Directors could make it easier for companies to be saved if they rescued financially troubled start ups earlier. Ryan Smith and Lara Kahn (partners at Webber Wentzel) agree with this view.
While business rescue proceedings are becoming less common, liquidations remain high. We believe South Africa’s businesses should consider business rescue in these difficult economic times more seriously.
Business rescue is often seen as a last resort. This approach has a fundamental problem: it is often too late to be used.
A prudent board will use the business rescue process as soon as possible, when there are first signs of financial distress. This is not the case, according to recent statistics.
There will be fewer business rescues in 2021
The Companies and Intellectual Property Commission published a report in February 2022 on the status and prospects of South Africa’s Business Rescue proceedings.
According to the CIPC “the purpose of the report is to provide a statistical overview of the status of business rescue proceedings within South Africa based on applications submitted to it. The report covers the period of 1 May 2011 (inception of Chapter 6 of the Companies Act, 2008) to 31 December 2021.”
This is the conclusion of a high-level review:
- There are currently 1 658 active rescues of businesses.
- 257 business rescues were initiated in 2021. This is a significantly lower number than previous years.
- 511 of the business rescues have been completed to date. 310 were declared null and 32 were left alone.
- 766 business rescues resulted in substantial implementation of a business rescue plan.
- 938 business rescues were canceled by notice of termination.
The numbers show that the number of rescues that resulted in substantial implementation of plans has fallen year-on-year. Contrast this with the 2021 statistics regarding liquidations.
Statistics SA released January 2022 statistics that showed approximately 932 companies had been placed into liquidation. Statistics SA’s latest liquidation numbers, published on 23 May 20,22, show that the total number has fallen by 12.7% between April 2021 and April 2022. Despite this improvement, liquidations remain high.
Statistics SA reports that there have been on average 150 liquidations per calendar month from January to April 2022, according to Statistics SA.
We believe that a major reason for these alarming figures is the inability of boards to act quickly and decisively at the first sign of financial distress.
Sometimes boards attempt to trade out of financial distress or restructure their businesses without consulting a restructuring expert. The end result is usually a rescue with little prospect of success or an instant liquidation.
Active use of business rescue
Ster Kinekor is an excellent example of how business rescue can help to ensure the survival and continuity of a business, and therefore create jobs.
Ster Kinekor, prior to Covid-19 was a cash-generative, well-run business. Covid-19 resulted in the company immediately losing income for a period of five months (during the initial ‘hard’ lockdown). Its income decreased as the lockdown protocols were eased, but they remained in effect, and operational costs continued to rise.
Despite management’s efforts to keep the business afloat through this period, which included taking on emergency Covid funding, the continuation of Covid-19 and the effect of various lockdowns (including the delay in content releases) resulted in the board of directors ultimately concluding that the company was financially distressed. In January 2021 the board declared the company bankrupt.
Ster Kinekor has had breathing space thanks to business rescue. As the movie exhibitor commenced business rescue when it was appropriate to do so, the appointed Business Rescue Practitioner – an expert in restructuring businesses – was able to continue trading in rescue and produce a business rescue plan which was ultimately approved by the overwhelming majority of creditors and shareholders.
If the board of Ster Kinekor had not acted quickly and decisively when it did, Ster Kinekor might have been in an unrescuable situation and possibly even in liquidation.
If people have a better appreciation and understanding of the potential benefits of a business rescue, we believe they can improve the numbers seen in 2021. We expect to see more successful rescues and less companies going into liquidation. However, boards must act quickly. Sometimes, this means putting aside your pride and prioritising the best interests for the business and all its stakeholders.