Business rescue success hampered by ostrich syndrome and some 'rogue operators'

Some rescue practitioners seem quick to accept appointments where there are no prospects of saving a business.
Some rescue practitioners seem quick to accept appointments where there are no prospects of saving a business.
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  • The rescue process of SAA is still not done after almost eight months and billions of rand.
  • This has put the spotlight on whether business rescue is indeed a viable option in SA.
  • The success rate of business rescue in South Africa is approximately 10%.

The business rescue process of South African Airways, which, after almost eight months and billions of rand, is still not complete, has put the spotlight on whether business rescue is indeed a viable option provided by the Companies Act.

The success rate of business rescue in South Africa is approximately 10%, according to George Nell, a senior business rescue practitioner at Corporate Business Rescue.

He adds that if, however, one disregards the real "bad apples" – companies which were already in a very dire state – the success rate of business rescue goes up to approximately 35%.

Purpose of business rescue

Nell explains that the purpose of business rescue legislation "provides for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interest of all relevant stakeholders".

In his view, business rescue has a future when it comes to struggling companies, as the process has at its core the preservation of the company and job opportunities. Yet, he believes that more robust legislation should be enacted to assist the business rescue practitioner and the process.

Three reasons for low success rate

The business rescue process is often inappropriately utilised, such as when a company is trying to create breathing room or manipulate a compromise with its creditors, says Grant Nirenstein, a director at attorneys Knowles Husain Lindsay Inc.

He agrees that the success rate of business rescue is extremely low, and, in his view, it is due to three reasons.

Firstly, by the time that most businesses go into rescue, the damage is already done. This is referred to as the "ostrich syndrome", where directors refuse to face the commercial reality. As a result, by the time they approach their legal or financial advisors, it's too late for the business to be rescued.

Secondly, the costs of business rescue mount quickly and can be prohibitive, especially when a business has been put into rescue too late.

Thirdly, business rescue practitioners are not always adequately skilled or equipped to understand the unique nature and operations of the business in rescue, in his view, often causing further deterioration of the business before it is ultimately liquidated.

He is, nonetheless, of the view that it is worthwhile having the business rescue process, as the alternative is liquidation, which terminates the business altogether without any prospects of recovery.

"Rogue operators"?

It seems some rescue practitioners are quick to accept business rescue appointments, write fees and utilise funds, which would otherwise be earmarked for creditors, in circumstances where the business has no prospects of rescue and should be liquidated.

These practitioners also tend to prolong the process unnecessarily and perform functions, which aren't required for purposes of the rescue, purely to increase their fees.

"They tend to get away with it, because people have low expectations of business rescue and aren't surprised when it fails," says Nirenstein, who has not come across many "rogue operators", although he says "they are out there".

If a business goes into voluntary business rescue, the board of directors makes the appointment of the rescue practitioner(s).

In Nirenstein's view, often directors will appoint practitioners who they know and can "manipulate". If the business is involuntarily placed into rescue, the creditor bringing the application proposes the practitioner.

If business rescue practitioners are not performing their duties or are dishonest, a court application to remove them can be brought, but this is a costly process.

Nell adds that the business rescue process is highly regulated and usually rids the industry of "rogue operators". The business rescue practitioners have a statutory regulated fee structure which could be verified by creditors at any time during the process.

Current business landscape

In the view of Laurie Dippenaar, co-founder of Rand Merchant Bank Holdings, there is a place for business rescue given the current business landscape affected by unforeseen coronavirus regulations.

"If you don't want to go straight from a business being in financial trouble to liquidating it, business rescue offers an interim step to possibly provide time to save the company," says Dippenaar.

He does see that one of the potential drawbacks of the rescue process may be that the rescue practitioner is not an expert in that particular industry within which the business operates. However, the rescue practitioner can then obtain the necessary expert input.

In the view of Erik Venter, former CEO of Comair, if the management of a company is not able to achieve business success, what is the likelihood of a "stranger" coming and doing it?

"Maybe in terms of smaller, unlisted companies or family-owned businesses the business rescue process can work, but for larger companies you would need someone at the level of an ex-CEO of a company to have the necessary institutional knowledge," says Venter.

He points out that the purpose of creating a business rescue option was not to deal with coronavirus-type unforeseen crisis situations. It is intended as an alternative to liquidation only if that is a viable option.

Labour Appeal Court ruling

Earlier in July, the Labour Appeal Court handed down a key ruling impacting on the business rescue process.

The rescue practitioners of SAA had appealed an earlier finding by the Labour Court that ruled in favour of the National Union of Metalworkers of SA (Numsa) and the SA Cabin Crew Association (Sacca) that the rescue practitioners could not start retrenchments at the airline without first submitting a business rescue proposal.

In the view of Alex Eliott of Eliott Attorneys, the Labour Appeal Court's judgment could have a major positive impact, because the it allows for the possibility of presenting employees and trade unions with a draft business rescue plan instead of a final published plan, which can form the basis of consultation.

"Rescue practitioners will need to prepare their business rescue plans much quicker and much earlier in the process," says Eliott.

He believes the court's line in the sand will guide rescue practitioners to a more genuine consultative approach towards labour and in developing a better quality rescue plan.

Nirenstein, on the other hand, argues that, although the judgment is well reasoned, the regrettable downside is that the already inadequate percentage of successful business rescues may be further diminished.

This could lead to liquidations of companies which could – notionally at least – be otherwise rescued, resulting in more people potentially ending up unemployed. 

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