JOHANNESBURG - Confidence in the business rescue process has increased over the past six years since its introduction into the Companies Act.

The main framework for business rescue in the legislation was sound and sufficient to put a successful rescue together, said Dr Eric Levenstein, a director at Werksmans Attorneys. Over the years the country has seen major successes, but it has also seen companies going into liquidation because business rescue failed. The latest example has been the retail outlet Stuttafords, which closed doors after trading for more than 140 years.

Business rescue is an essential part of restructuring businesses which run into financial problems. It allows the company to appoint a business rescue practitioner (a third party independent supervisor) to take control of the company’s affairs. The aim is to give the company a “fresh start” by being “rescued” and where it is given a second chance to trade on a profitable basis into the future. Statistics shows that liquidations were down 30.8% in July this year compared to the same time last year. In June this year 154 companies went into liquidations compared to 128 in July, representing a decrease of more than 16%.

This was not to say that business rescue was the reason, but it could be that there were far more informal restructurings taking place before formal business rescue proceedings commenced, said Levenstein.

“Financial institutions are far more supportive if the struggling company restructures informally before it enters the formal process of business rescue,” he added. The restructuring is given effect to in a business rescue plan. There is an imposed moratorium (breathing space) on all claims against the company while it is in business rescue.

“Prior to 2011, financially distressed companies had no alternative but to go into liquidation. This had massive consequences for the company as liquidation brought an end to the company’s life, brought an end to the company’s business and which terminated the jobs of all of the company’s employees.” The critical element for success is to start the process early. However, especially in privately owned companies, the directors are in many instances too emotionally involved.

“They do not look coldly at the business and answer honestly to the question whether they will be able to meet their financial obligations in the next six months,” Levenstein said. “It is a forward-looking test and if the answer is no, that is the moment for the company to start the process. Many directors, however, wait too long, and once the process has been left too late, too much value has been lost.” Faith Ngwenya, a technical executive at the South African Institute of Professional Accountants, said statistics provided by the Companies and Intellectual Property Commission (CIPC) demonstrate that in 78percent of the cases it took more than six months for the “substantial implementation” of business rescue proceedings.

She said during a business rescue process creditors were protected and the company was allowed to operate under the supervision of a business rescue practitioner. However, lengthy delays in the process increased the risk of additional liabilities for the company and the potential of greater financial losses for creditors.

According to CIPC statistics the industries with the greatest number of business rescue proceedings include retail, information and communication, and construction. Ngwenya said courts needed specialist skills to deal with the complexities of the Companies Act and the business rescue process. Instances where business rescue proceedings are initiated through court applications were limited, but it appears that the process in the courts can be lengthy.

“Business rescue is fairly new in South Africa, and although one can argue that a judge or a magistrate will use his professional judgment to take the correct decision, one has to acknowledge that these are not cases they deal with on a daily basis,” says Ngwenya. She believed there was a need for specialist courts, dealing exclusively with business rescue. Levenstein was not convinced that the courts were the problem.

He said in 90percent of the cases the process was initiated by way of a board resolution and not through the courts. Not all companies could be saved. However, they end up in business rescue because some practitioners were able to persuade the board to follow that route. “There has been no proper analysis of the rescue plan, and there is no realistic prospect of the company trading itself out of its financially distressed position.”

He said the “failure” of business rescue can in some instances be attributed to boards and companies getting the wrong advise from practitioners or lawyers. The South African Restructuring and Insolvency Association has made submissions to the Department of Trade and Industry, which calls for the accreditation of industry bodies in order to regulate business rescue practitioners.