Over the years, Deloitte has worked hard to position its Restructuring Survey as one of the industry’s leading research reports document identifying and discussing key opinions and trends that drive the informal restructuring side of the business turnaround profession.
This has been achieved and Deloitte needs to be commended for their efforts. Many BRPs and Turnaround Professionals look forward to attending the Survey results presentation and now turn to the survey as a point of reference when shaping and modelling their advice and business rescue/turnaround plans. It is also informative in relation to their own advisory service strategy.
But we need to bear in mind that this is a survey. And while the trends in the survey may be indicative of what is driving the industry, the feedback provided from the survey comes from a select group and not the whole industry
This caution needs to be given as one of the trends identified in the 2022 Restructuring Survey states that there is a crisis of trust in the business rescue process. This is a dangerous statement to make if one wants to apply it to every BRP or Turnaround Professional.
Framing the crisis (according to Deloitte)
The Survey points out that while business rescue may have taken a back seat in 2021, it does look to make something of a comeback in 2022, with 60% of respondents working in funders saying that they expect the level of business rescue in their portfolios to increase, if not significantly increase. This is unsurprising given respondents’ pessimism around economic growth in South Africa.
However, what is evident is that there is a widening trust gap between practitioners and their stakeholders. Low success rates, experienced especially by lenders, contribute to this. The suitability of the BRP is also rated as one of the main reasons that business rescue fails, ranking closely behind a lack of post-commencement financing (PCF) as a cause of failure. While the adage of the past was “no PCF, no BR”, perhaps this needs to change to “reputable BRP, successful rescue”?
The Survey points out that, despite there being 393 registered BRPs on the Companies and Intellectual Properties Commission (CIPC) database as of 27 January 2022, 77% of respondents believe that there are fewer than 30 who are adequately skilled and qualified to perform their duties. This is also the view of 90% of the BRPs interviewed. What speaks directly to the trust gap is that ethics and integrity, together with consequences for poor performance, are cited as the main areas which, if addressed, should improve this skills and qualification gap. Interestingly, in 2021, ethics and integrity (22%) ranked behind level of experience (42%), whereas they are front and centre in 2022 with length of experience ranking third – supporting the view that this is the biggest issue that needs to be addressed.
The Survey adds that lenders and lawyers further require regular, honest communication to improve trust in the process, followed closely by taking immediate control of cash. Some may argue that this is essentially ‘doing your job’. This finding speaks to the low levels of confidence and trust in the professionals tasked to oversee business rescue, which if not quickly corrected and addressed, could tarnish the reputation of business rescue irreparably.
The fees issue is not really a major issue
During some of the high-profile Business Rescues in 2020 and 2021 – which received significant media coverage – the public raised the issue of fees as a concern. This has seemingly taken a backseat in the Survey to other, more pressing issues.
The survey points out that, in terms of BRP fees, survey respondents acknowledged that the process is complex and that a fee structure should reflect this. However, what is starting to emerge is that a greater proportion of respondents believe that fees should be linked to creditor recoveries. Not surprisingly none of the BRPs selected this option; instead, 90% favoured fees being reflective of complexity. The greater emphasis on linking fees to creditor recoveries again aligns with a lack of trust as many of the interviewed stakeholders cited misaligned objectives in business rescue as a reason for concern, which often plays out in the fees. The fee issue is in of itself a complex matter not covered in the survey.
Where does responsibility lie for closing the trust gap? The Survey adds that if consequences for poor performance and better oversight are required, this is surely the responsibility of the regulator and professional bodies. Arguably, the judiciary is playing its part, with 61% of respondents citing recent case law as a force for positive change. However, the industry cannot ignore the recent case law stating that the court does not possess the necessary powers to order BRPs to repay fees on account of misconduct as this is considered beyond the court’s purview. This places the burden firmly back on the CIPC and professional bodies to drive high ethical standards and ensure disciplinary procedures are robust and managed fairly.
Important points to note
Once again, it must be pointed out that the Restructuring Survey is an important document that holds a lot of gravitas within the profession. And some of the experiences described above may well capture the central challenges for both creditors and lenders.
