Business Rescue during the COVID-19 pandemic – how to make it work Quarter 1 2021

By KYLENE WEYERS, Published in COVID-19 Company Law

South Africa, and the world at large, is being rocked by the COVID-19 pandemic. One of the hardest hitting consequences of COVID-19 is its impact on businesses throughout the country. COVID-19 is causing severe financial distress for many businesses in South Africa, both big and small, and almost no sector remains untouched.

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Therefore, in addition to the pandemic's impact on the health and wellbeing of people, and their day-to-day lives, the pandemic is wreaking havoc on the South African economy. 2020 saw many companies file for business rescue or liquidation, and with the ongoing lockdowns and restrictions, we can expect another wave in 2021.

This article discusses when business rescue, as a mechanism, works for companies that require saving, and when it doesn't.

Business rescue vs liquidation

Business rescue is defined as " proceedings to facilitate the rehabilitation of a company that is financially distressed." This is done through an appointed business rescue practitioner (BRP) who will prepare and implement a business rescue plan.

When applied correctly, and in the right circumstances, business rescue can successfully save a business. By 'save' the business, s128 of the Companies Act (71 of 2008) envisages that either the company will continue to operate on a solvent basis or, at the very least, that business rescue will yield a better return for the company's creditors than an immediate liquidation.

Where a company's financial position is so dire that it is no longer able to continue trading, it must be liquidated. The purpose of liquidation is to wind up the company's affairs by selling its assets, either by way of private treaty or public auction, to pay the costs of its winding up and its creditors.

There is no magic formula to apply when deciding whether a company should be placed in business rescue or go into liquidation. As restructuring professionals, we look at each company on a case-by-case basis, and analyse its financial situation to determine the appropriate way forward.

Under which circumstances is business rescue more likely to work, and which elements need to be present for business rescue to be successful?

Business Rescue is more likely to work under the following circumstances:

1) It is not left too late!

  • Far too many businesses struggle on for too long, and leave nothing to save. Timely intervention is absolutely essential.
  • Many struggling companies are in complete denial and won't acknowledge that either a complete restructuring of the business or a formal business rescue process may be the only viable option. For companies that are in denial, we first and foremost urge them to take a reality check, to accept that they are already in financial distress, and that something urgently needs to be done.
  • It is obviously a very tough reality for some directors and shareholders to face, because they have invested so much time, money and effort into their business over the years, and now they have to make the difficult decision to possibly place the company in rescue. However, for those directors who take action sooner rather than later, business rescue is more likely to work, and the business will be saved in the long-term.
  • It makes a big difference when a company seeks qualified help as soon as possible. Directors should consult with specialists to analyse their financial position and advise whether they should consider a more informal restructuring of the business first, or whether the company is a candidate for a formal business rescue (or even liquidation).

2) It enjoys the support of the majority of creditors.

  • Business rescue is a creditor-driven process. If the majority of creditors are not on board, then a company may be wasting its time in pursuing business rescue. It is of utmost importance that a company's larger creditors, like banks and major suppliers, are on board.
  • In many cases, creditors will assist if they sense that the debtor company is being open and transparent, is willing to pay, has constructive proposals and has a better chance of recovery if a business rescue plan is implemented (as opposed to the company being liquidated).
  • It is very important for a financially distressed company to have an open and honest discussion with its suppliers and creditors, to assess whether they can work out an agreement on the best way forward. The lines of communication need to be kept open. In practice, if a company (or a BRP on behalf of the company) proactively approaches the major creditors with a sound plan to improve the company's financial situation, to repay its indebtedness, creditors are more likely to support the process.

3) There is a real plan to save the business or, at least, viable components of that business.

  • A company may only file for business rescue if there is a "reasonable prospect" of the company being saved.
  • The question of what a reasonable prospect entails has been considered widely by our courts since the inception of the business rescue provisions. The courts have provided a guideline and indicated that there has to be a prospect, based on reasonable grounds, and on concrete and objectively ascertainable facts.
  • The most successful business rescues happen when the stakeholders sit down in advance and plan the rescue before actually initiating the formalities – this is the so-called "pre-pack".

4) The company's books and records are up to date.

  • For companies that have their books and records up to date, it is a lot easier and quicker to determine the company's financial position and to timeously work out the best plan to restructure its affairs.
  • When a company's books and records are up to date, a BRP is more quickly able to determine what the company's assets, liabilities and monthly expenses are, who the creditors are and what is owing to the creditors, who the debtors of the company are and what is owing to the company etc.

5) The business is able to run, even if in reduced form, during business rescue.

  • Companies in business rescue do generally need to down-scale their business operations, but there needs to be a business to run.
  • This of course requires money. The company will need to have existing cash flow or reserves to help the company trade. Business rescues are a lot more successful when the company or BRP is able to increase cash flow by cutting costs and reducing unnecessary spending. This may mean, for example, disposing of non-key assets, letting go of staff, cutting the marketing spend or cutting down on general operating costs.
  • It is also important for a company to concentrate its efforts on the business's best customers. Focusing on the company's most reliable and profitable customers is a very effective method of improving the company's cash-flow.
  • One of the most crucial aspects of a business rescue's success is the company's ability to obtain Post-Commencement Finance. It will not be possible for many companies to be saved without it.
  • From a creditor's perspective, even if the business cannot be saved, assets can still be realised more optimally, economically and efficiently in a business rescue than would be the case in liquidation – so, regardless, it is a better route to follow, since creditors control it and can drive the process.

Business rescue is more likely to work for a company if many of the elements discussed in the article are present. If these elements are not present and the company files for rescue, it may just become a costly and stressful waiting room for insolvency.

Weyers is a Senior Associate with Cliffe Dekker Hofmeyr. rgad