Business rescue – How well is it doing?

Business Rescue (BR) is one of the cornerstones of the “new” Companies Act. It is generally agreed that the BR section of the Act is based on global best practice and is of a very high standard.

Virtually all business owners will go through difficult times at some stage in their career – knowing how BR works could be the saviour of your business.

What is Business Rescue?

When a business is facing difficulties, it can invoke business rescue which results in a business rescue practitioner putting into practice an agreed rescue plan (involving key stakeholders such as banks, creditors, shareholders, employees etc). During this process, the company is legally protected from creditors’ claims.

The final result is the business returns to normal trading (if the action plan is successful) or is liquidated if the plan is unsuccessful.

How is it doing?

Up to March 2016, 2,148 businesses had entered BR and 1,129 cases were still in process. Of 1,019 completed instances, 310 or just over 30% were proving to be successful.

Whilst this marks a step–up from the previous Companies Act’s Judicial Management process, it is a good time to take stock of BR.

3 steps to improving the rescue rate

  1. Almost all commentators want to see an improvement in the calibre of BR practitioners. Banks cite issues in this regard as a reason why they are not prepared to advance funds when businesses go into BR.

Potential solution:  Get the CIPC to raise standards for business rescue practitioners to be accredited as qualified.  The CIPC has begun to do this.

  1. Many of the businesses which went into BR should not have done so.

Potential Solution: Get the business rescue practitioner (or independent specialists) to do an in-depth analysis of the business before commencing BR. Apart from directors, involving other stakeholders will improve this process. If this analysis supports BR, then it should be given the green light.

In the statistics above, many of the companies were poor candidates for BR and should have been liquidated. Thus, this process will enhance the potential for a successful BR.

  1. Financiers who fund companies in liquidation should become preferred creditors in the event of liquidation. This will encourage banks to be more amenable to taking the risk of lending to BR entities.

Of course the best way to avoid BR is to be proactive. Always have forward-looking cash flows and continually scan the environment for potential risks.