Business Rescue – A first resort, not a last resort | #BizWires


In South Africa business rescue initiatives have worked particularly well where the directors have understood the provisions of the New Companies Act and applied for business rescue in good time. Unfortunately, in many instances business rescue has been used as an alternative to liquidation, and the process has been chosen as a last resort when the company is unsalvageable. “According to the latest CIPC survey, 55% of business rescues have achieved a positive result,” says Neill Hobbs, registered Senior Business Rescue Practitioner and Director of Hobbs Sinclair in Cape Town.


Currently more than 1 000 companies per month are being placed into liquidation, compared to only 45 applying for business rescue. This indicates that the purpose of this legislation, which is, in itself, visionary, has not been understood.

Business rescue has suffered criticism, but Hobbs stresses that the focus should be on the successes not the failures. In the past two years, Hobbs Sinclair has assisted 17 distressed companies. Getting to grips with the practical application of this new and complex legislation has been both daunting and exciting. “What we have learned” says Hobbs, “is to be very diligent about which business projects we accept and in 2013 we turned down more projects than we accepted. Sadly many business managers tend to contemplate business rescue as the last resort, when all else has failed.”

Generally, post commencement funding is critical to the process as, although there is a moratorium on legal action against the company under business rescue, salaries, rentals and suppliers all have to be paid. Fortunately, financiers have responded to this opportunity and there are funders willing to pre-assess and commit capital to companies contemplating business rescue. In this regard, Hobbs Sinclair has been successful in raising some R75 million of capital that has been invested via the business rescue process. As the industry matures it is anticipated that more business leaders will see business rescue as a prudent opportunity to restructure and recapitalize their companies in today’s severe market conditions. Hobbs comments; “It is also an alternative and prudent mechanism to use in mergers and acquisitions, as any contingent and/or unrecorded liabilities are expunged through the process.”

Job preservation is a major benefit of the business rescue initiative. In the relatively small number of projects Hobbs Sinclair has been involved in, in excess of 750 jobs have been saved. The provisions of the New Companies Act make allowance for employees and Trade Unions to apply to place the companies they work for into business rescue. Surprisingly, there has been virtually no use of this opportunity by labour representatives.

As with any new legislation, it requires some time for the major corporations and institutions to adapt their processes to accommodate the new provisions. SARS have responded very appropriately and there are now designated and well informed business rescue officials in all SARS offices. The banks are also coming to terms with the practicalities of the implementation of the new law. Banks are well experienced in business turnaround interventions and have much to contribute to the rehabilitation of distressed companies. Early engagement with the relevant banks and a good working relationship between the bank and the practitioner is absolutely essential.

As well as the business rescue provisions, the New Companies Act places stringent obligations on directors and any other persons knowingly involved in managing and operating Companies. “It is in this respect,” says Hobbs, “that the new legislation is much more precise. The repercussions of trading under insolvent circumstances, under the new legislation, are extremely harsh for the directors, owners, shareholders or even third parties associated with the company. Now, these persons will be held personally responsible for the liabilities of the company and their personal assets can be forfeited to help cover the debts incurred by the company.”

Directors, therefore, have a duty to put their company through a solvency/liquidity test and, if the warning signs are there, to inform stakeholders, liquidate or opt for business rescue.

“The message is crystal clear,” says Hobbs: “if the company you represent is unlikely to meet is financial commitments in the foreseeable future you must immediately apply for business rescue or you, as an interested or associated person involved with the business, could find yourself carrying the burden for its failures and debts.”

“In practice,” says Hobbs, “we have found that in most cases it is more effective and definitely less expensive to work with existing management and staff of a company under business rescue. Their knowledge of the business is invaluable, and we need to have staff and resources at our disposal to draw on their considerable intellectual capital, and to carry out certain activities previously handled by the company, e.g. the chasing-up of debts and the billing of customers.”

The Companies Act expects practitioners to produce a comprehensive plan showing a route by which the company can be made viable, within three months.

“The Department’s three-month requirement,” comments Hobbs, “is in most cases too short. Our experience is that six to twelve months is usually needed, to be effective.”

Hobbs will formulate a Business Rescue Plan that may include restructuring the company’s business affairs, equity, property, debt and other liabilities, in a manner that maximises the likelihood of continued existence on a solvent basis. If this is not possible, the Business Rescue Plan may envisage a greater return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

The advantage of being under business rescue is that the company cannot be subjected to legal action, and unpaid creditors can be legally prevented from calling for immediate payment.

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