Business Rescue - A Different Perspective

By Hans Klopper [02/04]

There appears to be a widespread perception that South African liquidators are intent on 'liquidating and moving on' without regard whatsoever for the possibility of restructuring and rescuing a business. The allegations about the ”liquidation industry” have resulted in proposals being submitted for turnaround experts to be identified and appointed in order to cultivate a new culture of business rescue in South Africa.

It is of course admirable to promote a culture of business rescue as against the liquidation of companies. However, it would be naïve to accept that the mere establishment of legislation for purposes of rescuing businesses will have the effect that entrepreneurs will all of a sudden creep out of the woodwork and start rescuing companies. The rescuing of business can only take place in an environment where entrepreneurs coming to the aid of liquidated or ailing businesses, are provided with an incentive to do so.

It might surprise many of the parties who are so actively canvassing for the rescue of business that the necessary tools to implement rescue procedures already exist in our Law. There are, however, very sound reasons why such tools have not succeeded in bringing about a culture of business rescue in South Africa.

When a company in financial distress is placed in provisional liquidation it is normally done because there is a huge burden of debt. Upon the granting of a provisional liquidation order a moratorium known as a concursus creditorum is established and the hand of the law is laid upon the company. No creditor can enforce any claim against the company, and the assets of the company are protected from being attached by such creditors.

When a provisional liquidator is appointed, he is, in terms of provisions of the Companies Act, empowered to decide to carry on with or to discontinue any part of the business. The practical effect of this is that any prudent liquidator will take a commercial view in deciding whether it would be to the benefit of the creditors to continue with the business activities of the Company. It should only be in circumstances where it is clear that continued trading activities would lead to further deterioration of the business that a liquidator should elect to close the doors of the business and sell the assets. Liquidators with vast experience in turning around companies and businesses have been acting according to this principle for decades. This is how it is done in many other countries.

The professional liquidator, often a duly qualified Charted Accountant or an Attorney or both, will realize the dire consequences of an irrational decision to merely lock the doors and have the business’ assets sold by auction or otherwise. It would therefore be only the desperately inexperienced amongst liquidators who would allow the opportunity to maximize the realisation of a good business to slip past.

The recent amendments to section 38 of the Insolvency Act have the effect that contracts of employment of workers are no longer terminated upon the liquidation of an entity but merely suspended for a certain period. This change in Law affords the reasonably prudent liquidator, with the opportunity to extend to the workers the lifeline to at least earn an interim livelihood whilst he negotiates with prospective buyers.

When it is apparent that further losses would be incurred, steps are normally taken to reduce overheads to ensure profitable trading.

Market forces work in a liquidator’s favour where the business is well known or based on a sound business model and it appears that the business is capable of being rescued or sold as going concern. Parties interested in acquiring such businesses are normally easy to find. It is the “bad” businesses that normally prove to be problematic.

The tools for rescuing a company are already available in our legislation and are to be found in section 311 of the Companies Act. In terms of this legislation restructuring in the form of a compromise or an arrangement, acceptable to creditors, should take no longer than a few weeks.

However, the parties interested in restructuring a business are faced with the following hurdles:

• The reluctance by the South African Revenue Services to allow the company being rescued having incurred losses in the past, to retain assessed losses.
   

• No guarantee that the Courts would see the benefit of the proposed rescue and Order that meetings of creditors for purposes of considering the scheme or compromise may be convened.

The above obstacles have in the past made it almost impossible to provide proposed rescuers of business with any incentive to proceed and is the reason for thousands of jobs having been lost in South Africa in matters where many liquidators attempted to procure a rescue operation. There are success stories but one finds invariably that such successes are attributable to certain liquidators with a rescue mentality as against those who wish to “sell and move on”.

It should therefore be realized by Government and more specifically SARS that we actually have the tools available for the rescue of businesses, but that SARS and our Courts have over the years made it difficult for entrepreneurs to come forward for this purpose. This may be the reason that a culture to rather liquidate and walk away has been developed. In the light of this many entrepreneurs have expressed the view that they would rather buy the business assets on an auction and open a new business elsewhere.

Business Rescue must be incentivised in order for it to work and any business rescue plan must have the backing of government and, more importantly, the Revenue Services.

Should SARS not consider making it easier for rescuers of businesses by allowing for incurred losses to be assessed where such an assessment would have the effect of saving jobs?

Hans Klopper - B Proc B Comm, Managing Director of Independent Trustees (Pty) Ltd, Admitted Attorney, Cert Forensic Accounting and Fraud, Member Association of Insolvency Practitioners of South Africa (“AIPSA”), Director of Hans Klopper Inc, Chairman of the Northern Provinces Law Society’s Committee for Insolvencies and Liquidations.

Hans can be contacted on Tel. (021) 887-9992 or by e-mail.