When business rescue works (and when it doesn’t)

Because of the financial fallout of COVID-19 and the lockdown, Business Rescue is a hot topic.

21 Apr 2020 3 min read Business Rescue, Restructuring & Insolvency Newsletter Article

Unfortunately, many businesses will be placed in financial distress through circumstances not of their own making. Lockdown will have tipped businesses which were struggling because of the decline in the economy over the financial edge. Businesses in other sectors – especially hospitality and tourism – which were doing well before lockdown, face no income and an uncertain future at least in the short to medium term.

Aid packages have been announced especially for small businesses. Financial institutions and the property sector are being encouraged to be lenient to their customers who are facing income difficulties. These are the first places people should look for assistance to alleviate their short-term cash flow pressures. But this may not be enough. Businesses may have to resort to Business Rescue and even, unfortunately, liquidation.

Business Rescue is very useful if applied in the right circumstances.

Business Rescue can work when:

  • It is not left too late. Far too many businesses struggle on for too long and leave nothing to save. Timely intervention is essential – and this is a particularly difficult decision for owners who have invested so much time, effort and money into saving their businesses.
  • It enjoys the support of most creditors – and in particular larger creditors such as your bank or major suppliers. If they are not on board, you are wasting your time. Business Rescue is a creditor driven process. In many cases creditors will assist if they sense that the debtor is being open, has constructive proposals and that they have a chance of better recovery if a Business Rescue plan is implemented. From both creditors and debtors’ perspectives, early intervention is desirable. Most creditors are, out of self-interest, interested in recovering as much as possible. Creditors who are well secured are less interested in the survival of a business, but they may support rescue plans if their security is not threatened.
  • There is a real plan to save the business or at least viable components of that business. Business Rescue is not a “kick and pray” exercise in the hope that something better will emerge during the rescue process. The most successful Business Rescues happen when the stakeholders sit down in advance and plan the rescue before initiating the formalities – the so-called “pre-pack”. This does not have to be inflexible – the time that rescue buys may lead to better variations of what was pre-planned as possibilities emerge and there is less pressure to deal with them.
  • The business must be able to run, even if in reduced form, during Business Rescue. This needs money – either from existing cash flow or reserves, or post commencement finance (which can be difficult to obtain and expensive).
  • From creditors’ perspective, even if the business cannot be saved, assets may still be realised more optimally, economically and efficiently than would be the case in liquidation – so it is a better route to follow anyway since creditors control it.
  • A great advantage of Business Rescue is its flexibility – a plan can be devised to achieve any number of outcomes as long as it is supported by a sufficient majority of creditors. It is also a private and efficient process between stakeholders and the company, since state organs are uninvolved in the process. Courts will only step in if asked to do so, and the Master’s office has no role to play.

Business Rescue won’t work if the above elements are not present. All it becomes is a costly and stressful waiting room for insolvency.

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