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Understanding business rescue

Aug 28 2017 12:05

Cape Town - Business rescue has started to yield some positive results in South Africa, as the procedure has started to gain credibility in the country, according to Neil Miller, director and senior business rescue practitioner at Mazars Recovery and Restructuring.

He adds that many companies, however, still do not understand the process well enough. While great strides are being made in business rescue in SA, there are still many in the business sector who have misguided expectations or who misuse the process.

Not applying soon enough

“The vast majority of companies in distress do not apply for business rescue soon enough. One of the reasons for this is that business owners think that business rescue is an alternative to liquidation. The fact is that liquidation and business rescue are not interchangeable. By the time that liquidation is a likely outcome, the opportunity to apply business rescue has come and gone," says Miller.

"If a business owner sees that he will start having difficulty to pay creditors in the ensuing six months, he is obligated to consider whether or not to place the company in business rescue and, if not. It is a forward-looking test and one which should be applied when the company still has some capacity to restructure its affairs."

Delay tactic?

Justine Hoppé, senior legal counsel at Mazars Recovery and Restructuring, adds that many creditors view business rescue as a frustrating delay tactic employed by companies in order to stave off liquidation or litigation.

“While there are some exceptions, creditors are generally not allowed to take any legal action against a company in business rescue. It certainly is a fact that many businesses and unscrupulous business rescue practitioners have abused the process as a way to buy time," says Hoppé.

"It is also true that when used inappropriately, business rescue often drags out the process, which inevitably ends up in liquidation, leaving creditors with less money than a simple liquidation would have.”

READ: Tougher stance towards business rescue practitioners

What to expect

According to Miller, it is vital that companies know exactly what to expect when they apply for business rescue.

“The very first thing that any reputable business rescue professional has to do is to manage the business owner’s expectations,” he says.

Business rescue plans can, on occasion achieve the complete turnaround of a company.

“However, more often than not, more value is achieved from the company through a sale or structured wind down which results in  a better outcome for affected persons, particularly the employees” he adds.

Retaining control

Hoppé explains that directors and company owners often expect to retain control of their companies during business rescue.

“Directors and owners need to be aware that, when they enter business rescue, they relinquish control of their companies. The process is designed with primarily the interests of employees, creditors and shareholders in mind," he says.

"There are instances where company owners have partnered with business rescue professionals whom they are able to dictate to, but these arrangements are unscrupulous and usually end with the business rescue failing completely.”

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