Founder: Turnaround Talk
At the height of the South African Airways business rescue, the public started to ask questions about the effectiveness of the business rescue process, given the fact that the SAA business rescue was taking a long time to be finalized. When noises were made that Transnet would need some form of business rescue, or informal restructuring, these concerns were raised once again.
Granted, these are unique cases because any delays in the process would have to be bankrolled by the public through government dipping into tax revenue. While these delays wont typically have a direct impact on the public, the questions surrounding the status of business rescue, and the effectiveness of business rescue proceedings, are important questions to ask, especially if we are moving towards a market where we will either see a lot of business rescues or an increased focus on informal restructuring.
The Companies and Intellectual Property Commission (CIPC) recently released a report on the status of the business rescue industry. The CIPC states that the purpose of this report is to provide a statistical overview of the status of business rescue proceedings within South Africa based on applications submitted to the CIPC.
The CIPC warns that the report covers the period of 1 May 2011 (the inception of Chapter 6 of the Companies Act, 2008) to 31 December 2021. This report does not provide statistical comparisons with previous years.
Business rescue through the years
Between 2011 and 2021, the CIPC reports that 4 215 business rescues have been filed with the office.
The CIPC reports that, from the 4 215 cases (invalid filings are not included since the proceedings never commenced) we can see that:
- 310 proceedings were declared a nullity;
- 938 proceedings was terminated by way of filing a Notice of Termination (CoR125.2);
- 766 proceedings was substantially implemented by way of filing a Notice of Substantial Implementation (CoR125.3);
- 511 proceedings ended up directly in liquidation;
- 32 proceedings the court set aside the business rescue proceedings; and
- 1 658 proceedings are still in business rescue.
Companies that make use of the process
The CIPC reports that business rescue is mostly utilized by private companies. 69% of entities applying for business rescue are private companies while only 29% are close corporations.
Between 2011 and 2021, 2 893 companies that went into business rescue were privately owned. Only 97 companies were publicly listed companies. Closed corporations came in second place with 1 201 companies making use of the service. Twelve not for profit companies made use of business rescue.
Rescues by province
Being the economic heartland of the country, it is no surprise that Gauteng stands out as the province that has registered the most business rescues (1 901 rescues). The Western Cape comes in second with 565 rescues and KwaZulu-Natal comes in third with 374 rescues.
As the world, moves towards becoming carbon neutral, we see that there is a significant decline in global demand for coal. This has placed many South African coal mining companies under significant pressure which is reflected in the fact that Mpumalanga – the heartland of South Africa’s coal mining industry – recorded 183 rescues between 2011 and 2021. While there is no indication that all of the 183 rescues were of mining companies, it is important to note that the communities in Mpumalanga are largely built around mines and mining activity. If these companies face production issues, the community suffers as a result.
As the Covid-19 Pandemic increases in length, we may see a more even spread across the provinces as small business in tourist destinates such as George, Pilgrims Rest in Mpumalanga and Saint Lucia in KwaZulu-Natal are forced to seek help or close their doors.
What is interesting is the fact that 627 business rescues fall in the category of unrecorded.
Notice of Termination (CoR125.2) Filed
The information below indicates the volume of CoR125.2 filed for commenced business rescue proceedings.
The CIPC points out that it should be noted that a CoR125.2 may be received during a specific financial year; however, the filing of the document will be recorded against the year for which the business rescue proceedings commenced. For example: the CoR125.2 may be filed January 2015 but the proceedings commenced during the 2011-2012 financial year and therefore the CoR125.2 will be recorded against the 2011-2012 financial year.
- Termination: Liquidation 283
- Termination: Plan not accepted 35
- Termination: Not Distressed 517
- Termination: Set aside 2
- Termination: Undetermined 97
- Termination: Not possible to implement plan 2
- Termination: Court order 2
- Total: 938
Liquidation Documents Filed
The information below indicates the volume of liquidation applications and court orders filed for entities which commenced business rescue proceedings without the proceedings being terminated or business rescue plan being substantially implemented. It should be noted that a liquidation application or court order may be received during a specific financial year but the filing of the document will be recorded against the year for which the business rescue proceedings commenced. Example, the liquidation application may be filed January 2015 but the proceedings commenced during the 2011-2012 financial year and therefore the liquidation application will be recorded against the 2011-2012 financial year.
- Dissolved: 7
- Final Liquidation: 324
- Provisional Liquidation: 147
- Voluntary Insolvent Liquidation: 16
- Voluntary Solvent Liquidation: 17
Industries that are under pressure
It is no secret that south Africa has faced a tough economic climate since 2010. Economic policy has not been strong and unemployment has risen significantly since the boom period that followed the 2010 Fifa World Cup.
This is reflected in the statistics provided by the CIPC.
Between 2011 and 2021 there were 403 business rescues in the wholesale and retail trade as well as the repair of motor vehicles and motorcycles. This is a clear indication of a shift in consumerism towards importing replacement parts as opposed to panel beating vehicles. There is also no manufacturing facilities in South Africa, so all of these parts have to be imported from international markets. This has put the consumer under pressure which in turn puts the industries under pressure.
Following the boom period in the construction industry in 2010, there were 269 business rescues recorded in the construction industry. There are a number of factors that have led to this. Most of these are discussed in an article than was published in June 2021.
As pointed out earlier, manufacturing has been under significant pressure since 2011 with 292 rescues recorded between 2011 and 2021. This is mainly driven by the fact that fabrication out of China has become more affordable than local manufacturing. The impacts of this are being felt now as the global supply chain crisis has caused major issues in the current environment.
If we look at 2020 and 2021 in isolation, we see that the accommodation and food service industries have faced massive disruptions with 65 rescues being recorded during that period. This was followed by the mining industry which saw 40 rescues during this two-year period.
Another industry that is facing significant pressure is the real estate industry which saw 74 rescues recorded during this period. This is a clear indication that the public is under significant pressure and that we are currently in a buyers’ market for those who can afford to enter into the property market.
Photo By: Nubelson Fernandes on Unsplash
What does this mean?
The full report is downloadable below.
What does these statistics mean? These statistics provide a timeline which shows a specific point in time when business rescue became popular, and how this popularity has grown over the years. This will either be sustained or will shift towards informal restructuring as companies become more aware of the drivers of financial distress and the red flag that companies need to look out for when it comes to this.
When it comes to the industries that are facing financial pressure, a specific event can be pinpointed as a major cause of distress. Companies in these industries will need advice on how to reshape their business to accommodate the changing environment.
It is clear that the business rescue profession is alive and well. The future looks bright as companies will need to adjust their business models to fit into the current market. Even if we see the back of the Covid-19 Pandemic and enter a period of massive growth, companies that thrived during the pandemic will need advice on the future of their business.
Onward and upward BRPs!
