A Quantitative Analysis of Valuation Disclosure in Published Business Rescue Plans

Abstract

Purpose: Given the importance of valuations in business rescue and the vague guidance provided by the Companies Act 71 of 2008, the study analyses valuation-related disclosure in published business rescue plans (PPs) in South Africa (SA). The main objective of the paper, in addition to being exploratory of actual practices, was to highlight a need for improvements in the Companies Act legislation to support more consistent practices. Design: A quantitative content analysis was done of 55 PPs between 2013 and 2018, using descriptive content analysis and inferential statistical techniques. Findings: Primarily, the list of material assets were disclosed at accounting book values in PPs, and liquidation values were mostly independently determined. PPs described various risks relating to the implementation of the PP; however, the PPs mostly lacked calculations of how the risk will affect the business rescue value. On average, the business rescue value exceeded the liquidation value with 36.4 cents for concurrent creditors compared to 33.7 and 21.2 cents for preferent and secured creditors, respectively. Notably, when the PP included a sale of the business, offers received were, on average, 2.5 times the liquidation value and represented 57% of the book value of the company’s assets at the time. Practical implications: The study suggests improvements to the Companies Act to support more consistent valuation-related disclosure in PPs in SA, in particular, the disclosure of the valuation basis used, the average business rescue premium and offers relative to asset values. Such disclosure would provide evidence to investors on the sound potential of investing in a financially distressed company in SA but, at the same time, set realistic sale expectations for both creditors, BRPs and shareholders. Originality: In view of limited empirical evidence on business rescue prices, the article presents the results of original research in this field.

Enhancing creditor decision-making in South African business rescue proceedings: a comprehensive analysis of information requirements in business rescue plans

“…The findings further reveal that the BRV does not consider the associated risks of business rescue, which is an essential consideration for stakeholder decision-making (Conradie and Lamprecht, 2021a;Rosslyn-Smith and De Abreu, 2022). Additionally, the liquidation dividend is used to enforce accountability by the BRP to deliver a better outcome for creditors than in a liquidation scenario (Lusinga and Fairhurst, 2020).…”

“…In addition, participants emphasised that should these contingent liabilities materialise into a claim, they would affect the BRV. Conradie and Lamprecht (2021a) found that the BR plan should include material risk disclosures to allow an informed stakeholder the opportunity to independently evaluate the likelihood of realising the BRV and PLV.…”

“…The BR plan must disclose the business rescue value (BRV) and the proposed liquidation value (PLV) to allow creditors to make an informed decision about whether to support the business rescue or opt for liquidation proceedings (Madaus, 2014). The BRV and PLV depend on the valuation of the distressed company's assets, which can lead to conflicts between different parties (Conradie and Lamprecht, 2021a). These conflicts usually arise from the different valuation approaches and applied techniques.…”

Valuation of cryptoassets in EU insolvency: Challenges and prospects

“…119 Frequent market-based valuation methods entail price information in an active market or derive market multiples from a set of comparable assets. 120 However, such market may not always exist in the case of cryptoassets. 121 Although many cryptoassets trade either on-chain through the DLT underlying system or on exchange platforms, for others, such as pure utility tokens secondary trading might not be available as this depending on their liquidity and stage of development.…”

Informing the Vote: The Business Rescue vs Liquidation Decision

“…The second occasion is at the second creditors' meeting, where creditors are expected to vote on the business rescue plan (Conradie and Lamprecht 2015). In this instance, however, creditors should be in a far more informed position regarding the turnaround potential of the firm (Mumford 2003).…”