BUSINESS RESCUE STARTS WITH RECOGNISING A BUSINESS IN DISTRESS
The financial indicators are of the greatest and most visible help here. They are often late, and presented in a way that makes understanding the numbers and their impact difficult.
Boards, however, are required to monitor risk and ensure that risks are managed and there is no greater risk than business failure. The finance committee and the risk committee must ensure that the organisation is a going concern and more specifically that the corporation can meet its obligations as and when they fall due.
The Companies Act requires Directors to regularly assess that the business is a going concern and is able to meet its financial obligations as they fall due in the ordinary course of business.
CAUSES OF CORPORATE DECLINE ARE NUMEROUS BUT FALL INTO SOME VERY BROAD CATEGORIES.
THESE ARE LEAD INDICATORS FOR DIRECTORS TO BE AWARE OF:
- The market no longer exists or is declining rapidly
- There has been a major disruption in the market caused by factors beyond the control of the organisation
- There has been a major fraud that has compromised the ongoing customer relationships or caused severe financial distress and is not covered by insurance
- The business is faced with a sudden and protracted decline in the general economy or its market. The current global recession claims new casualties daily
- The business has grown too rapidly and is under-capitalised; current owners cannot keep up with the increasing growth and need to change the business
- A major customer or supplier has gone out of business suddenly with no supply or resultant bad debt
- The business has diversified and is badly run. Some divisions are stars and others are eating through resources. All of these cases need specific diagnosis and then a plan to remedy those issues. Turnaround is not a one-plan-fits-all-business.
TURNAROUND AND GOING CONCERN
In terms of various laws and governing standards, Boards are required to consider whether the business is a going concern and whether it has sufficient financial resources to meet its commitments as they fall due. This is often measured as resources for the next six months. Sustainable funding and business plans should provide for at least 18 months for larger organisations.
If there are questions of liquidity in such a review, the Board is obliged to consider the turnaround of the business. If the review shows that the business is unable to meet its obligations, the board must by law consider business rescue under the provisions of the Companies Act.
If the Board rejects business rescue, it must inform creditors of this decision. This may open directors to liability for reckless trading should they fail to disclose the lack of liquidity. The suppliers may run for the hills if Directors inform them that the business cannot pay the bills, yet the Directors are going to allow the business to continue to trading.
If the business is commercially and technically insolvent then the Board must consider the options of liquidation and insolvency.
It is in this process of considering the options when a business is in financial distress, that business rescue in terms of chapter 6 of the companies act comes into play.
THE CONCEPT OF BUSINESS RESCUE
Business rescue follows when it is clear that the company does not have sufficient cash to meet obligations as they fall due over at least the next 6 months.
The Board must also not have capital raising plans and alternatives in place. The business may need a capital injection or a complete operational revamp. Business rescue suspends creditors’ claims and allows the business to reposition provided that it can get the creditors to agree to the business rescue plan. Employee rights are secure in a business rescue subject to the provision of the Labour Relations Act.
1. The process under chapter 6
The Board initiates the process, appoints the business rescue practitioner and advises the affected parties that the process has commenced. The Business Rescue Practitioner has 21 days to produce a rescue plan and have it approved by a majority of creditors. The Business Rescue Practitioner is then responsible for the implementation of the plan. The process then ends and the normal running of the business is returned to the Board. Affected parties (creditors and holders of securities) can commence rescue proceedings by application to court
2. The consequences of business rescue
The purpose of the rescue process is to allow space for the business to return to profitability and deal with the issues causing the under-performance. As a consequence, all litigation is suspended and certain contracts can be renegotiated under the supervision of the business rescue practitioner. Labour contracts are not affected. Under the chapter 6 provisions, employee rights and amounts due to them are protected.
3. How can it be used to the benefit of the company employees creditors lenders and shareholders
(what is in it for me)
The process is designed to give breathing space for a solution to be worked out that is more beneficial to the stakeholders than business liquidation. This may include any number of solutions. Consequently, staff creditors, bankers and suppliers should support the process; they should get a sustainable business with secure jobs and profitable business. If the process fails then the business would go into liquidation.
4. The formal requirements for the process
The process can be commenced under S129 of the Companies Act by an appropriate resolution of the Board after ascertaining that the company will not be able to pay creditors as they fall due for payment in the next six months.
An affected person, creditor or trade union can bring an application to court under S131 of the Companies Act and place the business in administration under the Business rescue provisions of Chapter 6.