Business rescues surge as economies cool down

Following the introduction of business rescue by the new Companies Act, which came into effect on 1 May 2011, there has been a surge of high value companies that have gone into business rescue. There have already been almost 100 appointments of business rescue practitioners over the last few months around the country with several high profile companies choosing this route of recover.

A number of financially distressed companies are using business rescue to avoid liquidations, and the common view amongst insolvency practitioners is that business rescue is often a first-step in an inevitable liquidation process. Despite this, business rescue is gaining traction and many companies, creditors and other stakeholders actually far prefer business rescue to liquidations. We see it gaining great traction as the economy cools down and generally, banks have been supportive of the new provisions.

Certain creditors have quickly realised that companies are opportunistically trying to put their companies into business rescue to slow down or temporarily stop inevitable liquidation proceedings. Investec Bank won a provisional liquidation order for various Pinnacle Point Group subsidiaries, after a liquidation order was granted by the Western Cape High Court, despite the Pinnacle Point Group being under a business rescue. The view was that the company had tried for so long to resuscitate itself that it simply had no chance to survive.

Many business rescue applications are in the property development space and unfortunately many of these companies simply have no chance of survival or of being restructured. Taking them into business rescue will be a mistake as the chances of a successful turnaround will be slim. It’s a case of trying to revive a patient that is passed being on life support and has no chance of ever breathing again.

One of the unintended consequences of the act is making creditors aware of a company’s financial difficulty, which is now mandatory. If a director decides not to place a company in financial distress into business rescue, then he or she is under a statutory obligation to deliver a written notice to each affected creditor, confirming that the company is financially distressed, but is not being placed into business rescue. Although reasons for such a move must be provided, it could potentially put the company at further financial risk.

This has already created a situation where creditors have stopped supplying companies with goods and services and caused them to hasten business rescue proceedings. Unfortunately if many of these companies are not successfully rescued, they may well go into liquidation and this will actually cause an increase in liquidations. If this is the unintended consequence of the new Companies Act, it is certainly not what Government envisaged.

One of the roles of business rescue practitioners is to save a business, and that may include selling off redundant, obsolete or idle assets that are not critical to the survival.