The original article can be found here. Subheadings were inserted by Turnaround Talk.
After the pandemic, the riots in KwaZulu-Natal, power and infrastructure issues, supply chain challenges emanating from conflict in Eastern Europe, an economy that is struggling and with enormous pressure on the rand, financial distress is a reality for many SA companies.
Looking to 2023, with liquidations on the increase, restructuring and turnaround professionals (particularly business rescue practitioners) have a lot to do in helping these companies avoid collapse into liquidation.
2011 debut
Business rescue was placed on the SA restructuring map in 2011. Before that all directors of distressed companies could do was place their struggling entities into liquidation. A liquidator would in effect wind the company up, terminate employment and distribute liquidation dividends (often fire sale values) to creditors. It was frequently a negative and disastrous outcome for suppliers to that company, the shareholders and the SA economy.
Over the past 10 years we have seen the development of a new profession, that of the business rescue practitioner. From the outset we were faced with a new way of running the restructuring of a financially distressed company, where a business rescue practitioner could be appointed by the board. They could assist with holding off creditors, where the much-needed “automatic moratorium” (stay of claims) provided the company with the required breathing space to run a meaningful and focused restructuring process when it was one step away from full-blown liquidation.
SA now has a fully developed rescue profession, in line with international jurisdictions, where the ultimate objective of restructuring a failing company through a business rescue plan has become an imperative.
Not for everyone
The business rescue process is not for everyone. In certain instances, failing companies must consider liquidation and the termination of an unsustainable business. Zombie companies — those that trade on a continued unprofitable basis on the cusp of insolvency, remaining highly geared and reliant on loan finance — should be put out of their misery and placed into liquidation.
Directors and management sometimes hang on too long because they are too emotionally tied to the ongoing operation of their companies. As the company goes into a slow spiral of decline and loss-making, directors sometimes have to make hard decisions and look for independent assistance from outside. Either they need to consider a restructuring mechanism like a business rescue, or file for liquidation.
The business rescue mechanism allows directors and management to trade the company out of its financial predicament and into a solvent position. In SA, business rescue remains a robust, modern mechanism designed to restructure and compromise debt and give the company a fresh start.
Where this is not possible, a plan can be formulated to deliver a better dividend to creditors than they would have received in a liquidation. The advantage of being able to renegotiate prejudicial contacts, reconfigure the labour force through a controlled retrenchment process, and appoint new management and directors should never be underestimated.
Photo By: Canva
A fresh approach
We have since 2011 developed a whole new way of turning around ailing companies. We have a new and innovative case law precedent and have gained a number of highly specialised lawyers and judges, all steeped in business rescue matters.
There are the naysayers. They tell us business rescue doesn’t work, and the best thing to do with financially distressed businesses is place them in liquidation. But liquidation is clearly the end game, and where the company closes all employment comes to an end. At the very least, business rescue brings the prospect of a fresh start to the table and gives the company breathing space to consider and possibly implement a financial restructuring. All stakeholders (especially creditors) have a say in the future of the company and its ability to continue trading.
Business rescue gives distressed companies options, including rescue and restructuring of debt. It brings SA into line with the often successful restructuring and turnaround optionality we find in offshore jurisdictions such as the US (Chapter 11), Canada (CCAA), the UK (administration) and Australia (voluntary administration).
Vital evidence
The evidence speaks for itself. There have now been a host of business rescues in SA that have worked and where there is no doubt that the company, its creditors, employees and all other stakeholders have ended up in a far better position compared to if the company had gone into liquidation.
Examples of successful business rescues include Phumelela Gaming & Leisure (horse racing); Edcon (retail, where its businesses were bought out by Retailability and TFG); SAA, which airline continues flying; Ster-Kinekor (cinema business bought out by the Blantyre Group); Andalusite Resources Mine; Aeronautical Engineering (arms company bought out by the Paramount Group), and many others.
These business rescues have worked, many jobs have been retained and the companies have been able to continue contributing to the upliftment of the SA economy. We expect business rescue to continue to prove itself in the challenging economic times that lie ahead.
Eric Levenstein is the Head of the Business Rescue & Insolvency Practice Group at Werksmans Attorneys.
