For the better part of 2020 the term business rescue has come into sharp relief.
At first it was just South African Airways that had taken the business rescue route. However, as the COVID-19 pandemic spread, we saw several airlines entering business rescue as travel bans came into play including Comair and SA Express.
The question, however, is whether business rescue is a viable means to turn a company around or if it is simply a death knell sounding.
As we’re not versed in business rescue we called up director at Mazars Recovery and Restructuring, Justine Hoppe, to explain to us what business rescue is, whether businesses can indeed be saved through the process and how business rescue affects a business’ reputation.
So what is business rescue?
For many the announcement that SAA was going into business rescue was the sign that the end was near for the embattled airline.
As a result, the idea of business rescue being a bad thing has been touted around but that doesn’t always have to be the case. In fact, depending on the business and how early the process is initiated, it can actually help save the business.
“The easiest way to describe business rescue is a protective process created by the Companies Act which allows a company to appoint someone known as a business rescue practitioner. This person comes in as an independent person whose role is similar to that of a CEO, with a view to assessing the financial and operational health of the company and working with management to try find a restructured path forward,” Hoppe explains to Hypertext.
The aim of this is to avoid financial distress and Hoppe says usually a business enters this process when it is in financial distress.
So why not just liquidate the company then if it is in financial distress?
The trouble with liquidation is that often it becomes a feeding frenzy and stakeholders that are awaiting payment may never see that payment.
Through business rescue, if unable to restructure the company so that it survives the process, a practitioner is able to wind down a business (if necessary) in a far more controlled manner.
“Liquidation could be compared to the death of a company while business rescue could be seen as the company being under intensive care and bringing specialists in to get it back to good financial health,” says Hoppe.
To liquidate or rescue, that’s the question
As Hoppe points out, business rescue is an exercise which is governed by legislation, specifically Chapter 6 of the Companies Act of 2008.
However, that doesn’t mean all businesses qualify for business rescue.
This is highlighted in the legislation, specifically Chapter 6, Section 129 which clearly states that a board of directors can put a business into rescue if the company is financially distressed and “there appears to be a reasonable prospect of rescuing the company”.
It’s up to business owners and directors to know when a company is approaching that point but often the reality of failure is less attractive than the promise of hope.
“You should be looking at business rescue or other turnaround options when you start feeling the pressure financially and there is an obligation on directors to constantly assess whether they are financially distressed,” explains Hoppe.
The challenge is that business owners may think that, “next month things will be better” and while they might, the situation may not improve and it’s up to decision makers to make the hard calls.
However, the key thing to understand here is that business rescue is not a last resort.
Qualities to look out for
Of course, the key driver of success in business rescue is the practitioner guiding the business through troubled water.
There is no hard and fast rule when it comes to selecting a business rescue practitioner but there are a few things to be on the lookout for.
According to Hoppe, somebody with a financial or legal background is a good fit when assessing who to appoint. Chartered accountants and commercial attorneys with years of experience under their belt often make for good business rescue practitioners.
With that having been said, it’s important to shop around and find a person that understands your business. With that in mind, a good business rescue practitioner will take time to get to know the business a bit better so that they know the scope of what is being asked.
“Good business rescue practitioners will want to engage with you before your company goes into business rescue. They don’t want to take the matter blind because they don’t know what they are getting themselves into or if they can legitimately help you,” says Hoppe.
“If somebody is reluctant to give you an hour or two of their time for free to have that conversation – because a practitioner can’t charge in this capacity prior to being appointed – alarm bells should go off,” she adds.
It’s also important to look at – where possible – practitioners who have successfully navigated this process before with some degree of success.
When selecting a practitioner it’s also important that the company engages its accountants, directors and other stakeholders within the business who understand it deeply so that they can assist in this process.
Life after rescue
So can a business be saved through rescue?
Yes, and no.
As we’ve mentioned, a lot of the success of business rescue depends wholly on when the process is initiated.
“The longer you wait, the less choices are available to you and the less choices you have, the narrower the restructuring plan starts to look,” explains Hoppe.
Looking at SAA as an example, one could argue that business rescue has been implemented as an alternative to liquidation following the years of financial distress the airline has undergone.
In this instance, SAA undertook the process too late and saving the airline is a pipe dream at present.
Added to this, several challenges during the business rescue process have stymied practitioners and this delays the work that needs to be done.
But let’s imagine that a business manages to come out of this process and returns as a fully functional entity as it was before business rescue, will it slip back into old habits?
That depends wholly on how decision makers implement the directions outlined by the business rescue practitioner.
“If you get beyond the implementation of the plan the company gets discharged from rescue and goes along its merry way. The challenge then is not to fall back into old habits,” the director explains.
Common pitfalls include not keeping financial data up-to-date and falling into arrears with non-negotiables such as SARS.
“Once everything is tidied up and implemented by the business rescue practitioner and handed back to the directors to navigate moving forward, they have to carry on implementing those good, basic practices of business. Otherwise when faced with the next big challenge it could undo much of the benefit from the rescue process,” says Hoppe.
Companies also have to rekindle confidence in the business following a rescue process and slipping back into old habits could prompt the process again. While there may be no legal issues with this, it is likely to damage your reputation and trust should be a key driver in implementing systems and changes highlighted by business rescue practitioners.
Business rescue is neither a silver bullet or a death knell then, it is a delicate process that needs to be navigated with care from a well informed stand point.
Whether business rescue can save a business then is very much up to business owners but it’s clear that businesses can ultimately navigate this process and come out ahead.[Image – CC 0 Pixabay]