Business rescue should not be last resort

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"According to the latest Companies and Intellectual Property Commission (CIPC) survey, 55% of business rescues have achieved a positive result," says Neill Hobbs, registered senior business rescue practitioner and director of Hobbs Sinclair in Cape Town.
Currently more than 1 000 companies per month are being placed into liquidation, compared to only 45 applying for business rescue. This indicates that the purpose of this legislation has not been understood.

Moratorium on legal action

Generally, post commencement funding is critical to the process as, although there is a moratorium on legal action against the company under business rescue, salaries, rentals and suppliers all have to be paid. Fortunately, financiers have responded to this opportunity and there are funders willing to pre-assess and commit capital to companies contemplating business rescue. In this regard, Hobbs Sinclair has been successful in raising some R75m of capital that has been invested via the business rescue process.

As the industry matures it is anticipated that more business leaders will see business rescue as a prudent opportunity to restructure and recapitalise their companies in today's severe market conditions. "It is also an alternative and prudent mechanism to use in mergers and acquisitions, as any contingent and/or unrecorded liabilities are expunged through the process," Hobbs continues.

Job preservation is a major benefit of the business rescue initiative. In the relatively small number of projects Hobbs Sinclair has been involved in, in excess of 750 jobs have been saved. The provisions of the New Companies Act make allowance for employees and Trade Unions to apply to place the companies they work for into business rescue. Surprisingly, there has been virtually no use of this opportunity by labour representatives.

SARS officials

As with any new legislation, it requires some time for the major corporations and institutions to adapt their processes to accommodate the new provisions. SARS have responded very appropriately and there are now designated and well informed business rescue officials in all SARS offices. The banks are also coming to terms with the practicalities of the implementation of the new law. Banks are well experienced in business turnaround interventions and have much to contribute to the rehabilitation of distressed companies. Early engagement with the relevant banks and a good working relationship between the bank and the practitioner is absolutely essential.

As well as the business rescue provisions, the New Companies Act places stringent obligations on directors and any other persons knowingly involved in managing and operating Companies. "It is in this respect," says Hobbs, "that the new legislation is much more precise. The repercussions of trading under insolvent circumstances, under the new legislation, are extremely harsh for the directors, owners, shareholders or even third parties associated with the company. Now, these persons will be held personally responsible for the liabilities of the company and their personal assets can be forfeited to help cover the debts incurred by the company."

Directors, therefore, have a duty to put their company through a solvency/liquidity test and, if the warning signs are there, to inform stakeholders, liquidate or opt for business rescue."If the company you represent is unlikely to meet is financial commitments in the foreseeable future you must immediately apply for business rescue or you, as an interested or associated person involved with the business, could find yourself carrying the burden for its failures and debts."

Work with existing staff

"In practice, we have found that in most cases it is more effective and definitely less expensive to work with existing management and staff of a company under business rescue. Their knowledge of the business is invaluable, and we need to have staff and resources at our disposal to draw on their considerable intellectual capital, and to carry out certain activities previously handled by the company."

The Companies Act expects practitioners to produce a comprehensive plan showing a route by which the company can be made viable, within three months. "The Department's three month requirement is in most cases too short. Our experience is that six to twelve months is usually needed, to be effective," says Hobbs.

A business rescue plan may include restructuring the company's business affairs, equity, property, debt and other liabilities, in a manner that maximises the likelihood of continued existence on a solvent basis. If this is not possible, the rescue plan may envisage a greater return for the company's creditors or shareholders than would result from the immediate liquidation of the company.