ERIC LEVENSTEIN: Business rescue grows in relevance as SA practitioners increase

The role of the business rescue practitioner (BRP) is important in SA’s wider socioeconomic context, which requires an efficient business rescue procedure that includes a culture of accountability. 

The Companies & Intellectual Property Commission (CIPC) recently released a report on the development and mentorship of BRPs that supports the contention that business rescue filings play a big role in the restructuring of debt and the reorganisation of the affairs of distressed companies. 

Since the introduction of business rescue to SA law in 2011 a constant stream of BRPs has been licensed each year. In 2020, the first year of Covid-19, companies had to deal with the stress of reduced trading and the concomitant economic fallout. A total of 111 BRP licences were granted that year, more than double the average of previous years.

This trend continued into 2021, with 65 newly licensed BRPs joining the profession. The highest proportion of BRPs are in the economic hub of Gauteng, with the Western Cape and KwaZulu-Natal second and third. 

About 56% of BRPs are classed as junior practitioners, 22% are considered experienced and the remainder as senior. This ratio demonstrates that there is a substantial number of good up-and-coming younger members of the profession, and that business rescue is by no means the preserve of old hands. It is particularly encouraging that the CIPC report confirmed there are 47 BRPs under the age of 35.

In terms of section 138 of the Companies Act BRPs must belong to an accredited professional body. The CIPC’s statistics show that the accounting profession dominates, representing 43% of licensed BRPs, with the legal profession a close second (33%) and the business management profession coming in at 24%. This demonstrates that the knowledge base a BRP is required to have is a blend of accounting, legal and business turnaround skills. Clearly having a BRP with a combination of these skills advances the success rate of the business rescue process.

On the state of business rescue in SA, the CIPC statistics show 1,653 active business rescues in process, with 554 having resulted in liquidation since 2011. Moreover, since the introduction of business rescue to our law 852 notices of substantial implementation have been issued, where the terms of the business rescue plan had been supported by stakeholders and thereafter implemented. This indicates that business rescue (as a restructuring process) remains a viable and efficient option for ailing companies. 

Business rescue is largely sector agnostic, and businesses in diverse sectors of the economy have entered rescue. But the statistics of filings for rescue support the assessment that SA has an ever-weakening economy, with the manufacturing sector accumulating the greatest number of business rescue filings (19%) followed closely by the construction sector at 13% and mining at 7%.

The CIPC report confirms there were 373 business rescue filings in 2020 (at the height of the pandemic). Since then, 2021 has seen 347 and in 2022 there was a dramatic drop to 56. Since the peak of business rescue filings in 2020/2021 the number of new business rescues in 2022 has been on a sharp decline. This is not necessarily good news. Delays in filing for business rescue (leaving it too late) hamper the chances of the company trading out of its financial distress on a solvent basis.

Many companies in business rescue end up in liquidation. Moreover, in some cases they fail due to the inexperience of the BRP, frustration of the plan through the disruptive actions of the board or management, or a lack of available postcommencement finance.

A large number of BRPs belong to accredited organisations such as the SA Restructuring & Insolvency Practitioners Association, which has more than 700 members, as well as the SA Institute of Chartered Accountants and Law Professions Council. This bodes well for the profession, as these organisations monitor and police the actions of members, who would all be subject to a code of conduct.

According to the CIPC report the 10 largest rescues so far in SA’s business rescue history have been Hernic Ferrochrome, Consolidated Infrastructure Group, Hlumisa Investment Holdings, Eyomhlaba Holdings, Ellerines Furnishers, Group Five Construction, Group Five Limited, SAA and Tongaat Hulett. 

The CIPC concludes its report with a call for an effort made to ensure skills transfer and mentorship in the profession, and suggests there ought to be more collaboration to either increase the chances of a successful rescue or avoid business rescue entirely. It recommends that “boards of companies must be proactive in consulting with sector experts and turnaround/legal advisers” to determine the level of financial distress of the company. 

The time has come for boards of companies to become more robust in decision-making. There needs to be an awareness of the restructuring and rescue options available, so that directors are more comfortable with obtaining guidance at an early stage of the financial distress cycle. 

Directors have an obligation to understand their duties and obligations to stakeholders in this ever-changing economic and legal environment. 

• Dr Levenstein heads the business rescue & insolvency practice group at Werksmans Attorneys.