Business

Business rescue warning

Business rescue can be a very valuable tool for distressed companies. However, some challenges associated with the process could end up being value-destructive.

This was explained by Nastascha Harduth, CDH’s Director of Dispute Resolution and Head of the Business Rescue, Restructuring & Insolvency sector.

Business rescue is a legal process aimed at aiding a company in financial distress, by allowing it to reorganise and restructure its affairs, assets, equity, debts, property and liabilities.

According to the Companies and Intellectual Property Commission’s (CIPC) latest annual report, the business rescue proceedings statistics illustrate that the number of active business rescue proceeding cases has increased between 2011/12 and 2022/23. 

“However, the grand total of business rescue proceeding cases has come down between 2016/17 and 2022/23,” CIPC said in the report. 

The number of active business rescue cases has continued to increase almost every year. For the 2022/23 year, there were 249 active business rescue proceedings, up from 211 in the previous year. 

Harduth explained some of the challenges involved in business rescue proceedings.

“For example, although the tariff of fees which business rescue practitioners may charge is legislated, as the adage goes – you get what you pay for,” she said.

Those practitioners who may possess the skills to rescue a financially distressed company will ask for increased fees. 

She added, “and rightfully so, as the tariff is outdated by more than a decade.”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 end in sight, she said. 

“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, where practitioners lack the necessary experience and qualifications, the rescue process may suffer.”

Harduth explained that despite these challenges, business rescue remains a valuable tool for distressed companies, as it can help to prevent liquidation and job losses.

“It can be a useful tool through which, for example, a struggling company that holds viable businesses can attract investors with its liabilities being significantly limited,” she said. 

“It can also be a useful tool through which a distressed company can attain a capital injection through an equity raise while renegotiating its onerous contracts, and it is especially useful when a company needs breathing space from paying its pre-business rescue debts.” 

“Most striking is that a business rescue plan can be forced on dissenting creditors, no matter their class. How business rescue is used as a restructuring tool really depends on the practitioners and their advisors’ insight and creativity.”

According to Harduth, there is nothing wrong with business rescue, except that it is almost always initiated too late. Early intervention can overcome all of its current challenges.

That is, the sooner along the distress curve 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.

As a result, ‘good’ practitioners will be more inclined to take on the mandate. The process will also be cheaper and more likely to succeed. 

Harduth listed some typical signs which affected persons, who do not ordinarily have access to the company’s financial affairs, should look out for in order to act fast –

  • 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
CIPC Annual Report 2022/2023, Table B.5: Status of Business Rescue Proceedings

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