There can be little doubt that South African companies are having a tough time. The local and global economy is growing at a snail’s pace and the business confidence index fell to a seven-year low in the second quarter of 2016. Obviously more companies are going into liquidation – correct? Not so!
According to Stats SA the number of companies being liquidated has been in steady decline since it peaked in 2009. In that year just over 4100 businesses were liquidated, and this number has steadily decreased to just under 2000 in 2015. In the first six months of 2016 only 930 liquidations were recorded and at the current pace the number could reflect less than 2015 at year end. So where does the anomaly lie? Why are we seeing tougher market conditions but less liquidations? Enter Business Rescue.
The number of SA entities that have applied for Business Rescue from 1 May 2011 to 30 March 2016 number approximately 2150, and the consensus of opinion is that less companies are applying for liquidation directly, rather opting for the Business Rescue path. The legislation was designed to provide distressed businesses with a far quicker intervention than the judicial management process (which it replaced) but there is now evidence to suggest companies are staying in Business Rescue far longer than originally anticipated in the drafting of the Act.
According to an article which recently appeared on Moneyweb, a study was prepared for CIPC by University of Pretoria professor Marius Pretorius, whom put the success rate of business rescue proceedings at 9.4%. If therefore the rate of business rescue success is that low and the liquidation rate is falling, the conclusion one must draw is that companies are spending significantly longer periods under Business Rescue.
There is however little doubt that the legislation works. While 9.4% of distressed companies may not sound a lot, the typical businesses that do get saved are usually larger, owing to the fact that post commencement business rescue financing is more likely to be provided to larger businesses compared to small operators. Assuming 9.4% of the largest business rescue businesses are being saved, then this could translate into significant jobs saved and creditors appeased. The other success of the business rescue legislation is that especially concurrent creditors (creditors without security) now play a far more active role in the rescue process, compared to their input when companies liquidate. The main reason for this is that concurrent creditors hardly ever see much in the way of pay-outs from liquidations, but in Business Rescue there is a real chance of seeing some of the proceeds when a settlement deal is struck.
Business Rescue does of course have its flaws, and the flaws are not necessarily attributable to the legislation itself. In this country (as in many others) entrepreneurs or company boards simply wait too long before raising the flag. Many businesses that apply for rescue go into liquidation quite soon after the proceedings have started, owing to the fact that there is simply nothing left to save. The second problem is that South Africa does not yet have much appetite for post business rescue commencement finance. When capital is expensive and borrowing limited no financier would want to back a delinquent business – especially one which is being headed up by the same management team that brought the company to its knees. Unless the business has potential for being sold, or creditors can strike a deal in which liabilities are significantly reduced, there may not be much left to save.