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Covid Advisory: Business Rescue can help you survive the recession
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Covid Advisory: Business Rescue can help you survive the recession
08 April 2020
 
Did you know that business rescue proceedings can be used as a strategic tool to assist your business during these challenging financial times?

As we all know, the COVID-19 pandemic has and will continue to have a significant impact globally, with national lockdowns following in many countries. These lockdowns and the uncertainty created by the pandemic has wrought havoc across financial markets and is acting as a catalyst for a global recession. All indications are that the world is facing the deepest recession and most challenging health and economic crisis in 100 years. These negative economic effects are also keenly felt in South Africa, which is currently under a three-week (and possibly longer) national lockdown. Apart from the demand destruction and disruption of supply caused by the pandemic across the globe, South Africa will be particularly hard-hit as it was already in a technical recession at the start of 2020, its economy having contracted in the last two quarters of 2019.

Due to these circumstances many otherwise excellent and well run businesses are, or will soon be, either fighting for survival, especially from a cashflow perspective, or have simply reached a point where the shareholders are reluctant to further deplete their own vital cash resources. Either way, it stands to reason that business owners must consider options to ensure that their businesses survive and make it through this unprecedented time without the loss of all their cash and other reserves built up, in many instances, over a lifetime or more.

Current survival planning tactics considered by businesses range from staff retrenchments, salary cuts, expense reduction and mechanisms for continued income generation, to options for obtaining financial assistance. However, one tool that is generally overlooked, discounted or too hastily dismissed are the tools provided for in terms of the Companies Act 71 of 2008 and that were designed specifically for these exact circumstances. Such include the option of companies engaging business recue proceedings, which is an efficient tool to see companies through difficult times. It must be remembered that this tool is available even where liquidation was never a consideration. Business rescue can be used to simply limit the destruction of further resources currently located outside the company, or the incurrence of more debt in order to allow the company to get through the crisis.

The business rescue tool introduced by the Companies Act aims to assist companies in financial distress for whatsoever reason. Such businesses are afforded, using this mechanism, an opportunity to reorganise and restructure, but more importantly, to come to satisfactory arrangements with creditors (or any person or entity to whom contractual and other obligations are due) with the aim of ensuring that the business successfully navigates through the storm without depleting all cash outside the business in the shareholders’ hands and without the business drowning in further debt to finance the times in distress. Although the term ‘business rescue’ may be associated as a precursor to liquidation, it is in fact a simple and effective tool, not requiring any court proceedings, and forcing creditors to the table, thereby enabling the business to navigate through and survive the storm.

It could even be said that the business rescue provisions were almost tailored for Covid-19 and can function by analogy as the ventilator for businesses to recover from the flue whilst getting the business out of the ICU as soon as possible.

Business rescue proceedings aim to facilitate the rehabilitation of a company by providing for the following:

  • The temporary supervision of the company, and the management of its affairs, business and property, by a specialist business rescue practitioner.
  • A temporary suspension of the rights of creditors and other claimants against the company and its property.
  • The development and implementation of a business rescue plan which facilitates the restructuring of the company’s business, property, debt, other liabilities and equity, in order to ensure that the company makes its through its time of financial distress.
The question arises as to who is a business rescue practitioner? This can be a person or company that is appointed to oversee a distressed company during business rescue and draw up a business rescue plan for the company, in line with its unique circumstances.

Engaging in business rescue proceedings has a significant impact on the creditors, shareholders, employees and third-party financial institutions involved with a company. It is therefore essential that a business rescue practitioner with sufficient qualifications, knowledge and experience is appointed to assist the company in this regard.

A further question that arises, is when will a company be eligible to commence with business rescue proceedings? The primary consideration in this regard is whether or not the company is financially distressed. A company will be financially distressed if it appears to be reasonably – 

  • unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months (namely a state of commercial insolvency); or
  • likely that the company will become insolvent within the immediately ensuing six months (namely a state of factual insolvency).
Ideally, a company should engage with a business rescue specialist with a view to commence with business rescue proceedings as soon as possible after discovering that the company will unlikely be able to pay all of its debts as they become due and payable within the immediately ensuing six months. The sooner business rescue is commenced with, the greater the chances of success.

It is important to keep in mind that business rescue is not designed for insolvent companies or those that have no choice but to close their doors. It is specifically designed for businesses that are going through a difficult time financially, in order to assist those businesses to stay in business whilst weathering the storm, and without the destruction of all resources of shareholders held outside the company which is temporarily in distress.

Although we have used our best efforts to ensure that all information contained in this communication is accurate as at the date hereof, we cannot guarantee the accuracy thereof and recommend verification thereof before use.
 
 
 
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