WHY BUSINESS RESCUE?
Illiquidity is a sign of financial distress. When a company’s monthly figures show a pattern of difficulty in meeting payments and projections forward show the same picture, immediate action is imperative.
At this point, the commonly held view is to apply for liquidation, often at the insistence of impatient creditors eager to salvage whatever they can.
The sense of panic that invariably envelops a financially stressed company means decision making becomes badly affected and logic is often replaced by emotion and fear.
What is always required is the calming influence of an impartial expert with the insight and experience to recognise the underlying strengths of a company. In addition, to spotlight the aspects that, with well executed plans, can realistically result in a turnaround.
At BR360 we know that business success rests on 4 factors: market position, operational efficiency, people/management and financial skill. These same 4 factors will also reveal reasons for failure.
Part of the business rescue practitioner’s skill is not only identifying why a company can reverse its ailing fortunes, but also to make a coherent case to all stakeholders, and the court, that this can actually be achieved.
Business Rescue is about seeing the possibilities and being afforded the precious time to put a plan into action that is designed either to return a company to a position of solvency or ensure a higher return for the body of creditors than would have been realizable in liquidation.
OUR 360 APPROACH
Business Rescue requires a diverse set of skills in order to have any prospect of succeeding. It is very important to realise that a plan to turn around a company goes far beyond the short-term exigencies of cash flow and debtors. The plan needs to be considered from a number of angles that, combined, present a scenario that is realistic, do-able and sustainable.
Judge Eloff, in hearing business rescue applications, has made this very clear:
There are important details to note here. The court will expect the business rescue practitioner to have clearly identified the reasons for the distress and have details that outline both this and the recommended way forward. The word “sustainable” is key.
As Judge Eloff put it at the time:
JUDGE
ELOFF
In a business rescue application, the court has a priority responsibility to the stakeholders of the distressed company. Any decisions taken will have to show that their interests have been put first and that business rescue clearly presents the option with a better return than liquidation.
BR360 recognises that this is not a one-dimensional exercise and that every angle needs to be carefully considered. A plan that simply sources funding to meet immediate debt demands would fall short of our standard.
Having identified causes, it now needs to offer solutions. This is not a job for a single practitioner; it requires skills from a spectrum of experts in finance, law, employee relations, training, management consulting and marketing.
This is what a 360 degree, all-round business rescue requires. BR360 is able to draw on every expert skill required to not only ensure a successful application but also to take the company onto a path of sustainable success.
THE PROCESS
One of the challenges faced by business rescue practitioners is similar to those found in the medical profession in that companies that are ailing wait too long to seek help.
From the South Gauteng High Court:
A company’s health is monitored in its month-to-month financial accounts and it is here that the first signs of distress become evident. Company management must know the difference between a temporary blip and a problem that is embedded.
This exercise requires financial skills and insights but also discipline and objectivity. Staring down reality in this situation is always difficult.
The Companies Act is very simple and unambiguous and demands that an entity’s directors apply tests that takes a 6-month view of whether debts will be able to be met by the company or not.
The test further requires a consideration of the balance of the company’s assets to its liabilities within a 6 month period. In this way, both tests are forward looking.
If the conclusion is drawn that the company is heading towards insolvency, immediate decision making and action is imperative.
The decision to apply for Business Rescue assumes agreement to steps that will mirror the following:
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Temporary supervision and management of the company by an appointed business rescue practitioner
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Temporary suspension on the rights of creditors and other claimants (including SARS) to seek enforcement action against the company
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Implementation of an approved rescue plan in respect of restructuring the business, debt, property, liabilities and equity of the company
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Once a decision is taken to pursue business rescue, the following steps are taken to an agreed timeline;
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The company Board resolution and filing thereof
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The convening of the first meeting of creditors
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Consulting with employees and other stakeholders
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The practitioner’s investigations and publication of the proposed rescue plan
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The role of the business rescue practitioner
Upon appointment, the practitioner has to investigate, quickly and thoroughly, the feasibility of rescue.
In addition to assuming management and control, the practitioner has delegatory powers and therefore may delegate certain functions to existing directors/managers or third parties. Further, the practitioner may remove any member of pre-existing management, as well as to make new managerial appointments.
The practitioner, from the time of appointment, has 3 clear priorities:
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To arrive at a concise appraisal of the prospects of rescue
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To lay before the creditors, employees and other stakeholders the full details of this appraisal, together with the relevant evidence to support a rescue plan
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To execute the plan in a way that gives the rescue the best possible chance of success
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Post commencement finance
This is the term used to refer to any finance provided to the company once business rescue has begun.
This includes remuneration to existing employees and other employee-related expenses.
The source of finance to a company in business rescue, in accordance with the Act, is not prescribed.
Likewise, any unencumbered asset of the company may be used as security for such finance.
The Team
Business Rescue 360 is able to offer an all- round, problem-solving and solution- based approach because of the team at its core. Business rescue depends on connecting a wide range of talent and experience as well as legal and financial skills to both plan and execute successful outcomes.
It is this wide diversity of knowledge, plus the proven ability to arrive at workable solutions in difficult, high pressure situations that allows us to define what needs to be done, and as quickly as possible.
