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MANY South African companies experience a rocky ride, with statistics showing that 3 766 to 4 156 businesses undergo either voluntary or compulsory liquidation every year.
A business in deep trouble which is facing the very real prospect of liquidation can now consider opting for the legal process of business rescue.
This new chance at salvation for South African businesses became legally enshrined under Chapter 6 of the new Companies Act, No 71 of 2008 which officially launched a new era for financially distressed firms.
To date over 840 companies have filed for rescue, which has been attempted by 126 individuals licensed by the Companies and Intellectual Property Commission (CIPC).
However, there is a question mark over where business rescue as a regime is headed and whether the act is achieving what its spirit set out to. Business rescue is brand new, and business rescue practitioners (BRPs) are a new species.
Before Chapter 6, liquidation was a thriving environment. Now role players such as the regulator (CIPC), general creditors, banks, the courts, academics and employees have no clarity where this is heading.
They are now much more willing to interrogate the future of business rescue against a variety of scenarios. In particular, they are prepared to investigate the fundamental direction of the industry should a case be made for doing so.
What are we looking at currently?
Industry concerns
There is growing concern about all kinds of allegations facing the industry. Bluntly listed, those include:
• Process abuse by both shareholders and creditors (with support of their lawyers) to gain time for asset stripping (among others) before eventual liquidation;
• BRPs are blamed for incompetence, also for charging exorbitant fees and paying consultants to do their work;
• Banks also blame failure of rescue on incompetent BRPs;
• Simultaneously, banks are blamed for colluding with shareholders to vote against the proposed plans and then "manipulate" the resulting liquidation or buy-outs;
• BRPs don't help themselves by not reporting progress in time; and
• Removals and forced resignations start to happen.
To my mind, a major concern is that we don't know the distribution of continued business versus better yield for creditors that are attempted.
This crucial as there are many reports of pure debt restructuring and "glorified liquidations" rather than attempting to save the business (despite the act allowing for it).
The key uncertainties that we identified are:
• Firstly, we don't know what direction the rescue industry reputation is going. Based on the above allegations, it is worrisome and there are three flags going up signalling the wrong direction.
• Secondly, the competence levels of the existing BRP contingent is a key concern also with two flags. Previous research shows that even the BRPs acknowledge this as a main contributor to failure.
• Thirdly, support for business rescue from the banks is still unpredictable but seems to steer towards "not supported".
Informally, banks tell me "it depends on the BRP". Recent research confirmed this. It is a key determinant for the development of a PCF industry.
So by using the above, we developed four possible scenarios.
Scenario 1 - Everest quest 30%
The first mainline scenario we offer is called "Everest quest", suggesting that the industry and BRPs suffer heavily from a bad reputation despite some pockets of expertise under BRPs.
Banks oppose rescue in principle and aggressively oppose filing/BR. From the onset they vote against the plan, apply strict measures on bank accounts, effectively "freeze" the business operations by affecting account operations such as factoring, etc.
Finally, banks influence/vote/remove BRPs they feel don't make the grade.
BRPs are restricted by no access to bridging finance (post filing) to allow operations to proceed. They are out in the cold (Everest) and it is also the mountain before them.
No PCF can be accessed, and even the best plans cannot be financed. BRPs lose interest and belief while the industry is perceived as "not working anyway".
Scenario 2 - liquidation comeback 35%
The second and "worst case" scenario we put forward is the one we partly fear: it is called "liquidation comeback", suggesting a complete failure of the business rescue regime as a result of the rapidly increasing bad reputation and BRPs exposed to be the main contributor.
At the same time, the banks withdraw any support for BR based on perceived incompetence. Both contribute to a fallback to liquidation as no PCF becomes available. Proper turnaround and rescue mostly depend on PCF.
The word catastrophe comes to mind. Liquidator mindset prevails.
This scenario has the largest probability, in my opinion.
Both scenarios 1 and 2 assume negative reputation based on the industry concerns mentioned above. Good futurists will, however, always explore the outer limits of the cone of uncertainty that opens up into the future.
