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Capital Restructuring

Why Avoid Business Rescue

Photo by dlritter from FreeImage

Business Rescue proceedings are a legal process that attempts to rehabilitate a business that is experiencing financial distress and is unlikely to be able to pay its debt. The proceedings are usually provided for in law to protect the business from liquidation while a business rescue plan is being worked out.  In South Africa, the Business Rescue Process is provided for in Chapter 6 of the Companies Act 71 of 2008.  In the recent past companies such as South African Airways and the Edcon Group have embarked on this process.

The main advantage of the Business Rescue process is that it allows troubled companies to continue operating and potentially recover value unlike the case in a liquidation scenario.  The broader economic benefit is that jobs can be saved and the business as an economic agent can be maintained, hopefully under better management.

Business Rescue proceedings are however not necessarily the best way to go for many businesses facing financial difficulties.  Here are four reasons why businesses should seek to avoid the Business Rescue process.

1. Chances of Success are Low

Chances of success in the Business Rescue process are quite low.  In South Africa the success rates between 9% and 17% have been reported over time. Important to note is that the business rescue legislation in South Africa is still very and statistics are developing.  The Business Rescue legislation in South Africa became effective in May 2011 as compared to, for an example, the current American Bankruptcy code which became effective in 1979 (replacing Bankruptcy Act of 1898).

2. Creditors Take Priority

In many instances the legal business rescue process is initially about protecting the position of the creditors than it is about rescuing business operations.  The greater power to decide whether business rescue proceedings go ahead or not rests with the creditors. This is because creditors have the power to file for the company’s liquidation if the company is not able to pay its debt. The business rescue plan is only likely to be approved and implemented if the position of the creditors looks to be improved by the plan as compared to a liquidation scenario.

3. Loss of Executive Control

In a Business Rescue Process, a business rescue practitioner is appointed to lead the rescue proceedings.  The practitioner then assumes full management control of the company in place of its board and pre-existing management.  In this way the company board and executive management lose some control of the business.

4. Last Resort

Business Rescue is usually the last attempt at saving a financially distressed business. If this process fails liquidation is often the next step.  There are instances however when the Business Rescue Process is unavoidable and even preferable, when there is foreseeable liquidation and there is there is some chance that a work out can be successful or some value can be salvaged through other forms of business disposal.

The Preferred Alternative – Proactive Action

One of the biggest factors in determining the success of a business rescue process is early intervention.  Just like in human health and disease, early detection and correct diagnosis of issues to be resolved are critical to the availability and success of remedial options.

Proactively taking steps to avoid getting to the business rescue process is the better option. It is in the interest of business owners and executive managers to take control of the business turnaround process and relevant transactions at the earliest signs of distress – before it becomes necessary to rely on the courts and the formal business rescue process. Proactive financial restructuring of business capital is hugely beneficial in achieving business sustainability and health.

Click here for more insights into proactive capital restructuring.

About the Author: Lindo Sibisi

Advisor, researcher and writer in Business Growth and Funding, Lindo Sibisi is the author of the South African Business Funding Directory. Passionate about economic development through business growth, he has worked with many senior business executives to support them to manage complex and important decisions in business investments and funding. He is the Founder and Managing Partner at Ukwanda Growth Partners.

Disclaimer:

The opinions expressed in this article are for general purposes only and do not constitute advice of any kind. The reader should not use the information in this article as a basis for making any business, legal or any other decision without seeking appropriate professional advice.

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