The process of ‘business rescue’, as outlined in the Companies Act, has become heavily stigmatised in South Africa, leading to undue strain on corporates and an overall less healthy business environment, writes Hans Klopper, Head of Business Restructuring for BDO South Africa.
Companies, like people, can get “sick” from time to time. When this occurs, a business is said to be suffering from “financial distress”, a condition caused by various factors. So how do businesses go about treating financial distress? The answer is not too unlike how humans respond to illness.
When we’re feeling unwell we tend to seek medical assistance. In some cases, this will entail a visit to a GP and, if its more serious, a specialist. From there, we receive a diagnosis and “treatment protocol” often involving the prescription of medication, or even a hospital procedure.
Companies are also able to consult specialists for treatment protocols regarding ill health. These company specialists are able to diagnose the problems, and in turn make recommendations based on information contained within the Companies Act.
Most recommended forms of treatment for an ailing company can be found in the business rescue provisions section in chapter six of the Companies Act. Alongside prescribed actions, the Companies Act provides guidelines for the early detection of financial distress, which includes a positive duty on directors to either file for business rescue, or provide advance reasons to all their creditors and affected persons if they choose not to do so.
It’s inadvisable to ignore prescribed treatment when you fall ill. So why then would a company choose not to follow recommended steps when they suffer from financial distress? The answer has to do with the stigma surrounding the issue.
The stigma around seeking help
Unlike individuals, businesses fall under different considerations when it comes to addressing ill health. The reason for this appears to be due to the attitude adopted by the broader commercial environment that has brought shame to any entity that files for business rescue. As a result, reputational damage now appears to outweigh the risk of not seeking out recommended treatment and protection available to financially distressed companies.
The source of this stigma can be attributed to several parties.
First and foremost are the South African financial institutions who blacklist companies under rescue. By associating business rescue with liquidation, banks have been known to freeze accounts. It has even become commonplace for financial institutions to include a condition in loan agreements where filing for business rescue comprises an “act of default” and grounds for cancellation of a contract — an ipso facto clause banned in many restructuring regimes around the world.
The legal fraternity has also contributed to this stigma through its outright opposition to restructuring business. Over the last decade, business rescue practitioners have also brought ill repute to the process of business rescue due to a lack of experience, expertise or integrity.
The limitations
Support for companies that file for business rescue tends to be limited, despite the perceived support for the process. South African banks, for instance, are unwilling to provide any form of finance as a bridging facility to entities under business rescue.
The only real form of assistance companies under business rescue can expect to receive from financial institutions is “defensive funding”. This option is only offered when a bank or lending institution has no choice but to continue funding a business in order to protect their own security or position — an action further entrenched by the fact banks will not “bail out” other banks that provide post-commencement finance for that purpose.
The Companies Act legitimately provides the necessary “treatment protocols” available to businesses under financial distress. Despite this, financial institutions, creditors, and the general public do not see these actions as either positive or appropriate for a company in distress.
Instead, business rescue is perceived as treatment for a “terminal illness” rather than the beginning of the road to recovery. As such, when an entity initiates business rescue, all associated stakeholders tend to cease their dealings with the company.
In cases where parties have already lost money, this sort of attitude is understandable. But to paint all business with the same brush is harsh, and often misinformed.
What can be done
The stigma surrounding business rescue prevents companies from seeking pre-emptive help. And in cases where business does initiate the process, this often leads to increased risk due to other companies’ reluctance to conduct business with them.
In response, South Africa’s commerce sector needs to educate itself around what constitutes proper “business rescue treatment protocols”. In so doing, competent professional business rescue practitioners or restructuring professionals can be better relied on to do their jobs: helping distressed companies resolve their financial situation before it becomes untreatable.
