Business rescue is a corporate reorganisation process introduced in South Africa on 1 May 2011 under Chapter 6 of the Companies Act 71 of 2008.
The process provides financially distressed companies with temporary supervision of their affairs, business and assets or properties.
To continue with business rescue, proof of the ability to deliver a better return than in liquidation (BRTiL) must be provided and a compromise must be reached between the financially distressed company and its creditors.
A total of 1 398 legal business rescue cases have been filed in South Africa since the inception of the new Companies Act just over three years ago, according to the regulatory body, the Companies and Intellectual Property Commission (CIPC).
This translates to 400 to 450 filings a year and a projected total of 10 865 jobs saved in total.
Considering that each person holding a job on average supports four to six people, business rescue affected at least 40 000 citizens.
Even though JSE-listed companies such as African Bank Investments (Abil), Ellerines, Evraz Highveld Steel & Vanadium and more recently Glencore’s Optimum Colliery tend to get much of the spotlight when they file for rescue, many private companies use this rehabilitation process in an attempt to remedy their financal situations.
The industry’s status
Despite successful outcomes to a number of cases, difficulties within the business rescue industry prompted the CIPC to commission the University of Pretoria’s (UP’s) Department of Business Management to conduct in-depth research on the progress of business rescue processes.
This resulted in the June 2015 release of the Business Rescue Status Quo report – a research paper prepared by Marius Pretorius, professor in strategy, leadership and turnaround at UP.
“In order to file for business rescue, a company must be under financial distress and must have a reasonable prospect to come out of that distress,” says Pretorius.
“The rule is clear: if that reasonable prospect does not exist, the Act will tell the company to file for liquidation. The Act states that if the business rescue practitioner (BRP) comes to realise that there is no reasonable prospect, they must file for liquidation.”
Says CIPC communication specialist Tshiamo Zebediela: “It was deemed prudent to obtain information on business rescue since its inception in order to inform the CIPC and Specialist Committee of Company Law of its weaknesses, failures, successes and challenges from various perspectives, with the view to make it more efficient, workable and successful.”
The law commission wanted to understand the status of the process, following an influx of court cases around the issue, and determine what worked and what hadn’t, says Pretorius.
SA has a 9.4% business rescue success rate, a figure Zebediela welcomes given success rates in other countries.
“What is a successful rescue? If I sell half of the business, it’s good, people keep their jobs, but the business continues in the name of another business. Is that successful? Success is in the eye of the beholder,” explains Pretorius.
“If you ask the shareholders they will have their view; creditors will have another, while employees that keep their jobs will view it as successful. It depends on who you ask.”
Conflict between creditors and BRPs lead to the CIPC’s series of workshops aimed at addressing concerns.
Creditors blame BRPs for their inability to determine reasonable prospect and attempting to pursue BRiL when a reasonable prospect for business rescue success was not evident.
Banks, on the other hand, are blamed for preferring liquidation since it mostly secures the return of the money owed to them.
Is business rescue a stalling tactic for avoiding liquidation?
Pretorius believes it’s possible: “There are concerns regarding the abuse of business rescue and unfortunately there have been such cases. Good BRPs wouldn’t engage in that.”
The cost of business rescue
Business rescue is perceived as costly and indeed, cost has been pinpointed as one of the reasons why companies under business rescue are eventually liquidated.
Pretorius’s research shows that creditors (mostly banks) believe BRP fees are too high. BRPs disagree – they are of the opinion that the fee structure prescribed in the Act is too low.
Research shows that tariffs prescribed in the Act were determined before 2008 and did not make provision for basic inflationary effects.
This is an excerpt from an article that originally appeared in the 20 August 2015 edition of finweek. Buy and download the magazine here.