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Preassessment A Prerequisite

12 August 2013

Routledge Modise

An early evaluation of a company's affairs should become an integral part of the business rescue process.

All too often the question is asked why business rescues fail. There are many speculative reasons and some logical ones, too.

We know that business rescue proceedings in SA commences in one of two ways as envisaged in chapter 6 of the Companies Act 71 of 2008. The first is by way of a resolution passed by the board of directors and the second is by way of a court application brought about by an "aggrieved" affected person (creditor).

When resolutions to commence business rescue arrive on the desk of the Companies and Intellectual Property Commission (CIPC), no scrutiny or prior assessment of the company's affairs is conducted to decide whether or not the company is indeed financially distressed and that there is a reasonable prospect of rescuing the business. The result is that companies which may be beyond the point of rescuing are placed into business rescue. These companies likewise nominate their own business rescue practitioners simultaneously with their applications to the CIPC.

As a result, placing companies under business rescue by way of resolution which are beyond rescuing, as well as the appointment of a business rescue practitioner nominated by the company who may not be independent, is a recipe for disaster and the overall success rate of business rescues is therefore spoiled.

Data supplied by the CIPC indicates the number of companies which have gone into business rescue by way of resolution (375 of them) as opposed to companies which have done so by way of court order (81).

The difference is staggering as only 18% of businesses have gone into business rescue by way of court application as opposed to the 82% which have done so through the uninhibited procedure of filing a resolution.

So the next question is: what are the stats on successes and failures in business rescue? The CIPC has recently indicated after a survey conducted that there has been a 55% success rate in business rescue, with 38% of attempted rescues resulting in liquidations and the remaining 7% of companies still undergoing rescue proceedings.

Even though there is a 55% success rate (which qualifies for a below average pass), the 38% failure rate is high. It seems as though business rescues are being conducted with a "hit and miss" approach.

Of the 135 court applications brought to commence business rescue only 81 were granted, and of the 375 resolutions filed with the CIPC to commence business rescue all 375 resolutions filed were accepted.

It is clear the analysis of the courts coupled with their inherent discretion and application of the strict requirements imposed by the Companies Act has drastically reduced the number of companies going into business rescue, whereas these same businesses could have ordinarily gone into business rescue through the filing of resolutions.

Courts have the privilege of preassessing both the company's financial affairs and hearing argument as to whether a particular business rescue practitioner nominated to act as such in the court application is independent or not (if the issue arises).

The non-independence of a business rescue practitioner means that the interests of the creditors are not taken into consideration during the business rescue process or, at the very least, the interests of the company's directors (who appointed the practitioner) outweigh those of the creditors. This ultimately results in drawn-out rescues with very little prospect of success, not to mention frustrated creditors and destitute employees.

At present there are no provisions in the Companies Act that envisage the preassessment of a company's affairs before it is given the stamp of approval to commence business rescue by way of filing a resolution.

This is a failure on the part of the legislature, as the results clearly tell. The good news is that nothing stops the CIPC, or a business rescue practitioner who has been nominated by the company, to request that a preassessment be conducted before the company may go into business rescue by way of resolution. Any company which is truly financially distressed, but which has a reasonable prospect of being rescued, will be open to the request for a pre-assessment.

A pre-assessment of a company's affairs will no doubt greatly improve the success rate of business rescues, thus making it more sustainable. It will indeed limit the number of companies which will then actually qualify for business rescue. However the implication is that business rescue outcomes will become more determinable and creditors would be able to assess the situation earlier and take remedial measures if a company fails a pre-assessment, rather than having to wait until the company fails the business rescue attempt altogether, by which time it is too late as the company would be placed in liquidation.

Therefore a pre-assessment of the company's affairs as well as the determination of the independence of the nominated business rescue practitioner when a company files for business rescue by way of resolution will be beneficial for least the following reasons:

  • It will ensure a company is indeed in financial distress;
  • Whether or not a reasonable prospect of rescuing the business exists would be properly canvassed;
  • The independence of the nominated business rescue practitioner would be established;
  • The time period that the business rescue is probably going to last would be calculable;
  • It will be more time-efficient, It will save the company unnecessary costs occasioned with a failed business rescue;
  • It will provide creditors with a clearer view on their prospects of recovery and/or allow them to take proactive steps in curbing their risk;
  • It will limit business rescue practitioners from becoming personally liable, where they would in certain circumstance compromise themselves to "save" the business, but where such a business is beyond rescuing;
  • It will reassure employees and their trade unions on the prospects of success and create a more workable environment;
  • The CIPC will become more active in the business rescue process and not merely an administrator;
  • It will attract investment for purposes of post-commencement finance and perhaps be the catalyst for creating investment initiatives in this area;
  • It will ensure that the number of business rescue to liquidation conversions become greatly reduced, if not eradicated, by means of a thorough preassessment by a team of professionals comprising accountants, attorneys and industry specialists; and
  • If business rescue attempts do fail, we would have a more concrete answer as to why it did, since the numerous variables would have been explored at the pre-assessment stage.

Pre-assessments of a company's affairs and the determination of a business rescue practitioner's independence should become an integral part of the business rescue process and will result in a much better success rate.

Improving prospects of success

  • Any company which is truly financially distressed, but which has a reasonable prospect of being rescued, will be open to the request for a preassessment
  • A preassessment of a company's affairs will no doubt greatly improve the success rate of business rescues, thus making it more sustainable
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