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[Opinion] Business rescue could save distressed start-ups

Business rescue: Ryan Smith and Lara Kahn are partners at Webber Wentzel. Photo: Supplied/Ventureburn
Ryan Smith and Lara Kahn are partners at Webber Wentzel. Photo: Supplied/Ventureburn

If boards of directors put financially distressed start-ups and other companies into business rescue earlier, more options would be available, and more companies could be saved. This is the view of Ryan Smith and Lara Kahn, partners at Webber Wentzel.

Although fewer companies are commencing business rescue proceedings, the number of liquidations remains extremely high. With these numbers in mind, we believe that businesses in South Africa should be considering business rescue more seriously in these difficult times.

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In practice, business rescue is often seen as a last resort. The fundamental problem with this approach is that this last resort is visited far too late, by which time the door has closed.

However, if a prudent board uses the business rescue process early, at the first visible signs of financial distress, the business rescue process has a far greater prospect of success. The latest statistics show this is not happening, to a large extent.

Fewer business rescues in 2021

In February 2022, the Companies and Intellectual Property Commission (CIPC) published a report on the status of Business Rescue proceedings in South Africa at 31 December 2021.

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.”

A high-level review of the report tells the following story:

  • there are currently 1 658 active business rescues;
  • 257 business rescues commenced in 2021, a number that is significantly down from previous years;
  • 511 of the business rescues that have begun to date have ended in a liquidation, 310 in a nullity and 32 were set aside;
  • 766 business rescues have resulted in the substantial implementation of an approved business rescue plan; and
  • 938 business rescues were terminated by way of a notice of termination (for various reasons).

It is quite noticeable from the numbers that the percentage of rescues that result in successful plans being substantially implemented has dropped year-on-year. This must be contrasted with the statistics on liquidations which occurred in 2021.

According to the statistics released by Statistics SA in January 2022, approximately 1 932 companies were placed into liquidation. In the latest liquidation numbers published by Statistics SA on 23 May 2022, the total number of liquidations is recorded as having decreased by 12.7% in April 2022 compared with April 2021. Although this appears to be an improvement, the number of liquidations remains significantly high.

According to Statistics SA, there has been an average of 150 liquidations per month between January and April 2022.

Although the reasons for these alarming numbers need to be better understood, we believe a contributing factor is likely to be the failure by boards of companies to take swift and decisive action at the first signs of financial distress.

Often boards, with the best intentions, attempt to trade out of a financially distressed scenario or restructure their business without the assistance of a restructuring expert. The result is often either a rescue that is commenced with no prospect of success or an immediate liquidation.

Proactive use of business rescue

A good example of how business rescue can be a significant tool to help the survival and continuation of a business (and therefore employment), is the Ster Kinekor business rescue to date.

Prior to Covid-19, Ster Kinekor was a well-run, cash-generative business. Covid-19 resulted in the company immediately losing income for a period of five months (during the initial ‘hard’ lockdown). After that, its income was reduced as lockdown protocols were relaxed but remained in place, while operational costs continued to be incurred.

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. The board placed the company into business rescue in January 2021.

Business rescue has provided Ster Kinekor with breathing room. 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.

Had the board of Ster Kinekor not taken swift and decisive action when it did, Ster Kinekor may well have found itself in an un-rescuable position and potentially even in liquidation.

If there is a better understanding of and appreciation for what a business rescue can achieve, we believe the numbers that were seen in 2021 can be improved, with an increase in successful rescues and a decrease in the number of companies going into liquidation. The key, however, is swift action by boards. Sometimes this requires sweeping pride aside and prioritising the best interests of the business and its stakeholders.

  • Ryan Smith and Lara Kahn are partners at Webber Wentzel, the leading full-service law firm in Africa.

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