ERIC LEVENSTEIN: More companies facing business rescue and liquidation

As continued financial and policy pressure is brought to bear on corporate SA we will undoubtedly see an escalation in companies having no alternative but to consider a formal business rescue process — or face liquidation. 

A total 109 businesses closed down in the first month of this year alone. According to Stats SA’s statistical release on liquidations dated February 26, there was a 34.6% increase in the total number of liquidations in January compared with the same month last year. Most liquidations were voluntarily commenced, but 11 of the 109 were placed into liquidation by compulsory applications to court. 

Companies will inevitably continue to grapple with financial distress, necessitating the initiation of either an informal restructuring process or formal business rescue proceedings. Stress is evident across all sectors of the economy. 

According to the Companies & Intellectual Property Commission (CIPC) status report released in February, 17% of the entities that commenced business rescue proceedings from October 2023 to December 2023 were in the manufacturing industry, with the agriculture, forestry and fishing industry following closely with 13.2% of filings.

About 28.4% of the entities that were liquidated in January were in the financing, insurance, real estate and business services sectors, followed by 15.5% in the trade, catering and accommodation sector. 

In the latter quarter of 2023 many entities in the mining sector commenced business rescue proceedings after having determined that they were financially distressed. 

Pressure in the mining sector was also highlighted at the 2024 Mining Indaba, at which attendees were apprised of a grave skilled labour shortage issue confronting the industry. This critical shortfall of a pool of workers to service the industry has been identified as a primary impediment hindering the sector’s operational efficiency this year. 

Opening the Mining Indaba, President Cyril Ramaphosa flagged several factors hampering the sector’s performance. Alongside the talent shortage, energy deficits and transportation demands were of paramount concern. These challenges may explain the concerning trend of mining entities commencing business rescue in 2023. 

The lack of reliable electricity supply is one of the most costly challenges for businesses and is expected to persist and potentially worsen in 2024 and beyond. For financially distressed companies, opting for business rescue remains an attractive alternative to outright liquidation. 

The aim of business rescue is to restructure the affairs of a financially distressed company in a way that maximises the likelihood of the company continuing to exist on a solvent basis. If this cannot be achieved, the secondary objective is to restructure the business to yield better returns for the creditors or shareholders of the company than would ordinarily result from immediate liquidation.

It is the responsibility of the business rescue practitioner to develop and implement a business rescue plan. If approved, this plan aims to rescue the company through the restructuring of its business, property, debt, affairs, other liabilities and equity.

A further consequence on commencement of business rescue proceedings is the temporary moratorium on the rights of claimants against the company or regarding property in its possession. The purpose of the moratorium is to grant companies temporary “immunity” from legal proceedings initiated by creditors for claims that would otherwise have been due and actionable. 

Since the introduction of business rescue in 2011, SA has made a marked shift from a liquidation-orientated culture to one of business rescue, with the aim of reintegrating financially distressed companies into the market on a solvent basis.

The CIPC status report reveals that of the entities that terminated business rescue proceedings in the final quarter of 2023, 36% were successfully rescued due to meaningful implementation of a business rescue plan. 

This is a positive statistic, one that supports the business rescue process. The resulting effect is that these rescued companies are returned to the economy on a solvent basis and are ready to continue to trade with suppliers and consumers. 

The key to effectively rehabilitating a financially distressed company lies in commencing business rescue proceedings at the earliest indication of financial distress, within the meaning of the Companies Act. 

If the company has progressed too far along the path of financial distress the only remaining option may be liquidation through the sale of assets, subsidiaries and businesses to external buyers.

If entities delay taking action and only pursue business rescue when the company is already deeply entrenched in financial distress, the prospects of successfully implementing an operational or financial restructuring in the business rescue process becomes limited and difficult to achieve. 

To maintain and ideally increase the success rate of rescued companies, the crucial factor will always be early intervention. Directors of companies must buy into the notion that appointing a practitioner to oversee the company as early as possible in its distressed phase will enable proactive measures to be taken to achieve a return to solvency through a successful business rescue process. 

This approach facilitates the rescue of the business, thereby preserving most jobs, allowing companies to embark on the process of making a fresh start. 

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