Millions of words and numerous articles have been written about the Business Rescue Process. Not much has been written about the practical positives and negatives. Once a Business Rescue Practitioner is appointed, he/she/they have to do everything possible to rescue the business. But, as with anything in life, it is a balancing act.
Business Rescue is a process contained in the Companies Act of South Africa. Its specific aim is to assist companies that are in financial distress. The process provides the tools and timelines that can assist a business in getting out of its financial distress. It is thus an attempt to get the business back to its former glory. Well, here is an article that deals with the practicalities of the process.
There are many positive and negative aspects to the process. All of these must be considered by the board of directors. The timing of when to consider Business Rescue is dealt with in the post, “When to consider Business Rescue”.
The POSITIVE aspects of Business Rescue:
Legal Moratorium
The 1st positive aspect is what is referred to as the section 133 legal moratorium. This section states that no creditor may commence or start any legal proceedings. This includes enforcement actions, against the business as long as it is under the protection of Business Rescue. It also provides the business with much-needed breathing room while it sorts out its internal issues. This is also the time when the business must attempt to become more profitable.
Protection of Property
The 2nd positive aspect is the protection of property interests. Section 134 provides that the property in possession of the business under business rescue is protected to the benefit of the business. Even if the business is not the rightful owner, no person may exercise any right they hold over that property. Thus, the assets under the control of the business before the commencement of Business Rescue cannot just be removed from the premises without the consent of the BRP.
READ MORE: What is a Business Rescue Practitioner?
Suspension of Contracts
The 3rd positive aspect is contained in section 136. It states that the BRP can suspend any contract, except an employment contract. This entails that the BRP can for the time that the business is under Business Rescue suspend a contract that is not beneficial to the business. Thus, should it be forced to supply a service or goods in terms of a contract, the BRP can suspend the contract until such time as it has been amicably sorted out or until such time that the business has approached the court to cancel the contract.
Time to pay off debt
The 4th positive aspect is the time period granted to the business during which it can pay off its debts. The BRP will look at the potential cash flow of the business and then determine a time period for the business to repay its debts. This time period is presented to the creditors in the Business Rescue Plan and then voted in by them should they agree with it. The BRP is able to negotiate a time period to a maximum of between 3 and 4 years. There are not many Business Rescue Plans that go over 3 years in terms of their repayment periods, but I have seen plans with a repayment period of 4 years or 48 months.
Assistance
The 5th positive aspect which I have experienced is rather enlightening. Once you let your creditors, employees and shareholders know that the business is experiencing financial distress, I have seen these people band together. Suddenly they provide the business with more opportunities and possibilities, cost-saving measures and revenue-generation ideas than you thought possible. People like to help other people, it is as simple as that. Not everyone is out to bring your business down. You will be surprised as to where some of your assistance comes from during this difficult time.
The NEGATIVE aspects of Business Rescue:
Cost
The 1st negative aspect is that Business Rescue can be a costly affair. Here it is also important to take into consideration that you pick your BRP after considering a few options. Some BRP’s request a success fee on various actions performed or successes achieved over and above the legislated rates whereas some BRP’s charge no success fee. Thus, in order to reduce the total cost of the process, you need to interview a couple of BRP’s and determine which one is a right fit for your business and the culture of your business. It is also important to request a cost estimate from each BRP. Although this might sometimes be difficult to determine, many BRP’s have a system they follow and can relatively easily provide you with a cost estimate within that framework.
Reputation
The 2nd negative aspect is the reputational damage that the business will suffer. Your creditors will be irritated and frustrated with you and there is no way to get around this. One way of reducing the impact of the reputational damage is for the BRP to convey the reasoning behind the business entering Business Rescue correctly and to have full transparency during the process. I have found that negotiating with creditors and having full transparency in the process, provides them with a certain level of comfort. This has proven successful in that creditors have shown their willingness to assist the business during the process. Their assistance has helped me to rescue many businesses.
Stop Supply
The 3rd negative aspect is the possibility of being put on “stop supply” by the creditors. Remember that the creditors might not have been paid for a while and now the BRP tells them that they will not be paid immediately. Or worse from their point of view, they can expect to only be paid over a period of 48 months. This is perfect reasoning for a creditor to stop supply to your business completely. This can however be easily overcome through negotiation with the respective creditor. I have managed to reinstate the supply of credit during the process with various creditors by involving them in the process.
Bank & Credit
The 4th negative aspect is that the banks are not allowed to provide credit to businesses in financial distress. Once a business goes into Business Rescue, the banks have to stop all of the credit provided to the business in terms of their policies and Basel regulations. This could potentially be a problem for businesses that have an overdraft or revolving facility in place. Again, the impact of this can be drastically reduced through proper engagement between the bank and the BRP.
Other considerations:
A very important aspect is that during the Business Rescue proceedings, the business must be able to pay its monthly operating expenses including VAT or PAYE liabilities on a monthly basis. The reasoning for this is rather simple. If the business isn’t able to pay these monthly operating expenses then it is difficult for the BRP to prove that there is a reasonable prospect to rescue the business. Thus, when a board of directors considers Business Rescue, they must keep in mind and understand that the normal monthly overheads must still be paid going forward.
It is still worth it…
Although the Business Rescue process has negatives to it, it is still the best alternative to immediate liquidation. If you believe there is a chance for the business to survive the difficult time it is experiencing, then this process is the answer. It is however critical to note that, as the court stated in the case of Welman v Marcelle Props 193 CC, “business rescue proceedings are not for terminally ill close corporations. Nor are they for chronically ill. They are for ailing corporations, which given time will be rescued and become solvent”.
If you wish to discuss the positives and negatives of Business Rescue with me further or if you wish to get more information, please feel free to give me a call by clicking the link below.
I always offer my first 60-minute consultation free of charge.
