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Why directors’ attachment hampers Business Rescue

Johannesburg, 9 April 2013 - One of the most innovative features of South African company law is the inclusion of Chapter 6 of the Companies Act 71 of 2008, focussing on Business Rescue.

Business Rescue is a substantively non-judicial, commercial process which seeks the ultimate rescue of a company in financial distress by maximising the likelihood of the company staying solvent. Failing this, Business Rescue seeks a better return for creditors and/or shareholders than would result from the immediate liquidation of the company. But having come into effect in May 2011, it is probably worth asking whether Business Rescue is working as intended.

Recent statistics are quite startling, with approximately 12% - 15% of companies in Business Rescue successfully recuperating from financial distress. According to the CIPC at present only approximately 100 out of the 840 companies that have filed for Business Rescue have successfully turned around.

This suggests that the majority of companies entering Business Rescue do not have realistic and deliverable long-term business plans and cannot produce the cash flows that were initially projected when Business Rescue was applied for.

A contributing factor to this is the general assumption that Business Rescue constitutes a predominantly legal process. In reality, the essence of a successful turnaround ultimately depends on a company’s ability to generate cash, thereby enabling it to exit Business Rescue and become a self-sustaining business.

The importance of seeking legal advice when considering filing for Business Rescue is indisputable. However, there appears to be insufficient focus given to challenging the financial business plan which underpins the entire decision-making process.

This is especially relevant given that the plan has generally been prepared by the Board of directors, and employees of the company, all of whom have a vested interest and an emotional attachment to assuming that the business can be saved. This typically results in unrealistic projections of what would be required to save the business.

In 2012, the number of voluntary liquidations fell by 24.5% relative to 2011, while the number of compulsory liquidations also fell by 16.8% in the same period. This gives some credence to the interpretation that companies are benefiting from Business Rescue and associated processes.

There is a far greater role for independent financial specialists to play in providing an objective and realistic view on the business plan, prior to filing for Business Rescue. This independent viewpoint will enable both the lawyers and the Board of directors to take a clear view on the integrity of the business plan and whether Business Rescue is a viable option.

A good financial advisor will also highlight other potential mitigating actions that could be pursued, such as the sale of a division or asset and cost saving exercises that may not previously have been considered, and could even avoid the need for Business Rescue entirely.

Seeking this sort of advice can only improve the success rate of Business Rescue in South Africa by excluding those companies which have followed the process as a last ditch attempt but are ultimately doomed. 

It is becoming increasingly evident that if you don’t adequately prepare for financial distress and Business Rescue, chances are you probably won’t survive it.

Business Rescue needs to be approached as a financial and technical, as well as a legal process. That may help improve its chances of success.

Wilson and du Preez are with the Restructuring Services team at Deloitte.

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