At this time, in the words of New York Times columnist, Tom Friedman, “we need to manage the unavoidable so that we can avoid the unmanageable”. Many businesses are shortly going to experience unprecedented pressure and will very soon be entering the first stages of financial distress.
Like many humans treat their health, likewise in business, the first signs of “financial illness” are mostly ignored and management invariably waits for the problems to “go away” instead of taking the necessary “medicine” early. This then leads to more financial hardship which in most cases caused companies to go into liquidation with a very difficult prospect of restructuring its affairs.
However, the Companies Act contains the “medicine” available to businesses showing the first signs of distress and is flexible and presents opportunities for not only restructuring professionals but also to investors who wish to invest in potentially distressed situations at a lucrative return.
Directors need to be mindful that a failure to take the necessary action when the first signs of distress appear may lead to personal liability. This is provided for in section 129 (7) of the Act.
While it is so that entrepreneurs do not readily concede that they may have problems. It will be foolish not to seek official help when the first signs of “financial illness” appear. When positive cash flow is still available and potential shareholder assistance is still possible, the chances of the successful restructuring of the business showing such early signs of distress are so much greater. All that it requires is to seek early professional assistance!
The term ‘business rescue’ describes the purpose and aims of the corporate rescue procedure included under Chapter 6 of Companies Act and is also used as a noun to describe the proceedings encapsulated in Chapter 6 as a whole. The term ‘financially distressed’ means that when it ‘appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months’, or ‘appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.’ Many businesses are already in that space!
Business rescue proceedings can be initiated on a voluntary basis, by way of a resolution of the board of directors of the company, to begin business rescue proceedings, and also on a compulsory basis, by way of an application to court by an ‘affected person’ – a shareholder, creditor, the registered trade union representing employees or any of the employees of the company.
Two requirements must be satisfied for the board of directors to voluntarily commence business rescue proceedings, namely, that the company is financially distressed and that there appears to be a reasonable prospect of rescuing the company. The board of directors of a company may accordingly commence business rescue proceedings by passing a board of directors’ resolution supported by a majority vote. When passing a resolution, the directors must act in good faith. Bad faith will be demonstrated when the intention of the directors in passing the resolution is an abuse.
Upon early signs of financial distress multiple layers of services are available to restructure such potential distressed financial affairs. There are multiple levels of skills available, such as the restructuring of employment contracts, a thorough look at a business’s tax affairs, advice on corporate finance, assistance on forensics and then, if necessary, advice on business restructuring. Most importantly, where directors take pro-active steps to engage with its creditors, being its business’ most affected stakeholders during times of distress, they may, in the fullness of time, be seen have taken all such reasonable steps as might have been expected of directors under such circumstances. A failure to do so may lead to undesirable consequences.
We live in rapidly changing times and the world (specifically social media) is awash with information and misinformation about the Corona pandemic, irrational behaviour is the order of the day. However, it is evident that the severity of the situation is starting to set in. Global markets are in an unprecedented downward curve and US commentators are starting the refer to a depression as opposed to a recession. The Dow Jones is at 2017 levels having wiped out all the post Trump growth and mention was made on CNN that some R 3- 4 Trillion USD will be required to repair the US economy and with some 24,7m jobs that may be lost. The South African decline in stock values shows no reprieve and values are still decreasing.
“Stay at home” is the decree in California which means that 40m people will be out of commercial circulation. In South Africa employers are urging employees to work from home, restaurants and bars are subject to a 6pm liquor serving “curfew “and shopping malls are deserted - the first commercial casualties as a consequence of Covid-19 are starting to occur. Air traffic is almost non-existent and at this rate, airlines are likely to experience a worldwide meltdown. A consequence of this, once the position normalises, is going to be rising travel costs and a knock-on effect on all businesses that rely on travel. We still have a lot of waiting and watching to do but for now, BDO’s Business Rescue practitioners assist with ‘sick companies’ on a daily basis – speak to our experts and let us help you keep your business breathing.
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