Law firm Cliffe Dekker Hofmeyr (CDH) business rescue and insolvency director Lucinde Rhoodie says South Africa can expect an uptick in business rescue filings, as more businesses will look to it as a means of saving their companies following significant impacts of the Covid-19 pandemic and the recent civil unrest in KwaZulu-Natal and Gauteng.
Business rescue happens when a company is financially distressed, and found to be either commercially or factually insolvent, but it can only be processed when there is a reasonable prospect that the company can be rescued such that the company’s rescue will ensure it remains liquid, preserves jobs and positively contributes to the South African economy.
Rhoodie concedes to Engineering News that companies may face some reputational disadvantages from entering into business rescue but insists that “the advantages far outweigh the disadvantages”.
Advantages include saving the company, which allows it a further opportunity to contribute to the South African economy by being a trading and solvent establishment.
Additionally, it ensures the preservation of jobs, something which South Africa is in dire need of as its record high unemployment rate continues to rise.
“What we will definitely be seeing for the next couple of weeks and months is going to be an uptake in business rescue. It’s very important for directors of companies and close corporations to understand that they would be faced with a very difficult decision as to whether they should wait and see if things improve, or if they should make the decision to apply for business rescue,” Rhoodie comments.
Unfortunately, business rescue is often seen as the problem and not the solution, Rhoodie says, adding that business rescue is there to “alleviate the problems” caused by, for example, the pandemic and recent riots.
“We can never deny that our businesses have really not been having an easy time over the last 18 months or so. The economy has experienced its most drastic swing in decades after the impact of the Covid-19 pandemic, which had devastating effects, and the recent riots and civil unrest also worsened the South African economy,” she adds.
Unfortunately, this means that businesses will be faced with tough decisions and Rhoodie believes business rescue is one of the ways to help businesses to get out of a difficult situation.
“Business rescue may be the solution as it may create, or at least present, an option for some distressed companies not to go the traditional route of pulling the trigger by liquidating the company, which results in very bad returns for creditors, and the most important thing, results in almost certain job losses,” she elaborates to Engineering News.
Rhoodie warns that directors should be aware that it is “within their legal fiduciary duty” to act in the best interest of the company.
“Directors must also understand that there are possibilities of personal liability for the debts and the loss of a company if it is found that a director caused the company to trade recklessly.”
She, therefore, urges directors to “seek guidance as soon as possible” to avoid personal liabilities.
Further, she advises that, before entering into a business rescue process, directors should determine if a company is “capable of being rescued” in the sense that it will be able to trade solvent going forward, and ensure that stakeholders, creditors and shareholders will get a better return than what they would have received had the company been liquidated.
“This is but one of several factors that professional legal advisers need to take into account when advising a company whether it can be rescued,” she says.
CDH, she adds, will, “as long as there is a reasonable prospect of rescuing a company”, always encourage businesses to consider business rescue before liquidation, as the latter option is “very final, and the death of the business and employment”.