Eight lessons learned from ten years of business rescue
21 September 2021
Financial distress, over-indebtedness and negotiating relief is a highly emotive issue and often the hardest to solve.
For many years, accountants and lawyers in South Africa who specialised in restructuring lamented the lack of a formal procedure for rescuing businesses under financial distress. In South Africa pre-2011, the only method available was to place a company under provisional liquidation first and then propose some form of arrangement or compromise between the company and its creditors pursuant to a proposal by the new investor. Many of us hoped there would be legislation to formally restructure companies, which came in May 2011 via the new Companies Act.
As the first few business rescue assignments were undertaken, professionals quickly realised that there were many uncertainties and grey areas in the legislation. Although many of these uncertainties have been legally clarified and developed in the last decade through judgements and case law, many of us could do with clearer guidance.
What we have learnt in the last 10 years?
- Management and the business rescue practitioner must be aligned
We strive to lead by example and be clear about our roles and responsibilities, but business recue processes can only be successful if management and the business rescue practitioner are fully aligned.
- Industry experts are integral to success
While we understand our roles as restructuring professionals, we also need the close assistance of an industry expert with operational knowledge of the field or sphere of business.
- Without new money, there is little hope
New money is the lifeblood of any proposed restructuring and rescuing a company. Without new money or so-called ‘post commencement finance’ the only option remaining is to ensure that creditors are merely placed in a better position than a formal liquidation and to propose an informal winding down. Not that there is anything wrong with this and it is worth mentioning that in the United States under Chapter 11 proceedings, “liquidation plans” can be published.
In Australia, if business rescue (or “administration”,) cannot be achieved, the administrator automatically becomes the liquidator and liquidates the company.
It’s not clear why this cannot be done in South Africa. Under circumstances where one deals with a licenced professional, there ought to be no reason why the business rescue practitioner could not, formally, convert the business rescue into a formal liquidation.
- Business rescue is a risky business
Business rescue comes with risks, and it’s not uncommon for practitioners to be sued. The truth is that no practitioner worth their salt would ever alienate someone affected by the rescue process. The best among us all have their “battle scars” from legal skirmishes.
- Acting early when the early signs of distress start to show gives the best chance of recovery
Leaving the business to bleed until “a quarter to midnight” is not ideal. Differently put, do not embark upon an uphill route without some petrol left in the tank. Under circumstances where directors approached business rescue practitioners at a time when there was still some funding left, the companies have proved to be more likely to be rescued. Where relationships had been badly damaged already it has been found that it was almost impossible to restore faith and creditors invariably refused to have anything to do with the restructuring process proposed by the practitioner.
- Stakeholders must work together
We have also seen that what proved to be a definite disaster was when there was a fallout between the business rescue practitioner and management. The law reports of the past decade are already awash with cases where the stakeholders such as the directors and the business rescue practitioner crossed swords and ended up in court proceedings against each other. A definite recipe for disaster! The solution to this is for the professional business rescue practitioner to be always clear about what the proposed outcome is and to communicate that to management and other affected persons and more particularly, the creditors.
- Clear communication and constant engagement are a must
It’s critical to be consistently clear, deliberate and direct when negotiating business recue proceedings. Especially with creditors, it’s very difficult to vote against a proposal when the creditors believed that the proposal was partially their idea.
When management refused to take cognisance of the notion of restructuring and where they actively undermined the practitioner, cases collapsed.
- Business rescue works
During the course of the past few years, we have seen business rescue proceedings of prominent entities and state-owned enterprises such as South African Airways and also of companies such as Comair, Edcon, The New House of Busby. In the past few months there were the cases of CNA and Mango Airlines. All of this brought the notion of business rescue to the ‘man in the street’.
The construction industry in South Africa was decimated in recent years and business rescue proceedings were common. Fortunately, business rescue became available as a corporate tool. Basil Read and Group Five went into business rescue and winding down business rescue plans were adopted. Esor Construction went through business rescue proceedings during the latter part of 2018 and a business rescue plan was adopted in early 2019 and today they are still in business.
There will always be a debate as to whether a particular business rescue process was successful or not. But what these cases have shown is that business rescue can and does work if it begins while there is still a viable business to rescue.
The definition of a success in business rescue means different things for different people. In certain instances where there was a “commercial accident” and where the creditors received only a fraction of a return on their claims, such as 5 cents in the rand, but the business survived with the retention of some of the jobs, people will argue that there was a success. In other instances where creditors were almost paid in full but where the business closed, some people will view it as a failed business rescue. It all depends on one’s perspective.
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