From crisis to opportunity

This precarious balance of hope and hardship underscores the urgent need to create what could be termed a ‘second chance economy’. In such an economy, distressed businesses are supported to recover and contribute to growth, rather than collapsing under the weight of poor leadership and systemic barriers. Achieving this vision requires two critical shifts; 1) proactive management of financial distress by businesses, and 2) a reimagined insolvency regime that aligns with the South Africa’s economic realities.

The cost of late intervention

In South Africa, financial distress often becomes a crisis long before stakeholders take action. The Deloitte Restructuring Survey 2024 (restructuring survey) reveals that companies frequently delay addressing distress until late-stage triggers, such as covenant breaches or missed payments, have already occurred. By then, the scope for recovery narrows sharply, and the social and economic consequences can be far-reaching.

The MTBPS and the restructuring survey identify sectors such as agriculture, retail, and manufacturing as particularly vulnerable. Agriculture, for instance, faces escalating input costs, climate shocks, and disease outbreaks, such as the recent avian flu crisis, which has disrupted food production and fuelled inflation. Meanwhile, logistics inefficiencies at key ports continue to hinder manufacturing and exports, undermining competitiveness and growth.

These challenges underscore the broader cost of delayed intervention. Retail and agriculture are not just economic contributors; they are essential to food security and consumer stability. Similarly, manufacturing and logistics are pillars of trade and industrialisation. Proactively managing distress in these sectors is not merely a corporate concern—it is a national imperative for safeguarding jobs and supporting economic resilience.

Managing distress in the current economic environment

For businesses navigating this complex landscape, the ability to act early and decisively is paramount. The restructuring survey highlights several key strategies that companies can adopt:

1. Early warning systems: Boards must prioritise liquidity monitoring, covenant stress testing, and scenario planning to identify distress before it escalates into a crisis.
2. Stakeholder engagement: Early, transparent communication with creditors, suppliers, and employees can build trust as well as secure the support needed to stabilise operations.
3. Operational restructuring: The most effective tools for recovery include cost reduction, cash flow optimisation, and working capital improvements. Companies must act swiftly to streamline operations, divest non-core assets, and focus on efficiency.
4. Governance reforms: Weak governance is a persistent internal driver of distress. Strengthening board oversight and appointing experienced turnaround directors when signs of distress appear can enhance decision making during periods of uncertainty.

These measures provide companies with the best chance of navigating financial difficulties. However, they are not sufficient in isolation. South Africa’s insolvency framework must also evolve to provide a supportive environment for recovery, enabling businesses to rebuild and contribute to economic growth.

Reimagining the insolvency regime for a second chance economy

South Africa’s insolvency regime, centred on the Insolvency Act and Chapter 6 of the Companies Act, has potential but unnecessary complexities and blind spots exist that make corporate rescue (rather than controlled wind-downs) far less prevalent. The restructuring survey identifies three critical areas for reform:

1. Post-Commencement Financing (PCF) protections: Enhanced legal safeguards for lenders wanting to fund companies in business rescue via PCF would encourage greater access to the liquidity distressed companies need to restructure effectively. Without such protections, businesses face liquidity constraints that often lead to premature liquidation.
2. Specialised insolvency courts: Prolonged judicial delays undermine the effectiveness of business rescue. Establishing dedicated insolvency courts, staffed with experienced judges, would expedite resolutions and reduce costs, enabling businesses to recover more quickly.
3. A unified Insolvency Act: South Africa’s outdated insolvency laws, last overhauled in 1936, need modernisation. A consolidated framework would create clarity and predictability for stakeholders, making restructuring processes more efficient and collaborative.

Such reforms would not only improve outcomes for distressed companies but also bolster confidence among creditors and investors. This, in turn, would preserve jobs, stabilise critical industries, and contribute to long-term economic growth.

A resilient economic future

South Africa’s economic challenges are substantial, but so too are the opportunities for transformation. By combining proactive corporate intervention with a reimagined insolvency regime, the country can create the conditions for a second chance economy. This is an economy where distressed businesses are not discarded, but given the tools to recover, adapt, and thrive.

The MTBPS’ emphasis on structural reform and private-sector collaboration provides a timely backdrop for these changes. With agriculture, retail, and manufacturing at the heart of South Africa’s economic engine, preserving these sectors is essential for achieving the modest growth targets outlined in the budget.

What South Africa needs now is action. Policymakers, business leaders, and restructuring professionals must collaborate to drive these changes, recognising that the path to economic resilience begins by giving businesses a second chance. If seized, this moment of opportunity could mark the turning point in South Africa’s journey toward inclusive and sustainable growth.