and management to trade the company out of its financial predicament and into a solvent position. In SA, business rescue remains a robust, modern mechanism designed to restructure and compromise debt and give the company a fresh start.
Where this is not possible, a plan can be formulated to deliver a better dividend to creditors than they would have received in a liquidation. The advantage of being able to renegotiate prejudicial contacts, reconfigure the labour force through a controlled retrenchment process, and appoint new management and directors should never be underestimated.
We have since 2011 developed a whole new way of turning around ailing companies. We have new and innovative case law precedent and have gained a number of highly specialised lawyers and judges, all steeped in business rescue matters.
There are the naysayers. They tell us business rescue doesn’t work, and the best thing to do with financially distressed businesses is place them in liquidation. But liquidation is clearly the end game, and when a company closes, all employment comes to an end. At least business rescue brings to the table the prospect of a fresh start and gives the company breathing space to consider and possibly implement a financial restructuring. All stakeholders (especially creditors) have a say in the future of the company and its ability to continue trading.
Business rescue gives distressed companies options, including rescue and restructuring of debt. It brings SA into line with the often successful restructuring and turnaround optionality we find in offshore jurisdictions such as the US (chapter 11), Canada (CCAA), the UK (administration) and Australia (voluntary administration).
The evidence speaks for itself. There have now been a host of business rescues in SA that have worked and where there is no doubt that the company, its creditors, employees and all other stakeholders have ended up in a far better position than if the company had gone into liquidation.
Examples of successful rescues include Phumelela Gaming & Leisure; Edcon (whose businesses were bought out by Retailability and TFG); SAA, which continues flying; SterKinekor, the cinema business bought out by the Blantyre Group; Andusalite Resources Mine; and Aeronautical Engineering, which was bought out by the Paramount Group.
These business rescues have worked, many jobs have been retained and the companies have been able to continue contributing to the upliftment of the SA economy. We expect business rescue to continue to prove itself in the challenging economic times that lie ahead.