Business rescue, liquidation loom for more companies
As continued financial and policy pressure is brought to bear on corporate SA we will undoubtedly see an escalation in companies having no alternative but to consider a formal business rescue process — or face liquidation.
Altogether 109 businesses closed down this January. According to Stats SA’s statistical liquidations release of February 26, there were 34.6% more liquidations this January than in January 2023. Most liquidations were voluntarily commenced, but 11 of the 109 were placed in liquidation by compulsory applications to court.
Companies will inevitably continue to grapple with financial distress, necessitating either an informal restructuring process or formal business rescue proceedings. Stress is evident in all sectors of the economy.
According to the Companies & Intellectual Property Commission (CIPC) status report released in February, 17% of the entities that commenced business rescue proceedings from October 2023 to December 2023 were in manufacturing with the agriculture, forestry and fishing industry following closely with 13.2% of filings.
About 28.4% of the entities liquidated in January were in the financing, insurance, real estate and business services sectors, followed by 15.5% in the trade, catering and accommodation sector. In 2023’s fourth quarter, many entities in the mining sector commenced business rescue proceedings after determining they were financially distressed.
Pressure in the mining sector was also highlighted at the 2024 Mining Indaba where attendees were apprised of a grave skilled labour shortage issue confronting the industry. This critical shortfall of workers to service the industry has been identified as a primary impediment hindering the sector’s operational efficiency this year.
Opening the Mining Indaba, President Cyril Ramaphosa flagged several factors hampering the sector’s performance. Alongside the talent shortage, energy deficits and transportation demands were of paramount concern. These challenges may explain the concerning trend of mining entities commencing business rescue in 2023.
Lack of reliable electricity supply is one of the most costly challenges for businesses and expected to persist and possibly worsen in 2024 and beyond. For financially distressed companies, business rescue remains an attractive alternative to outright liquidation.
The aim of business rescue is to restructure a financially distressed company’s affairs in a way that maximises the likelihood of the company continuing to exist on a solvent basis. If this cannot be achieved, the secondary objective is to restructure the business to yield better returns for the creditors or shareholders of the company than would ordinarily result from immediate liquidation.
It is the business rescue practitioner’s responsibility to develop and implement a business rescue plan to save a company by restructuring its business, property, debt, affairs, other liabilities and equity.
A further consequence on commencement of business rescue proceedings is the temporary moratorium on the rights of claimants against the company or regarding property in its possession. The moratorium grants companies temporary “immunity” from legal proceedings initiated by creditors for claims that would otherwise have been due and actionable. Since the introduction of business rescue in 2011, SA has shifted markedly from a liquidation-orientated culture to one of business rescue, with the aim of reintegrating financially distressed companies into the market on a solvent basis.
The CIPC status report reveals that of the entities that terminated business rescue proceedings in the final quarter of 2023, 36% were rescued due to meaningful implementation of a business rescue plan. This is a positive statistic that supports business rescue. The resulting effect is that these rescued companies are returned to the economy on a solvent basis and are ready to continue to trade with suppliers and consumers.
The key to effectively rehabilitating a financially distressed company lies in commencing business rescue at the earliest indication of financial distress, within the meaning of the Companies Act. If the company is too far down the path of financial distress the only option may be liquidation through selling assets, subsidiaries and businesses. If entities delay taking action and pursue business rescue only when the firm is deeply entrenched in financial distress, the prospects of successfully implementing operational or financial restructuring in business rescue becomes limited and difficult to achieve.
To maintain and ideally increase the success rate of business rescue, the crucial factor will always be early intervention. Directors of companies must buy into the notion that appointing a practitioner to oversee the company as early as possible in its distressed phase will enable proactive measures to be taken to achieve a return to solvency through a successful business rescue process. This approach facilitates the rescue of the business, preserving most jobs and allowing companies to embark on making a fresh start.
TO INCREASE THE SUCCESS RATE … THE CRUCIAL FACTOR WILL ALWAYS BE EARLY INTERVENTION