Building a profession from the ground up: Lessons learnt from Namibia

Since Covid-19 hit the world, the need to rescue viable businesses in financial distress cannot be emphasized enough. Business Rescue could provide a very useful alternative for financially distressed businesses in Namibia. Access to adequate finance is an additional important requirement for every viable but financially distressed business.

Business rescue is a growing profession in Namibia. The country has seen the value that it can offer in international markets which prompted the Namibian Government to establish a task force to look into the profession and to make recommendations on how the profession can grow in the future. Below is an extract from the report on the state of business rescue in various jurisdictions as well as their limitations.

United Kingdom
The United Kingdom offers financially distressed businesses various rescue procedures namely:

• Administration receivership.

• Company voluntary arrangement; and

• Scheme of arrangement.

The Insolvency Act provides for the restructuring of businesses in financial distress in the UK. The Insolvency Act is the law that provides a legal platform for all matters that pertain to business insolvency in the United Kingdom. The law is aimed at preserving viable businesses in the UK, by ensuring that a restructuring plan is in place to consider rescue, rather than directly initiating a liquidation process.

The Company Voluntary Arrangement (“CVA”) is a rescue arrangement that was introduced by the Insolvency Act of 1986 with the aim of rescuing ailing companies so that they can undergo a reorganisation or arrangement plan before insolvency sets in. The agreement offers the ailing companies an out of court route which reduces administrative costs and time.

There are various ways that an administrator can be appointed. The most popular way is through an Administrative Order (AO). Thorough this, an administrator can either be appointed by the court or company directors. A CVA therefore allows companies to be rescued and preserved by giving them the chance to develop appropriate plans, while enjoying an extended delay on credit claims. A company will have to prove its going concern status if it were to sell its assets.

The Enterprise Act of 2002 is also another important piece of legislation that deals with financially troubled companies and anticompetitive behaviour, by enforcing competition law and cracking down on anti-competitive behaviour conducted by businesses in the UK.

The Competition and Markets Authority (CMA) is responsible for enforcing the Enterprise Act of 2002 by establishing relevant regulations to deter anti-competitive practices by businesses in the UK. The Act has set out corporate insolvency provisions for the purpose of increasing efficiency and accountability in business rescue proceedings. The Act also abolished administrative receivership and replaced it with a new, ‘streamlined’ administration procedure and better outcomes were achieved by distressed businesses.

One of the key limitations of the UK business rescue profession is costs. The high costs (i.e., hiring a consultant to draft a proposal for presentation to the creditors and filing of documents at court) incurred by small businesses is a major reason why the uptake of the CVA arrangement has not met a high target (of entities that opt for the CVA route) as envisaged.

A successful business rescue with the CVA arrangement is not always guaranteed. When a business fails, a portion of debt will ultimately be borne by the business seeking for rescue under this scheme, whereas a successful rescue under the CVA arrangement fosters a good relationship between the debtor and the creditor.

A moratorium of action which makes it clear on what action should be taken against the company is also not provided for in the CVA proposal, hence creating a lack of certainty in this regard. Creditors may therefore try to dictate the CVA process by enforcing their rights prior to the decision-making procedures convened to approve the proposal.

Australia
Australia offers rescue to financially distressed businesses through the Australian Corporations Act (Australian Government 2005). The Act allows for corporate governance responsibilities to be delegated to an external administrator over the company’s ailing affairs through a process called Voluntary Administration (VA).

VA was first introduced in Australia in 1993 to offer a quick and cheap restructuring mechanism for small and medium-sized companies. Voluntary administration also provides these companies some degree of flexibility as well as breathing space when dealing with its creditors. It normally takes 28 business days to complete a business rescue under voluntary administration unless that period is extended by the court or creditors. The rescue process begins when the creditor appoints an administrator who facilitates the arrangements between the debtor and creditor by ensuring that the creditor accepts the proposed deed of the company arrangement.

VA was designed to be efficient and flexible when creditors are involved by eliminating court involvement. The court will however be allowed to intervene during instances where the exercise is being abused, and therefore ensuring that creditors are not overly disadvantaged. Despite its ‘creditor-friendly’ disposition, voluntary administration is still yielding positive results and the number of companies entering the schemes that are rescued is increasing.

There are some limitations to the business rescue process in Australia.  While Australia offers rescue to finically distressed businesses through the Australian Corporations Act (Australian Government 2005), no provision for distressed investors is offered in the Act and no incentive for post commencement financing is given either, thus giving very little sense of excitement to investors.

Lessons learned
The purpose of the report was to do an investigation into the global business rescue space and to learn key lessons from each jurisdiction. The report does investigate the South African profession in detail but does not make any note of the limitations that we face. Rather, it takes note of the importance we put on certain topics such as reasonable prospect for rescue and post commencement financing.

What is key is that there is a lot of involvement from Government in the development of the Namibian business rescue profession. It is apparent that the Namibian Government is cognisant of the fact that the profession does play an important role in the economic future of the country and that the profession will benefit from world leading legislation that can improve the chances of success in the industry.

Let’s take a step back and ask ourselves if we can learn lessons from international professions? Can we implement global best practice principles to improve our profession? Will we face the same limitations that global professions face? Finally, can our Government play a more inclusive role in the development of our profession? 

Phahlani Mkhombo is the MD of Genesis Corporate Solutions and is a Senior Business Rescue Practitioner.