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Johannesburg - Business rescue in South Africa is still the most sought-after solution for financially distressed business, according to Deloitte, a leading global professional services firm.

The Deloitte Restructuring Survey 2014, released this week, found that although the South African economy is expected to continue stagnating under issues ranging from labour unrest to rising debt levels, and many businesses are expected to be forced into restructuring to address their challenges, there is a general lack of understanding about the role business rescue practitioners can play in helping an ailing company return to health.

Wanya du Preez, a senior manager for restructuring services at Deloitte, said the survey on business restructuring, the first of its kind in South Africa, involved respondents from legal, business rescue, corporate banking and debt teams at development finance institutions.

The restructuring of companies that are in financial distress in South Africa was introduced through the new Companies Act, although it has been in practice for a long time in other countries, especially in the US.

In South Africa, if a firm is in financial distress it can apply for a business rescue at the high court. If granted, a business rescue practitioner will be appointed to supervise the affairs of the company until it is back to strength or it is liquidated.

Du Preez said the advantages of business rescue included:

l The emphasis is on preserving jobs and the priority ranking of the interests of employees;

l The business rescue practitioner is guaranteed fees ahead of other creditors;

l SARS as a creditor is not automatically granted preferential status.

l Entities bringing funding to a distressed business are granted priority above other secured creditors who supported the business while it was financially viable.

Du Preez said: “The focus of the new South African legislation is ‘business friendly’. A company in distress hands over control of its destiny to a business rescue practitioner and not its creditors.

“A distressed business electing business rescue as a solution to its financial problems is given an opportunity to benefit from a creditor’s moratorium, while the emphasis is placed on returning the business to health.

“However, one of the key criteria for qualifying for protection is that it can be proved that the company has a fair chance of recovery.”

She said the number of companies that had entered into business rescue since its inception on May 1, 2011, was 1 415 according to a presentation last month by the Company Intellectual Property Commission (CIPC).

Du Preez said: “In terms of success rate, the CIPC quoted in the same presentation that the success rate is 50 percent. However, in reality the success rate is closer to 12 percent and 15 percent, as shown by the respondents of the Deloitte Restructuring Survey 2014.”

The survey found that manufacturing, retail, resources and construction are the most likely to suffer financial distress in the current environment, where 72 percent of respondents expect the economy to stagnate and result in increased company restructuring activity.

A prime cause of financial distress could also be an increasing interest rate, linked to increased indebtedness of business, Du Preez said.

Du Preez said: “Against a background of increasing pressure on management, many business leaders are facing the burdens of a lack of cash flow, meeting tax payments, pressures on gross margins and covering overdraft and loan obligations [at] banks – all signs of a distressed firm.”

She said sources of funding companies in distress were limited in South Africa. This contrasts strongly to markets like the US, where there are firms that specialise in finance for distressed companies.

In South Africa, only 17 percent of distressed firms expect distressed lending to be made available, according to the survey.

When pressed further on this, Du Preez said: “Bank rescue has been in the US for almost 20 years. Here, business rescue has [been] in existence for three years and has little buy-in. It will take a few years for our banks to be comfortable with it.”

She said the legislation required that once an application for business rescue had been filed, a practitioner had 25 working days to submit a plan of action for restoring a company’s profitably, which was subject to the approval of the majority of creditors.

This serves to emphasise that business rescue is an urgent process, even though leeway is granted by the courts on these reporting periods, depending on the size and complexity of a business.

“The role of the business rescue practitioner is to identify the key problems in the business and assess all financial restructuring options. These can include solutions ranging from shareholder-based plans, external investor funding, potential mergers and acquisitions and, if all else fails, liquidation,” Du Preez said.

The survey found that of those polled, 78 percent believed business rescue practitioners were not adequately skilled or qualified. She said it was essential for the business rescue industry and companies it assisted that these challenges were addressed.