SINK OR SWIM – BUSINESS RESCUE

Lowvelder article for 27 January 2017.

Restructuring of companies in financial distress is on the increase.

In South Africa, Chapter 6 of the Companies Act introduced business rescue as an opportunity for financially distressed companies to file for a formal restructuring process, aimed at rehabilitation and enabling them to continue trading successfully.

This has far-reaching effects on creditors, shareholders, and employees.

In the past, companies in financial distress had no alternative but liquidation. This meant that once liquidated, a company’s assets were sold on auction which resulted in very small dividends, if any, for creditors and the retrenchment of all its employees.

The aim of business rescue is to provide a temporary moratorium on the rights of all creditors to proceed against the company during the business rescue period. The business rescue practitioner is tasked with the development and implementation, of a plan to rescue the company by restructuring its affairs, business, debt and other liabilities in a manner that maximises the likelihood of the company continuing in existence on a solvent basis.

If this cannot be achieved, the aim would be to provide a plan which would result in a better return for the creditors than would result from the immediate liquidation of the company.

Rather than being placed in liquidation, business rescue does provide an alternative for creditors to be settled within a reasonable period and employees to keep their jobs. Often, the dividend offered in a business rescue scenario is far greater than that which would be received in liquidation.

Therefore business rescue is an alternative option for companies that are facing insolvency.

In order to have the best chance of rescuing a company, it is important to act as soon as it is realised the company is in financial distress and not wait until the writing is on the proverbial wall.

Rather than sink, a company often only requires a breathing space to restructure its debt which threatens the solvency of the company.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances