Last year 1,962 SA companies went to the liquidation wall.
The figure could have been lower if more companies in financial distress had opted for business rescue.
"Business rescue provides a moratorium to shield a company in distress from creditors wanting to put it into liquidation," says Haroon Laher, Norton Rose Fulbright SA’s head of financial restructuring and insolvency. While it is in business rescue stakeholders, like employees and creditors, can engage and secure an outcome better than liquidation.
"All is not perfect in the world of business rescue," says Laher. "But SA is on the road towards a maturing rescue culture."
Business rescue was what 83-year-old Progress Milling in Polokwane needed to save it from a liquidator’s axe.
In a swift turnaround, the company went into business rescue in March and by September had been saved by a consortium of new investors.
Progress’s rescue had far wider implications.
"Liquidation would have put 400 people out of work," says Laher. It would also have spelt disaster for much of the local agriculture sector.
"Progress is supplied by 7,000 farmers, most of whom are small-scale emerging black farmers," he says.
"They would have lost a lot of money and many would not have survived."
Business rescue was brought into being in April 2011 by chapter 6 of the Companies Act. It is gaining ground, but perhaps not at the pace it should be.
According to the companies & intellectual property commission, 494 business-rescue proceedings were started in the 12 months to March.
Though this was up from 415 in the previous 12 months, it represented less than a one-third increase compared with the number in the first 12 months that distressed companies had access to business rescue.
"The important thing is that the number of business rescues is rising and liquidations are falling," says Laher. "It is what you would want to see."
Daniel Terblanche, an associate director at Deloitte, believes there is potentially a lot more work awaiting business-rescue practitioners.
"The feedback we get from financial institutions indicates they are attempting to achieve a lot of solvent solutions," he says.
Edcon is a stand-out example . Drowning in debt, it had business rescue written all over it. The solvent solution was for Edcon bondholders to swap R20.7bn debt for equity. It has left Edcon with shareholders that include Standard Bank, FirstRand, Barclays Africa, Standard Chartered and Investec.
Arguably for the financial institutions involved, Edcon was too big to be allowed to fail.
This is far from the norm, according to Deloitte’s 2016 survey-based SA restructuring-sector study — of which Terblanche is a co-author.
When respondents to the study were asked whether they believe SA has a rescue culture, 78.1% said no.
The success rate of business rescue is not clear-cut. Providing an indication, 35.5% of respondents to Deloitte’s study rate chances of success at less than 25%, while 54.8% rate it at 51% and higher.
The two highest-rated success measures are a better return for creditors and a business restored to solvency.
In many cases it will not result in the same level of success as was achieved with Progress Milling. Often the only viable solution is a managed, piecemeal sale of assets — as with the recently closed Masonite rescue and the ongoing Evraz Highveld Steel rescue.
One of the biggest challenges faced by business-rescue practitioners is securing financing during the business-rescue process. Unlike the US, where business rescue is supported by a US$240bn distressed-debt market, SA’s business-rescue practitioners rely heavily on banks for financial support.
"Post-commencement [of a rescue] banks are reluctant to extend credit," says Laher. What is missing, he believes, is greater legal certainty for lenders during the business-rescue process.
"The business rescue sector needs a specialised court, a court dealing efficiently and quickly with business rescue disputes. Time taken to resolve a dispute in ordinary courts is often destructive of any hope to salvage a company" says Laher. "Chapter 6 provides for one, but nothing has been done."
Terblanche has his doubts: "A specialised court would definitely help, but I do not see it happening any time soon."