I have developed two new scenarios called "outliers". One is the best case and the other a short-term scenario.
Scenario 3 - drowning anglers 25%
The first outlier scenario we offer is called "drowned angler", suggesting that rescue as a regime will not significantly contribute to save businesses, jobs or related industries as hoped for.
BRPs (anglers) drown in the mess they create as a result of large-scale incompetence. Only a few competent ones survive and the industry shrinks accordingly.
This scenario largely depends on poor skills leading to incompetence in the tasks to be executed. Seeking a better return for creditors is the easiest option for the incompetent and makes it difficult to be exposed for weak skills.
Scenario 4 - game changer 15%
This is the best case scenario (still an outlier) which we really hope for.
BRPs act competently, ethically and save many businesses by turning them around or rescuing them. In this scenario, we have a growing, competent BRP core that successfully drives BR.
There are minimum levels of process abuse and filings take place earlier, leading to overcoming "rotten egg effects". Based on their positive reputation, this success breeds success, courts act quickly and banks are willing.
Possibly a PCF industry develop,s following the US and UK models.
Flags (indicators) to monitor are:
• the number of rescues challenged in the court based on BRP competency and credibility;
• reports and allegations on abuse;
• early opposition by banks stating they will not vote for the plan anyway; and
• the ratio of continuation of business (turnaround) to return type rescues should be determined.
We have three sources for flags for all scenarios. The first one is the BRP and bank feedback obtained through scientific research.
The second is the outcome of the BR audits planned by CIPC to establish competency and who should be licensed or not in future.
Third are reports to CIPC about abuse and requests for investigation relevant to competence. Potentially courts will also contribute.
Barring any black swans, scenarios 1 and 2 cover 65% probability. So, don’t bet on a single future. Rather keep all four of our possible futures in mind, and watch the flags go up or down. How we make decisions will become very important.
• Here's how you can help: send your comments and insights on matters I may have overlooked, and share your stories either in favour of or against.
What are the options? Lets go there next time and give me your ideas.
- Fin24
A business in deep trouble which is facing the very real prospect of liquidation can now consider opting for the legal process of business rescue.
This new chance at salvation for South African businesses became legally enshrined under Chapter 6 of the new Companies Act, No 71 of 2008 which officially launched a new era for financially distressed firms.
To date over 840 companies have filed for rescue, which has been attempted by 126 individuals licensed by the Companies and Intellectual Property Commission (CIPC).
However, there is a question mark over where business rescue as a regime is headed and whether the act is achieving what its spirit set out to. Business rescue is brand new, and business rescue practitioners (BRPs) are a new species.
Before Chapter 6, liquidation was a thriving environment. Now role players such as the regulator (CIPC), general creditors, banks, the courts, academics and employees have no clarity where this is heading.
They are now much more willing to interrogate the future of business rescue against a variety of scenarios. In particular, they are prepared to investigate the fundamental direction of the industry should a case be made for doing so.
What are we looking at currently?
Industry concerns
There is growing concern about all kinds of allegations facing the industry. Bluntly listed, those include:
• Process abuse by both shareholders and creditors (with support of their lawyers) to gain time for asset stripping (among others) before eventual liquidation;
• BRPs are blamed for incompetence, also for charging exorbitant fees and paying consultants to do their work;
• Banks also blame failure of rescue on incompetent BRPs;
• Simultaneously, banks are blamed for colluding with shareholders to vote against the proposed plans and then "manipulate" the resulting liquidation or buy-outs;
• BRPs don't help themselves by not reporting progress in time; and
• Removals and forced resignations start to happen.
To my mind, a major concern is that we don't know the distribution of continued business versus better yield for creditors that are attempted.
This crucial as there are many reports of pure debt restructuring and "glorified liquidations" rather than attempting to save the business (despite the act allowing for it).
The key uncertainties that we identified are:
• Firstly, we don't know what direction the rescue industry reputation is going. Based on the above allegations, it is worrisome and there are three flags going up signalling the wrong direction.
