South Africa’s already struggling economy has been battered further by the COVID-19 pandemic, which will see many companies plunge into financial distress. Companies with a financial year ending in June have begun to announce their earnings and, so far, the indicators are predictably grim.
In addition, many small medium- and micro-sized enterprises (SMMEs) which are the lifeblood of the country’s economy, look set to shut their doors due to the impact of the extended lockdown on their trading activity.
In these tough economic times, many companies might have no alternative but to consider applying for business rescue as a means of facilitating the rehabilitation of their financially distressed businesses.
Dr Eric Levenstein, Director and Head of the Insolvency, Business Rescue and Restructuring practice at Werkmans, outlines five things to know about business rescue in South Africa:
- Legally: South Africa’s modern business rescue regime is governed by The Companies Act 71 of 2008 (the ‘ACT’) and COVID-19 has made it even more critical for businesses to understand the procedures contained therein.
- Key benefits: Business rescue provides an alternative to the liquidation of the struggling entity through implementation of a strategic plan to restructure the business and possibly turn it around, while balancing the rights and interests of its stakeholders. It is a more flexible and company focused approach and is in line with international jurisdictions. Filing for rescue effectively places a general moratorium (stay on claims) on legal proceedings against the company and also has the effect of protecting the property interests of the company.
- Act early: Businesses in distress should file their business rescue notices sooner rather than later, as delaying the inevitable can be even more disastrous. The longer the business waits, the more the debt builds up and the slimmer the chances become of an eventual return to solvency and liquidity.
- The BRP: Business rescue provides for the temporary supervision of a company and the management of its affairs, business and property. Central to this process is the appointment of a Business Rescue Practitioner (BRP) to oversee the distressed company and draft a business rescue plan which, once approved and adopted, becomes binding. The process includes a temporary moratorium on the rights of claimants against the company or in respect of property in its possession.
- The how: The business rescue plan helps to restructure the struggling company’s affairs, business, property, debt, other liabilities and equity in a manner that increases the likelihood of its survival, or results in a better return for the company’s creditors or shareholders than an immediate liquidation would provide.
Dr Levenstein says, “Directors of distressed companies must be mindful that if they continue to trade their companies in insolvent or financially distressed circumstances, they could open themselves up to personal liability claims from displeased creditors looking to recoup their financial loss. A successful business rescue is one that delivers a restructured and viable company back into the South African economy, retaining jobs and restructuring the discharge of debt resulting in a better outcome for all.”
Want to know more about business rescue? Register for the upcoming Business Rescue in the Time of COVID-19 Webinar, to be hosted by Dr Levenstein on 16 July. Dr Levenstein is also author of the loose-leaf title published by LexisNexis South Africa, South African Business Rescue Procedure.