One of the major ways that South Africa avoided the worst impacts of the 2008 Global Financial Crisis was that, despite the crisis, there was significant demand for global commodities. This was driven by the fact that China was in the middle of a significant infrastructure build programme.
This demand then extended into 2010 when there was a significant infrastructure boom in south Africa as the country hosted the FIFA World Cup for the first time.
South African companies were major suppliers during the commodity boom and could not overcome the impact of waning demand. Indalo Business Consulting recently implemented business rescue programmes for two key companies which will hopefully put them back onto the road of profitability.
Steel manufacturer case study
Upon initial assessment of the company, Indalo found amongst other things that:
• The company had been failing to secure new orders and had subsequently lost a substantial amount of existing contracts;
• The company had insufficient cash flow to fund the existing order book and other working capital requirements; and
• Management and the executive team of the Company were being paid excessively high salaries which resulted in an unaffordable salary bill.
There were a number of challenges that Indalo had to overcome during the implementation of the business rescue plan. At the time of the appointment, the company had already been consecutively displaying a weak balance sheet and could no longer afford to pay their debts as they fell due and payable. In an attempt to resume production, Indalo faced many challenges such as;
• Securing new clients for the company as the company previously relied on SOE’s for contracts;
• Becoming tax compliant and resuming insurance that were necessary for production and tender applications;
• Managing internal conflict, fractions and self-interest groups amongst management;
• Managing employee salaries and the applicable legislation of old employees moving to the new entity; and
• Addressing theft within the business and the mismanagement of funds.
A number of key interventions needed to be put in place. In restructuring the Company, Indalo had to conduct various investigations into the use (or abuse) of funds within the business. We also had to establish the roles and responsibilities of the executive.
The problems which we were attempting to solve were historical and entrenched in political issues outside of the realms of corporate governance. Upon the conclusion of all investigations, Indalo elected to restructure the management of the company and advise that the business be sold.
A number of factors influenced Indalo’s decision to advise that the business be sold. These included:
• The high cost of electing to resume operations in light of the accumulated debt;
• The cost of maintaining staff and experienced workers; and
• The cost of running the plant.
Securing post commencement financing also proved to be a problem. The BRP entered into a period of engagement with prospective bidders who have expressed interest in purchasing the assets or the business of the Company in order to obtain firm binding offers. Following the consultation and engagement with the two highest bidders, the BRP accepted an offer from an engineering company who were the highest bidder. The steel manufacturer was sold for R 88 000 000.
Aluminium manufacturer case study
Upon initial assessment of the company, Indalo found amongst other things that,:
• The company had incurred over R 20 000 000 in losses and were unable to pay its debts;
• The creditor arrear amounts (excluding shareholder loans) were in excess of R 23 599 176;
• Disputes between the directors and shareholders made it difficult for the operations to continue and for critical decisions regarding the health of the business to be made; and
• Employees were disgruntled and unsure of what the future held or the continuation of the business.
Indalo had to overcome some significant challenges during the implementation of the business rescue plan. As the directors failed to file the resolution timeously to commence business rescue due to disputes, the courts made the ruling to place the company under business rescue.
The process of assisting the distressed company came with many challenges. When Indalo assumed responsibility of the company, operations were at a halt. In addition to this;
• All essential services such as electricity and water supply were suspended as these accounts were in arrears;
• Suppliers had terminated contracts and removed machinery that were critical to production;
• The company failed to renew and apply for the required and necessary licenses;
• The company could no longer afford to pay salaries and maintain its staff, alongside being party to various litigation battles; and
• The company was no longer tax compliant which directly affected its ability to apply for further funding.
In restructuring the Company, Indalo applied three key interventions which included:
• Determining various options of restructuring the company;
• Evaluating the best option in light of the current market and projected change; and
• Implementing the chosen strategy and closely monitoring the development.
Within a span of six months, Indalo was able to restructure the Company and deliver a result better than that of a liquidation. In achieving this, Indalo performed a full assessment of the company’s financials which included all debtor and creditor books, an asset and liability analysis, and a full commercial due diligence on all implemented processes.
Due to no funding being available to restart operations, Indalo embarked on a sale process. In finding a suitable buyer, Indalo adopted a fair and transparent bidding process where the company was publicly advertised. All potential buyers were made aware of the rules of the bidding process and were required to show, amongst other things;
• Proof of funding;
• Skill and knowledge of the industry; and
• A prospective continuation plan of the business.
Upon concluding the sale process, Indalo was able to successfully restructure the shareholding through the sale of the business and paid each creditor an amount equivalent to 10 Cents to the Rand. The employees were further paid all benefits in relation to Section 198 of the Labour Relations Act. The operation in Richards Bay is continuing successfully with the restructured shareholding.
We learned a number of key lessons while implementing these two rescues:
- Financial mismanagement and political infighting can significantly impact a company’s ability to operate. Further, it significantly impacts the current and future value of the company;
- Covid-19 was not the cause of financial distress, it was the push that saw the companies become more distressed. This is the case that most companies are facing in South Africa today; and
- A new broom certainly does sweep clean. When there is financial mismanagement and leadership issues, the company is best served through a whole new board.
I still feel that there is a strong case for business rescue as opposed to liquidation. The distressed companies discussed in this article could have been ideal candidates for liquidation; however, if that was the case, the value to creditors would not have been as high as it was and employees would have found themselves without a job.
The value of the business rescue process is not only to creditors, but to the South African economy by retaining jobs.
Charles Phiri is an Associate at Indalo Business Consulting