• Secondly, the competence levels of the existing BRP contingent is a key concern also with two flags. Previous research shows that even the BRPs acknowledge this as a main contributor to failure.
• Thirdly, support for business rescue from the banks is still unpredictable but seems to steer towards "not supported".
Informally, banks tell me "it depends on the BRP". Recent research confirmed this. It is a key determinant for the development of a PCF industry.
So by using the above, we developed four possible scenarios.
Scenario 1 - Everest quest 30%
The first mainline scenario we offer is called "Everest quest", suggesting that the industry and BRPs suffer heavily from a bad reputation despite some pockets of expertise under BRPs.
Banks oppose rescue in principle and aggressively oppose filing/BR. From the onset they vote against the plan, apply strict measures on bank accounts, effectively "freeze" the business operations by affecting account operations such as factoring, etc.
Finally, banks influence/vote/remove BRPs they feel don't make the grade.
BRPs are restricted by no access to bridging finance (post filing) to allow operations to proceed. They are out in the cold (Everest) and it is also the mountain before them.
No PCF can be accessed, and even the best plans cannot be financed. BRPs lose interest and belief while the industry is perceived as "not working anyway".
Scenario 2 - liquidation comeback 35%
The second and "worst case" scenario we put forward is the one we partly fear: it is called "liquidation comeback", suggesting a complete failure of the business rescue regime as a result of the rapidly increasing bad reputation and BRPs exposed to be the main contributor.
At the same time, the banks withdraw any support for BR based on perceived incompetence. Both contribute to a fallback to liquidation as no PCF becomes available. Proper turnaround and rescue mostly depend on PCF.
The word catastrophe comes to mind. Liquidator mindset prevails.
This scenario has the largest probability, in my opinion.
Both scenarios 1 and 2 assume negative reputation based on the industry concerns mentioned above. Good futurists will, however, always explore the outer limits of the cone of uncertainty that opens up into the future.
I have developed two new scenarios called "outliers". One is the best case and the other a short-term scenario.
Scenario 3 - drowning anglers 25%
The first outlier scenario we offer is called "drowned angler", suggesting that rescue as a regime will not significantly contribute to save businesses, jobs or related industries as hoped for.
BRPs (anglers) drown in the mess they create as a result of large-scale incompetence. Only a few competent ones survive and the industry shrinks accordingly.
This scenario largely depends on poor skills leading to incompetence in the tasks to be executed. Seeking a better return for creditors is the easiest option for the incompetent and makes it difficult to be exposed for weak skills.
Scenario 4 - game changer 15%
This is the best case scenario (still an outlier) which we really hope for.
BRPs act competently, ethically and save many businesses by turning them around or rescuing them. In this scenario, we have a growing, competent BRP core that successfully drives BR.
There are minimum levels of process abuse and filings take place earlier, leading to overcoming "rotten egg effects". Based on their positive reputation, this success breeds success, courts act quickly and banks are willing.
Possibly a PCF industry develop,s following the US and UK models.
Flags (indicators) to monitor are:
• the number of rescues challenged in the court based on BRP competency and credibility;
• reports and allegations on abuse;
• early opposition by banks stating they will not vote for the plan anyway; and
• the ratio of continuation of business (turnaround) to return type rescues should be determined.
We have three sources for flags for all scenarios. The first one is the BRP and bank feedback obtained through scientific research.
The second is the outcome of the BR audits planned by CIPC to establish competency and who should be licensed or not in future.
Third are reports to CIPC about abuse and requests for investigation relevant to competence. Potentially courts will also contribute.
Barring any black swans, scenarios 1 and 2 cover 65% probability. So, don’t bet on a single future. Rather keep all four of our possible futures in mind, and watch the flags go up or down. How we make decisions will become very important.
• Here's how you can help: send your comments and insights on matters I may have overlooked, and share your stories either in favour of or against.
What are the options? Lets go there next time and give me your ideas.
- Fin24
*Dr Marius Pretorius is professor - business rescue, strategy and leadership at the Department of Business Management, University of Pretoria. Views expressed are his own.