However, a few things need to be pointed out:
- secured creditors and lenders will always prefer informal restructuring over business rescue or liquidation because they have more control over this process and the value that they will receive relative to their investment; and
- while it is undeniable that informal restructuring is growing – and will continue to grow in the future – informal restructuring is not suitable for every company, business rescue is inevitable in some cases. Just as business rescue is not suited to every company and liquidation is inevitable in some cases.
Perhaps the most important point to make is that the bad experiences described above (which are of course a critical reality) are often associated with a handful or rotten apples within the profession and not indicative of the majority of BRPs. While a few rotten apples do not spoil the barrel, the perception needs to be properly addressed to prevent a general distaste for the profession and its purveyors.
Let’s interrogate one statement made in the Survey a bit further: what is evident is that there is a widening trust gap between practitioners and their stakeholders. Low success rates, experienced especially by lenders, contribute to this. The suitability of the BRP is also rated as one of the main reasons that business rescue fails, ranking closely behind a lack of post-commencement financing (PCF) as a cause of failure.
When were these companies put into business rescue? Were they put into business rescue early on in their financial distress or when the company was neck deep in the weeds? This is important because it impacts the success of a rescue. Was truthful information supplied to the BRPs by the companies during their discovery prior to the rescue? This has been flagged as a significant challenge by at least two prominent BRPs. With regards to PCF, like lenders, banks will be reticent to commit funding to a rescue that faces the challenges that we have discussed above.
Clearly, where the distress has been caused by the fraud and malfeasance of shareholders and directors, there is no likelihood of restoring trust and convincing any lender to advance funding. This needs to be investigated and addressed. Often the choice between liquidation and business rescue is between the personal outcomes for the senior managers and directors and to protect their own financial interests.
Let’s interrogate another statement: the Survey points out that, despite there being 393 registered BRPs on the Companies and Intellectual Properties Commission (CIPC) database as at 27 January 2022, 77% of respondents believe that there are fewer than 30 BRPs who are adequately skilled and qualified to perform their duties. This is also the view of 90% of the BRPs interviewed.
There were 111 respondents to the Survey. Therefore, 86 respondents feel that there are only 30 BRPs who are adequately skilled and qualified to perform their duties. There are more than 111 creditors and lenders that deal with companies. Deloitte also did not point out how many BRPs were interviewed, so we do not know if it is 90% of 10 BRPs, 90% of 50 BRPs or 90% of 393 BRPs that concur with this sentiment.
Why is it important to retain the integrity of the profession?
While there is seemingly this crisis of trust in the profession. It is important to note that not every company is suited to informal restructuring, not every BRP or Turnaround Professional is unscrupulous, and not every BRP is as unskilled as the statement above may suggest.
In fact, business rescue is a useful tool when saving a company from liquidation where value is preserved for creditors, jobs are saved, and a company that continues to contribute to the fiscus is retained. While informal restructuring will increase in popularity, so will business rescue.
If we read between the lines, and listen to certain whispers in the profession, there are some cases where certain BRPs act unethically. This is something that can stain the reputation of the whole industry and needs to be resolved. Perhaps this is a challenge to the CIPC and the South African Qualifications Authority (SAQA) to introduce a mandatory course in ethics that all BRPs need to take with an accompanying examination that all BRPs will need to pass in order to maintain their certification.
At the end of the day, all parties enter into a business rescue or an interaction with a BRP on the basis of trust. We need to give BRPs every opportunity to perform their duties to the best of their abilities, and this cannot be done if they are scrutinised with a critical eye by stakeholders at every turn. We need to be careful when making a statement like there is a lack of trust in the industry; we must evaluate the veracity and origin of these conclusions, and we must address what is a clear concern for at least a few of the countries most significant creditors.
This task is likely to fall at the feet of the professional bodies, with the Turnaround Management Association of Southern Africa (TMA-SA), the South African Restructuring and Insolvency Practitioners Association (SARIPA) and Southern African Institute of Chartered Accountants (SAICA) needing to step up to the plate to ensure that members meet the high ethical standards required for any fiduciary appointment and provide a transparent process for the evaluation of rescues and the remediation of any unethical behaviours.