Business rescue yields mixed bag of results
Business rescue, South Africa's equivalent to chapter 11 bankruptcy in the United States, is generally working well.
It has notched up some notable successes in the 18 months since its inception in May last year.
The number of business rescue applications is rising steeply, although there are several rough edges in the new law. Because of the costs of business rescue – unlike chapter 11, it imposes a new layer of management on a troubled company – the system is probably only suitable for medium-sized and large companies.
So far, the highest-profile business rescue cases have failed, most recently 1time Airline after about two months in business rescue, and black economic empowerment construction company Sanyati Holdings, after about two weeks.
Nonetheless, there have been some significant successes. One of the better known of these is Blyvooruitzicht Gold Mining, whereas others have included Polmaise Colliery and Eldorado Fresh Lettuce.
But even the cases that have failed have sometimes served to highlight the issues and challenges that face businesses in South Africa. Sanyati Holdings called attention to tardy government payments, whereas 1time's failure raised the issue of whether the government backing of state airlines could be having a negative impact on private airlines.
According to Rory Voller, deputy director of the Companies and Intellectual Property Commission, more than 700 businesses entered business rescue between May last year and early November this year.
About 80% of them followed an application by a stakeholder (for instance, a director or other officer of the company, an employee or a creditor) without a court application; the balance entered the process as a result of a court application.
Court applications generally occur when there are differing views on whether the company should file for business rescue or be liquidated. In more than 90% of the court applications for business rescue, the attempt has failed and the companies have been placed in liquidation, according to Alex Eliott, an insolvency and business rescue expert at Eversheds attorneys.
This is probably because these companies are often at a last-gasp stage, whereas the process is meant to assist companies when there is still hope of recovery.
Elliot said the length of time taken to hear court applications also contributed to the problem.
Of the cases in which business rescue has originated as a resolution from a stakeholder, the initial results have been much more positive.
So far, of the 700 overall cases, about 170 have come to resolution in an average of five months.
According to the commission's statistics, about 55% of companies that went through the entire business rescue process were successful, said Voller, although Elliot believed the long-term success rate would be lower than that.
The new Companies Act allows a three-month period for business rescue, which, as some experts said about 1time's case, is often unsufficient time to turn a business around.
Once a notice of business rescue has been filed with the commission, it appoints a business rescue practitioner, who has 25 days to produce a rescue plan.
Eliott said that the practitioner's chances of success in business rescue were enhanced because he or she came in unencumbered by boardroom politics or the interests of shareholder groups and was freed of many strictures in the Companies Act regarding decision-making.
As the law gained more currency, Eliott said, business rescue cases could attract venture capitalists, competitors who were willing to risk investing capital in the businesses, or even development finance institutions such as the Industrial Development Corporation, which could provide finance to save a black economic empowerment company like Sanyati Holdings.