Covid-19 has left the world’s economy in a far worse position than prior to the pandemic. The timing of its arrival in South Africa, and the following lockdown, could not have been worse. Our economy was already plagued with businesses in financial distress. Low GDP growth and high unemployment served to accelerate this process.

As a result of the pandemic, our already low credit rating was further downgraded by Fitch and Moody’s. The combined impact of these factors has caused many businesses to become financially distressed. Companies experience this phenomenon when they are unable to meet creditor payments. When this occurs, the possibility of insolvency drastically increases. This is also where the possibility of business rescue comes into play.

The Covid-19 pandemic has had a serious effect on economies worldwide. South Africa is no exception to this.

Financial Distress

When a company experiences financial distress, it has a few options available to it. It can liquidate, undertake a turnaround, or file for business rescue. Most often, the preferred route for such a business is to prevent a forced liquidation. This has a detrimental impact on local communities, especially thanks to job losses. Many companies consider the feasibility of rescue as a way towards rehabilitation.

Business Rescue

The legislation for this process saw its introduction in 2011. It serves as a mechanism which allows businesses a temporary moratorium on claims payments from creditors. This “suspension” allows temporary relief to the financially distressed company. Distressed companies will make changes to various aspects of their business, including:

• Ownership changes
• Management changes
• Operation changes

These changes aim to facilitate the company’s rehabilitation, and continued survival. In this way, a company that is successfully rescued will avoid closure. In doing so, it can save some or even all jobs within it.

 Business Rescue aims to assist businesses in financial distress. There are a few different ways to determine if a business is financially distressed.

Potential Concerns

Since its adoption, business rescue has had many questions that surround it. These questions include the success rate and effectiveness of the process. Currently, it sees a low success rate in South Africa, as well as concerns that it is a costly addition to inevitable liquidation.

It is worth noting, though, that there are many examples of successful rescue. These cases serve as an example of implementation for companies in financial distress. When properly conducted, the potential for an improved success rate definitely exists.

Improving Success Chances

So, how can you improve the chances of success for your business? There are a few factors here:

1. Stakeholders in the business should gain an understanding of legislation for business rescue. Not all financially distressed companies are suitable for the process. Rescue is not necessarily a substitute for liquidation. Companies that are unlikely to rehabilitate should apply for liquidation rather than rescue.
2. Management should consult extensively about using rescue legislation to rehabilitate the business. Consultations should include employees, trade unions, bankers, creditors, funders, and shareholders. Some stakeholders could prefer an active or supportive role during the application process. This is preferable to management informing them of their decision only at a later stage.
3. The skills of the appointed rescue practitioner are vital to the success of rescue for the business in financial distress. Legislation specifies that the practitioner should have the necessary qualifications in:

• Legal
• Business
• Or accounting fields

Research also indicates that the practitioner should have the following skills:

• Mediation
• Conflict resolution
• Restructuring
• Decision-making skills

Corporate Business Rescue are professionals in the field of Business Rescue. For questions and enquires, contact us.