Business rescue increases amongst SME and corporates

Business rescue

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CNA is the latest in a string of high profile brands that have gone, or are considering going into business rescue, following in the footsteps of Ster Kinekor, Edcon, Comair and SAA. Business rescue is also on the increase in the SME sector, as many suffer from financial distress. To put this into perspective, in 2020, 233 files for business rescue were recorded, according to the Companies and Intellectual Property Commission (CIPC). The majority happened in Gauteng. These numbers are set to spike further as the effects of the pandemic are felt and the third wave knocks on our doors.

Business rescue not always a bad thing

The process of business rescue, offered by Chapter 6 of the 2008 Companies Act, is not necessarily a bad thing says PJ Veldhuizen, a Commercial Litigation Consultant at boutique law firm, Reynolds Attorneys. It shows that companies and their boards are being responsible and taking action, in an attempt to stop the haemorrhage and prevent a further collapse of the company’s financial commitments. It also buys the business time, via the statutory moratorium against legal action, in which to turn the ship around. Outcomes are better for staff and creditors too, compared to if a company liquidates. In the case of Edcon, it meant that the sale of 371 Jet Stores and 120 Edgars stores saved 5,200 jobs, although it also lost 22,000.

CNA considers their options

In the looming case of CNA, which was part of the Edcon Group, but extricated itself by the end of 2020, trading has understandably been tough. Notwithstanding the closures of schools, its stores were shut during the hard lockdown and, due to diminished sales, it battled to pay for stock, which is now visibly evident on its shelves. Some suppliers have also stopped supplying CNA completely due to non-payment. While CNA has taken steps to remedy these delays by contacting creditors with a payment plan that suggests dues will be settled by the end of the month – while the retailer puts funding in place – should this not happen, it’s likely the company will go the same route as Edcon and others and be placed in business rescue.

“I presume the board is currently considering whether they are financially distressed and whether business rescue is an option, which is the prudent thing to do. If they do decide to opt for business rescue a business rescue practitioner will investigate and assess whether there is a reasonable prospect of being able to trade its way back to health. But hope is not a strategy. If in financial distress the choices are limited – either a reasonable prospect exists of trading back to commercial solvency, or business rescue is expected to achieve a better return for the company’s creditors and shareholders, or the company should be liquidated,” says Veldhuizen.

As a last resort, liquidate

Liquidation involves the winding down of a business, either voluntarily or by order of a court. All company assets are liquidated, or sold, so as to pay off the business’ creditors. Smaller businesses may be enjoined to take this route if business rescue is not an option. However this should be the last resort as they may not have the funding to start-up again after such a brutal process, and their staff may lose any pay due to them. As such, SMEs, and big businesses alike, are strongly encouraged to do whatever they can do to revitalise their operations and avoid going down the liquidation route. “If there is no post commencement finance available to steady the ship and no sales are coming in, and all other restructuring opportunities have been exhausted, there really is only one answer: liquidate,” says Veldhuizen. The failure to liquidate, in these circumstances, could be construed as reckless with concomitant personal liability issues for directors.

To avoid this, Veldhuizen advises businesses follow these three points:

  1. Generate cash flow

To get a business back on its feet, it needs to increase its liquidity. These funds could be introduced by the business owners themselves, or an investor.

  1. Review management roles

While unpleasant, when a business gets to this point, management or staff may need to be replaced. Having the wrong people in place to turn things around could cause more issues down the line. Excess resources are also problems, as operations need to be slick and the most cost-effective that they can be.

  1. Seek help from a business practitioner

The appointment of a business rescue practitioner can help to enable trading to continue while implementing a business rescue plan. This process was introduced in 2008 as part of the Companies Act and sought to help businesses and companies engage with creditors and find a viable plan of action.

“It is likely that we will see even more of these high-profile cases as the operating environment that has been decimated by the pandemic continues to be hit hard. Of course, we don’t know what CNA will do or what the outcome of the board’s assessment will be. That said, they seem to be taking the steps to make the right decision.

“Companies which fail to timeously decide to go down the business rescue route and then go into liquidation, may find their directors in the witness box answering some difficult questions. They will sure to be asked when do you think you were in financial distress, when did you last pay your landlord or VAT on time? If they knew this and credit was still being incurred, they drag people down with them and could be held personally liable for reckless trading,” concludes Veldhuizen.

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First published on: ForbesAfrica