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  • Six Reasons Why Business Rescue Should Not be Feared
Articles:

Six Reasons Why Business Rescue Should Not be Feared

23 November 2023

In the world of business, times of uncertainty and financial distress are inevitable — especially in our current economic climate. South African shareholders and directors are bound by the responsibility to act in the best interests of all affected parties of a company. This means that when a company faces solvency and liquidity challenges, as prescribed by Section 4 of the Companies Act 71 of 2008, it must undergo a rigorous assessment, writes Buhle Hanise Chief Operating Officer of Business Restructuring at BDO South Africa.

When a company fails the solvency and liquidity test, its Board is tasked with making critical decisions that impact creditors, shareholders, clients, and employees. In such times, business rescue is often a good option.

As a tool, business rescue allows a company to continue its operations on a solvent basis with the help of restructuring of its affairs. Many businesses however tend to view business rescue with fear and apprehension. In these cases, those who come in to help a business are seen to be working more in the interests of creditors, rather than as an extension of their team.

To counter this misperception, it's essential to understand how business rescue can be a viable and constructive path for a struggling business. Here are six reasons why pursuing this path should not be feared:

       1. Business Rescue helps avoid liquidation

The major benefit of business rescue is that it helps a business avoid liquidation. This in turns saves employees from losing their jobs, and creditors going unpaid. By opting for business rescue, a company can signal its commitment to recovery and streamline and restructure its operations. The process is cost-effective and keeps the doors open for a brighter future.

       2. Assists with creditors

When a business enters the independent business review stage, it signifies that there is still hope for a turnaround. Business rescue can create schemes of arrangements with creditors, helping to reduce costs and navigate industry challenges effectively. This collaborative approach can lead to mutually beneficial solutions.

       3. Offer a holistic approach to solving problems

Business Restructuring/Review (which included Business Rescue) requires a comprehensive advisory team that can provide internal support for various aspects of the restructuring plan. These advisors should be seen as an extension of the business, working to manage costs, improve profitability, and ensure shareholders receive dividends. Business rescue is not only about working solely for the interests of creditors; it's about preserving the long-term interests of the company.

       4. Find a commercial solution

Professionals experienced in turning around distressed businesses are adept at identifying commercial solutions. Business rescue practitioners take full management control of the enterprise, acting within specific mandates and timeframes. This approach ensures that the company's operations are aligned with its recovery strategy.

       5. Turnarounds can take time

In a world where instant gratification is often sought, business rescue reminds us that patience is key. Restructuring a company takes time, with most businesses showing signs of recovery only after 18 months to three years of dedicated effort. Success in business rescue is a journey that requires perseverance.

       6. Assisted by strategic funding

Business rescue in most cases would require upfront funding to sustain the company's operations during the recovery process. While it is not a guaranteed fix, securing funding can be made easier by finding a strategic partner with the necessary resources. When the right investor comes on board, it can significantly enhance the chances of success.

Overall, business rescue should not be feared, but rather embraced as a tool to protect the interests of all stakeholders in a financially distressed company. It can help businesses avoid liquidation, work collaboratively with creditors, and provide a holistic solution to their problems. It requires patience and upfront funding but has the potential to pave the way for a successful recovery. Business rescue is about securing the future of the company, its employees, and the broader economy, and it should be viewed as a valuable option in times of financial distress.