DR ZOLANI BUBA | CEO
PhD (PhD in Commercial Law: Business Rescue Specialization) (UCT) LLM (Tax) (UCT) LLB (UCT) BSocSci (UCT)
Licensed Business Rescue Practitioner
Dr. Zolani Buba boasts significant experience and technical expertise in tax, tax administration and commercial law. He has written numerous articles and co-authored textbooks in these areas and this work provides clear evidence of his incisive analytical and communication abilities.
Zolani has served on the Davis Tax Committee and was formerly National Business Rescue Specialist for SARS.
WALTER GEACH | CHAIRMAN
BA LLB (UCT) MCom FCIS CA (SA)
Prof Walter Geach is uniquely qualified and experienced in the fields of trusts, taxation and estate planning. He is a chartered accountant CA (SA), an admitted advocate of the High Court and former Head of the Department of Accounting at UWC. Among his many other academic achievements, he has also authored/co-authored over 15 published books which have become go-to reference works in the industry. He is a director (non-exec) on several boards, including Grand Parade Investments Ltd.
DAVID MASTERTON
BCompt (Hons) CA (SA) CFE MDP B‑BBEE
David is a Chartered Accountant with extensive knowledge of a broad spectrum of advisory roles.
In his 8 years career with SAPPI as Commercial Manager, he built valuable experience of supply chain management, work flow and system implementation.
David joined Nolands in 2013 in that time has assumed leadership in several aspects of the company’s business, including advising clients on BBEEE strategy, re-structure, M&A and in identifying opportunities and initiating start-ups.
PAT PATTINSON | BUSINESS RESCUE PRACTITIONER
Since 2011, Pat has been appointed to more than 50 formal businesses rescue assignments in various industries throughout South Africa. He has achieved an outstanding success rate of more than 90% on published business rescue plans.
In December 2015 he was officially promoted to a Senior Business Rescue Practitioner and at the end of 2018 was accredited as a Professional Turnaround Practitioner SA (PTP-SA SAQA)He is currently the COO of the Turnaround Management Association of South Africa (TMA-SA).
He has broad experience in business, finance and law.
BR360 CASE STUDIES
The reasons why any business can become distressed to a point where rescue is needed are many and varied.
That said, there are also many recurring themes which often plot the arc from start-up to momentum to success and then a plateau from which a business either takes timely remedial action or continues a downward spiral.
AUDIO VISION GROUP OF COMPANIES
Retail; Western Cape; Annual Turnover R70 million
The business rescue proceedings were launched via court application on 26 July 2013. The Companies were placed under business rescue and supervision in terms of the Court Order. The Companies had stores in the Canal Walk Shopping Centre, Tyger Valley Centre and Victoria & Alfred Waterfront.
The Companies employed 57 employees in total consisting of sales people, administrative staff, logistic staff, instillation teams and management. The Group of Companies are specialist consumer electronics stores that handles a variety of product categories from basic audio visual equipment and accessories to full scale home installation and theatres.
The reasons for the failure of the Companies were as follows:
The Companies had to meet more stringent requirements as a Samsung partner, by issuing an 8 week forecast for all Samsung stock required, over and above the current months’ stock deliveries. This became a financial problem as their main supplier and thus creditor, Group Appliance, had to issue order numbers for the stock on forecast, effectively buying 2 months’ worth of stock in advance.
Subsequent to the appointment of the BRPs the major supplier agreed to maintain supply, post-commencement in an attempt to raise the stock levels which in turn would increase the gross turnover for the benefit of creditors. An amount of R3 million was afforded by the supplier that effectively raised the turnover during the first trading month by more than R1 million. The creditors approved the business rescue plans that included the following:
- All employees to be retained.
- A compromise was reached in the amount of 28,2c/R1.
- The Companies continued to trade and the suppliers were afforded an opportunity to continue with their relationship with the Companies
The assignments only lasted 4,5 months where after the Companies continued with its trading activities.
DFC GROUP OF COMPANIES
Agriculture and Retail; Western Cape; Annual Turnover R160 million
This Group of Companies consisted of 5 entities being the Hatchery, Breeder, Broiler, Abattoir and Holdings Company. This assignment commenced via Special Resolution during February 2012.
Due to the economic downturn the Groups’ prospects to continue trading were severely hampered. The combination of escalating input costs, specifically maize and fuel placed the Group under severe cash flow pressure. The price of packaged chicken products did not follow the same pattern of increase as inputs and this, coupled with a strike during the latter part of 2011, took its toll on the trading activities of the Group.
The major secured creditor agreed to supply post commencement finance for the ongoing trading activities. The post commencement finance afforded the BRP an opportunity to ensure a better exit route for creditors than liquidation. The secured creditor, with an exposure of circa R125 million, was at risk to lose at least R75 million should the BRP not create value within the business rescue process. The Companies were ultimately sold to a listed company which had the following effect on the affected persons:
- The purchaser agreed to retain the services of 40 % of the 500 staff members.
- The concurrent creditors that would have received no dividend under liquidation circumstances received a dividend as part of a compromise that were reached with them.
