Business rescue – more pros than cons, but for whom?
July 21, 2021
Depending from whose perspective you are looking when it comes to the pros and cons of business rescue, all ‘affected persons’ have a vested interest in the success of the business rescue process. However, some parties may come out on the other side feeling a little hard done by, despite the many possible positives for the business and its creditors that are likely to occur.
Since the implementation of the Companies Act in 2011, business rescue has proven to be the more popular course of action over liquidation to assist or rehabilitate businesses in financial distress. I think this uptake can be attributed to affected parties and financial institutions becoming more familiar with its workings and methodology, and of course there is the (mostly) good press around successful outcomes that companies, large and small, have experienced over the years.
That said, success is subjective so what determines or defines a successful outcome and for whom – the staff, creditors, directors, the public, the company?
A creditor who receives more than he/she would have got through immediate liquidation may not view it as success as he/she will have been denied the opportunity of potentially holding those involved with the trade and affairs of the company personally liable had the company gone into liquidation.
The other side of the coin is that a company that continues to trade with its creditors, albeit having had them write off pre-business rescue debt, will have them remain customers for the future. As an example, let’s say I owe you R50 000 and I say I cannot pay – so I’m going into business rescue and out of BR you get R5 000 – that might not excite you but what may still be construed as success is that if I went into liquidation that would be the last R5 000 you get. If I continue to trade, however, then there is the prospect of going back to business as usual.
In this instance I would say take the haircut now so you can continue the relationship with each other going forward.
Very often there is a fallout between the directors who appoint a business rescue practitioner, thinking that that they are there to do their bidding. Well, you can think again – the business rescue practitioner (BRP) works for the company – not the shareholders and not the board. Be in no doubt, they are in control and are not put in place to do the bidding of any party. Furthermore, they have a legal right to make far-reaching decisions as to the way forward for the company, including the replacement of existing management, subject to relevant labour legislation, so be clear on your decision to bring a BRP onboard.
I would say that possibly the only unfavourable effect of business rescue proceedings would be the negative publicity and perceptions the company would receive, particularly from financial institutions and other trade creditors who may justifiably be more sceptical about extending credit to the company post business rescue without additional security.
Essentially business rescue provides breathing space for a company in distress, where creditors are unable proceed with or implement any legal proceedings pending the outcome of the business rescue or with the business rescue practitioner’s consent. This moratorium should not be misconstrued as suggesting that a company can retain possession of assets not lawfully in their possession. For instance, if a lease has been cancelled over a moveable asset such as a car or property, they cannot retain possession of the asset but must hand it back and any recovery action by such a creditor may not be barred by the moratorium against legal proceedings.
Even if a company is found to have passed the point of being successfully rescued, business rescue proceedings enable the appointed practitioner to meet the second possibility of business rescue, i.e. to obtain a better return for creditors than would be the case if the company were to be liquidated immediately – this could be achieved through a sale of assets or an orderly wind-down of operations.
In the current Covid environment it would be wise to consider business rescue as a structured, cost-efficient, effective method of returning your business to solvency that will be beneficial to all parties in some way or another, and ultimately achieve a better return than a liquidation.
In my opinion any outcome that avoids liquidation is a success.
PJ Veldhuizen, MD of boutique law firm Gillan & Veldhuizen Inc