By Piers Marsden
With liquidations placing considerable strain on both financial institutions and the national economy, there is a worldwide trend towards rescues, turnarounds and workouts. Piers Marsden talks to Accountancy SA about helping ailing businesses in South Africa.
What are some of the most common reasons for business failures in South Africa?
Typically, businesses in South Africa break down because of a shortage of working capital, mismanagement or fraud.
How severe does the financial distress need to be in order for a business to qualify for business rescue?
The business needs to look unlikely to be able to pay its debts in the next six months, which is termed ‘commercial insolvency’, or be likely to go actually insolvent within six months, for instance when liabilities exceed assets, which is called factual insolvency. Importantly though, it’s not for businesses that are terminal and need to be put into liquidation. Business rescue is for good businesses that have fallen on hard times or, as the new Companies Act says, ‘businesses that have a reasonable prospect of success’.
What does business rescue actually mean?
Technically, business rescue is the institution of proceedings, in terms of chapter 6 of the new Companies Act, to facilitate the rehabilitation of a company that is financially distressed. In plain English, it’s about allowing a troubled business to ‘press pause’ long enough for an independent person to take a look at its situation and develop a way forward that balances the rights and interests of all relevant stakeholders.
That might mean restoring solvency and liquidity or, in a worst case scenario, winding up the business for a result that is better for the shareholders and creditors than in the case of liquidation.
How does the process work?
So times are tough. Bullets are flying. Your customers need stock, your staff are panicking. In that sort of context, it’s neither useful nor sensible to expend all of your energy fighting off antagonistic creditors. You need to focus on getting your business back on its feet, and that’s what the pause button, or more technically, the ‘temporary moratorium’ allows for. Basically, during a business rescue, the business is protected from legal enforcement action by creditors for a limited period of time.
And that’s where the business rescue practitioner comes in.
Right. During this breathing period, a technically and commercially competent, independent person takes formal control of the business to identify the causes of the financial distress, uncover solutions and opportunities, and then formulate and execute the restructuring plan. Having a practitioner on board means that the incumbent management, usually under immense pressure, can focus on day-to-day operational issues. It also means that the restructuring process is independently managed and streamlined, minimising the costs and stresses of restructuring.
What skills does the business rescue practitioner need to have?
The obvious ones are the technical competencies: the Companies Act stipulates that a practitioner has to be in good standing in a legal, accounting or business management profession. Beyond that though, you need to have practical business sense, because you need to be able to manage liquidity, anticipate risks and look out for business opportunities.
Perhaps even more importantly, you need emotional intelligence (EQ), because you’ll be managing competing priorities among stakeholders during stressed times. Importantly, you’ll also need to be able to communicate the right messages to the right stakeholders, all of whom have different needs. And then you have to be able to execute. The business rescue practitioner needs to be results-oriented, pragmatic and able to implement rapid and often radical changes in a dynamic and often highly-charged environment.
The pressing question is, does business rescue work?
In the US and Canada, success rates are roughly two out of three for plan approval, with a doubling of the success rate in the last decade, but that’s partly because they are very particular about who qualifies for business rescue. And that’s really what it comes down to: business viability. With a viable business and a skilled practitioner, business rescue is generally very successful.
Can you share a success story with us?
We worked with a medical supply company that had been in business for 30 years. Its biggest customer stopped paying it and it was in the process of refurbishing a factory, so it was essentially operating on one cylinder. It was a good business, but it had cash flow issues,w and needed help. We went in as the business rescue practitioners and because we have great relationships with the banks, we secured funding to pay running costs while we worked on a plan of action. Within 60 days, we presented the plan to shareholders and creditors.
What might a plan like that entail?
It’s essentially a plan to give all stakeholders the best deal possible. In liquidation, secured creditors get paid and the rest often get nothing. In business rescue, we try to split the pain amongst all three role players – shareholders, secured creditors and trade creditors.
In this case, we got the creditors ten times more than they would have achieved in a liquidation. Trade creditors got bumped to the front of the queue, and while they had to take a haircut on their debt, they still got a reasonable deal.
Who makes the final call on the plan of action you propose?
Creditors do. We presented the plan to 98% of creditors and 100% of those present voted in favour of it. Technically, you need 75% approval and you can cram down on dissenting creditors. If you affect the rights of shareholders, they would need to vote in addition to the creditors’ vote.
What made this case a success?
First and foremost, it was a good business going through a tough time. In this instance, the shareholders contributed to the process and agreed to not draw any fees for three years. Everyone came to the party and that’s why it worked so seamlessly. We unfortunately had to retrench 25 of the 150 employees, but they got a full retrenchment package and we saved 125 jobs by saving the business.
So business rescue is good for job preservation?
It should be. Aside from the strain liquidations place on banks and our economy, on a micro-level, failed businesses mean job losses – and South Africa can’t afford that. The good news is that we’re starting to move to a more debtor-friendly environment. That’s good for business, which is good for jobs, which is good for the country. The new Companies Act is designed to invigorate businesses, to save jobs and to give businesses in trouble a second chance at success.
Perhaps in closing it can be summarised the key success factors for business rescue.
To my mind, there are three primary success factors:
- The ability to procure post-commencement finance.
- Mature and responsible creditors.
- An independent practitioner skilled enough to craft a plan that is approved by the requisite majority.
Piers Marsden CA(SA) is a Business Rescue Practitioner at Matuson Associates.
This article was originally published in the December 2012/January 2013 issue of ASA.