- The secured creditor was paid in full.
The business rescue process lasted more than 2 years.
CAPRICORN COLD STORAGE (PTY) LTD
Logistics / Cold Store; Western Cape; Annual Turnover R50 million
The Company commenced business rescue proceedings in terms of Section 131 of the Companies Act placing the Company under supervision on 19 November 2014. The Company conducted the business of a customs bond store, cold store and warehouse as well as a customs-clearing agent. It was also involved in transport and logistics. It had 26 full time employees.
The financial position of the Company was attributed to a deed of surety in favour of Standard Bank for the debts of a Company named Muizenberg Import Export and Distribution (Pty) Ltd (“Muizenberg Import”). This company was provisionally liquidated on 19 June 2014 at the instance of a Company, Ry and Kuang PTE Limited.
The indebtedness of Muizenberg Import towards Standard Bank amounted to R14,640,128.00. Therefore, under the suretyship, the Company was indebted to Standard Bank in a similar amount. Due to the liquidation of Muizenberg Import, Standard Bank has called up the suretyship.
From our preliminary investigations and the historic trading figures at hand, we had come to the conclusion that some or all of the assets vesting in the Company had to be disposed of in order to settle the claims of the Creditors. In order to realize the best value, the assets had to be disposed of as a going concern or under controlled circumstances. The BRP secured post commencement finance from a related company that afforded him the opportunity to create value within the process. The creditors sanctioned the business rescue plan that resulted in the following:
- All independent creditors’ claims were settled in full.
- All employees retained their employment.
- The continuation of business activities on a reduced scale.
The business rescue process lasted 7 months.
ENGENIUS TOYS FOURWAYS (PTY) LTD – Retail
Gauteng/Western Cape; Annual Turnover R12 million
The Company commenced business rescue proceedings via Court application on 18 September 2012. The Company conducted business as a retailer of Lego retail products, Lego educational products, Lego licenced products and Lego Wear Clothing. The Company had 11 full time employees.
The business lost monies due to a poor decision to open in the Centurion Mall which was trading at a loss of approximately R200,000.00 per month. After closing this store in July 2012, the Company had to cover the costs of closing this business as well as buying itself out of a lease. This loss was estimated to be in the region of R900,000.00. Due to the lack of finance, the shareholders agreed to source funds from other investors. A further reason for the Company being in financial distress was a lack in decision making by the shareholders due to various disputes among them.
The BRP secured post commencement finance from a related company that afforded him the opportunity to create value within the process. The business rescue plan was initially not sanctioned by the creditors but after subsequent negotiations, the business could continue with its trading activities.
- All employees retained their employment.
- All independent creditors’ claims were settled.
- The Company continued with its trading activities.
The business rescue process lasted 5 months.
JATAN 002 BK TRADING AS NETWERK KOERIERS
Courier Service; Western Cape / Northern Cape / Eastern Cape; Annual Turnover R50 million
The Corporation commenced business rescue proceedings via Special Resolution on 24 February 2014. The Corporation offered overnight courier services in the Northern Cape, Southern Cape, Eastern Cape and Western Cape Provinces. Through their 44 depots they were able to render outstanding services at competitive prices. The Corporation had 31 salaried employees, 25 waged employees and 15 sub-contractors that were reliant on the existence of the business for their livelihood.
The main reason for the failure of this entity was substantial debit loans by the members. During the business rescue process these loans were recovered in part and is this process still ongoing. The business was sold to management (excluding the members) for substantially more than the forced sale valuation. The effects of the approved business rescue plan were as follows:
- All the employees’ contracts were transferred to the successful bidder.
- Creditors received a dividend of at least 75c/R1 of which the majority has already been distributed.
- The business continued.
The outcome of this assignment was substantially better than liquidation as all the employees retained their employment, creditors received in excess of 75c/R1 and the business continues to operate.
JONKHEER GROUP OF COMPANIES
Retail; Western Cape / Northern Cape; Turnover R70 million
The Companies commenced business rescue proceedings via Special Resolution on 27 August 2013. These Companies were wholesale wine and liquor concerns, focussing on servicing the Southern Cape and Karoo areas. Due to many changes in the market, rising costs of labour and debtors’ policy of some of the larger retail groups, the Companies incurred severe cash flow problems.
The Companies supplied liquor to various clients including but not limited to Pick ‘n Pay and Makro. The Companies had 90 salaried and waged employees.
No post commencement finance were required on these assignments. The creditors approved the business rescue plans and it was agreed that business rescue should endeavour to create a better exit route than would be the case under liquidation circumstances. The effects of the approved business rescue plans are:
- All employees were transferred to the successful bidder.
- The sale of the assets of this Company generated circa R15 million, more than would have been the case under liquidation circumstances.
- Creditors received 86c/R1.
Jonkheer Finansieringsmaatskappy
- All creditors settled in full.
CONTACT US
If you believe it to be in your company’s best interest to explore any aspect of the topics raised here, we invite you to get in touch with David Masterton for a completely confidential chat, without any obligation whatsoever. His contact details are on the right.
Alternatively use the messaging form below and we will get back to you.