According to recent Statistics South Africa (Stats SA) data, there has been a rise in company closures, with liquidations increasing by 14,3% in April 2024 when compared to April 2023. Further, according to the Fitch Ratings forecast of real gross domestic product growth, we will see an increase of only 0,9% in 2024 and, at best, 1,3% in 2025. Against this backdrop, and given our social, economic and political landscape, organisations in South Africa face real challenges, and business distress can be expected.
Business rescue is a legal process aimed at rehabilitating financially distressed companies. Even so, for all its initial sparkle and progress, some assert that it is, in fact, “value destructive” as certain challenges have arisen during its short history.
Despite the challenges, business rescue remains a valuable option for distressed companies, aiming to prevent liquidation and job losses.
The only real thing ‘wrong’ with business rescue is that it is almost always initiated too late.
Business rescue is a legal process aimed at rehabilitating financially distressed companies. Even so, for all its initial sparkle and progress, some assert that it is, in fact, “value destructive” as certain challenges have arisen during its short history.
Tariff of fees
For example, although the tariff of fees that business rescue practitioners may charge is legislated, as the ad goes, you get what you pay for. And, those practitioners who may (fingers crossed) possess the skills to rescue a financially distressed company will ask for increased fees – and rightfully so, as the tariff has been outdated for more than a decade. Significantly, delays in business rescue proceedings can hinder efficient recovery and the longer the business rescue process drags on, the greater the unforeseen costs and the likelihood of unintended consequences arising, which can strain distressed companies further. Some business rescue proceedings have been ongoing for almost a decade with no clear end in sight!
The success of business rescue also hinges on the financially distressed company being supervised by competent practitioners who can formulate and implement a cogent business (rescue) plan. The right practitioner should be able to take control and manage the immediate crisis, rebuild stakeholder support, fix the business and resolve future funding. However, the rescue process may suffer when practitioners lack the necessary experience and qualifications.
Despite these challenges, business rescue remains a valuable option for distressed companies, aiming to prevent liquidation and job losses.
So, what is wrong with business rescue? Well, nothing. Its current challenges can all be overcome by early intervention. That is, the sooner along the distress curve (or, put differently, further away from the company’s commercial insolvency) a board of a distressed company or its affected persons act to restructure the company’s finances and operations to avoid a formal process, or formally place the company in business rescue, the less messy the process, the more inclined ‘good’ practitioners will be to take on the mandate, the cheaper it is, and the more certain the prospect of rescue becomes.
Typical signs
Typical signs which affected persons (who do not ordinarily have access to the company’s financial affairs like boards do) should look out for in order to act fast include, but are certainly not limited to:
- Late payment of supplier invoices, and often the withdrawal of credit lines (i.e. cash-on-delivery).
- Factoring customer invoices, meaning the “sale” by the company of some or all of its outstanding invoices to a third party as a way of improving its cash flow and revenue stability.
- Lack of leadership and of urgency.
- Declining customer service and low staff morale.
- “Right sizing” the company through retrenchments.
Nothing is wrong with business rescue, save that it is almost always initiated too late.
Nastascha Harduth is a Director at CDH and is the Sector Head of the firms Dispute Resolution practice
