The current demand for turnaround professionals has been three years in the making

Since the beginning of the Covid-19 Pandemic, there have been fears that the challenges facing companies in the current environment will place many of them into financial distress. This has highlighted the need for business rescue and the good work done by turnaround professionals to retain value for shareholders.

One of the most highly anticipated documents that is released in the industry is the Stats Sa report on liquidations. This serves as a benchmark as to whether the distress that companies are facing is to much for them or if there is a reasonable prospect of saving the company. It also shows which industries are facing more challenges than others.

The other document that is highly anticipated is the report from the Companies and Intellectual Property Commission on the status of the business rescue industry. What does the recent report tell us?

Increased filings

According to the latest report, there were 279 business rescue plans filed in the 2021-2022 year. The report further points out that there are currently 63 business rescue plans that are still ongoing.

Of the 279 plans that were filed in 2021/22, only 11 ended up in liquidation. However, only 15 plans ended up in a substantial implementation while 34 plans were terminated. This is a bit concerning and possibly gives credence to the Deloitte statistics regarding the amount of suitably qualified turnaround professionals in the industry.

The report does show that has been an increase in the number of business rescue filings since 2019/2020. In 2019/2020 there were only 183 active business rescue plans recorded by the CIPC, this increased to 206 in 2020/2021 and 279 in 2021/2022. This points out that, while many companies did become distressed during Covid, many were facing significant challenges before the Pandemic.

What is encouraging is the decrease in liquidations. In 2019/2020, there were 31 liquidations, this decreased to 30 in 2020/2021 and finally 11 in 2021/2022.

The CIPC report points out that, of the 4 370 cases (from 2011/2012 to 2021/2022):

• 310 proceedings were declared a nullity;
• 982 proceedings were terminated by way of filing a Notice of Termination (CoR125.2);
• 852 proceedings were substantially implemented by way of filing a Notice of Substantial Implementation (CoR125.3);
• 546 proceedings ended up directly in liquidation;
• 32 proceedings the court set aside the business rescue proceedings; and
• 1648proceedings is still in business rescue.

BR by province

Predictably, Gauteng (the economic heartland of South Africa) saw the most companies facing financial distress. The CIPC report shows that there were 182 active business rescue cases in 2021/2022.

Again, this increased significantly from 2019/2020 which had 197 active business rescue cases. There was another increase in 2020/2021 where there were 210 active business rescue cases. However, this is predictable given that it was at the peak of the Covid-19 lockdown.

The Western Cape was another hotbed for financial distress. The CIPC report points out that there were 47 active business rescue cases in 2021/2022. However, unlike Gauteng, there is a decreasing trend in the nation’s second biggest economic hub. In 2019/2020 there were 59 active business rescue cases. This decreased to 52 active business rescue cases in 2020/2021.

Interestingly, Mpumalanga – not traditionally considered a major economic hub – saw 34 active business rescue cases in 2021/2022. This increased significantly from 2019/2020 and 2020/2021 where there were 19 active cases. This is perhaps an indication of the distressed experienced by the tourism industry over the past three years.

BR by industries

We can already gather two things from the CIPC report:

• Companies were already facing financial distress before the Covid-19 Pandemic; and
• The increases between 2019/2020 and 2021/2022 shows that the Pandemic did force many companies into financial distress.

There have been plenty of reports about the industries that have faced the most challenges over the past three years. However, the CIPC report provides a clearer (official) picture.

The agriculture, forestry and fishing industry faced the most disruption with 46 active business rescue cases in 2021/2022. This was followed by the manufacturing sector which saw 44 active business rescue cases and the construction sector which recorded 31 active business rescue cases.

There were 50 cases in a category labelled Other Service Activities.

Let’s look at the impact of Covid. At its height in 2020/2021 the following industries were impacted significantly:

• Manufacturing (48 active business rescue cases);
• Wholesale and retail trade, repair of motor vehicles and motorcycles (47 active business rescue cases); and
• Construction (26 active business rescue cases).

What does the report tell us?

What does the CIPC report tell us?

First, the headwinds that led to financial distress were present before Covid. This means that the traditional root causes of financial distress are the challenges that turnaround professionals will deal with the most.

The number of liquidations, while fluctuating between an increase and a decrease, is concerning and does suggest that the Deloitte statistics about the number of suitably qualified turnaround professionals is accurate.

Finally, there are industries that have been more immune to the covid challenges than others. It will be interesting to see next years statistics as they will be from the year which was the worst loadshedding year in the country’s history. This has emerged as a significant root cause of financial distress. My own feeling is that there may be another increase in the number of business rescue cases in the 2022/2023 year. I am happy to be proven wrong.