Guarantee construction underwriting management agency Performance & Customs Bond Services (PCBS) says the most recent liquidations and insolvencies statistics released by Statistics South Africa on October 22, 2012, indicate that the total number of liquidations in the construction industry from August to September that year has almost doubled.

“The rise in liquidations can be partly attri- buted to many financially ailing construction companies applying for business rescue under the new Companies Act without proper planning before lodging their application,” says PCBS claims and risks management executive Tunga Changamire.

To mitigate the closure of construction compa- nies, the business rescue plan was introduced in 2010 when changes were made to the Companies Act. Many construction and engineering compa- nies are using business rescue plans to salvage their companies from liquidation.

The business rescue plan is a preliquidation phase whereby the company has the opportunity to restrategise and recapitalise to prevent it from being liquidated or sold.

“Between 2011 and 2012, the construction sector experienced some difficulty and quite a number of companies went into liquidation, owing to cash constraints. As a result, many companies have applied for business rescue plans.

What we have noticed is that many companies know what the business rescue plan entails, which can be problematic when trying to assist companies during this difficult period,” he explains. How can it be problematic when companies know what the plan entails?

Changamire notes that the business rescue plan is a good option. However, it is essential that the company in question operates with transparency during the process and plans carefully before the application is filed, as everyone stands to lose if liquidation goes ahead.

Companies are given 30 days to initiate restructuring or strate- gising. If a company is unsuccessful with the implementation and execution of the business rescue plan, it is liquidated. If the company is successful with the implementation of the business rescue plan, the company can apply to be removed from the business rescue plan.

One of the challenges in the industry is that companies appoint business rescue practitioners with no predetermined rescue plan in place, relying solely on the appointed business rescue practitioner to rescue or rehabilitate the company from financial duress.

Another challenge is that there is a legal mora- torium on the company during the 30 days during which it will be implementing the business rescue plan. This may benefit the company, but the guarantors working on the process do not have the same protection under the moratorium.

“This puts the guarantors in a difficult posi- tion, as they are left to pay the outstanding claims should the company file for liquidation. This is not fair, as they are not protected against this. Such a challenge should be reviewed to protect guarantors from having to take such risks for the companies,” says Changamire.

While the business rescue process is relatively new within the local context and is still being tested, Changamire predicts a growth surge in construction companies opting for business rescue over the next five years.

“Last year, we saw the construction industry under a lot of pressure but the business index is going up and there was a surge in contracts being awarded; consequently, we hope to look forward to a year of recovery,” he concludes.