Ascertaining the Impact of Post-Commencement Finance on Business Rescue in Kwazulu-Natal, South Africa

Abstract

Corporate rescue in South Africa has been bedevilled by many challenges. The new South African Companies Act 71 of 2008 (hereafter referred to as “the Act”), which came into effect in May 2011 contains a new chapter titled “Business rescue and Compromise with Creditors”. Post commencement finance (PCF) is finance or credit approved for a company in business rescue, which is regulated by section 135 of the South African Companies Act. The Act provides for companies to secure PCF as turnaround investment to secure its financial well-being. However, it is difficult for a distressed business to access PCF as it is challenging to operate on a cash basis when they face the likelihood of insolvency or forced sale of their assets to remain sustainable. This was evident during the recent global financial crises when obstacles to accessing PCF were identified as the chief deterrent for businesses that require rescue or reorganization (Pretorius and Du Preez, 2013). A review was performed to assess what the impact was, of a distress company obtaining PCF in KZN. Empirical research includes a qualitative research design engaged to explore the impact of PCF on the success of business rescue efforts for distressed companies in KZN. Insights and understandings were drawn from the participation of business rescue practitioners in Kwa Zulu Natal. This included addressing the challenges of obtaining PCF and what finance is available. The findings from the literature review confirm that the barriers to obtaining PCF are the most limiting factors in rescuing businesses in distress in KZN and the challenges include the time frame within the business rescue plan and that financial institutions are not prepared to support a business rescue without collateral.

Valuation practices under business rescue circumstances in South Africa

“…In addition, under the Goal 2 business rescue scenarios, the study provided evidence that an asset approach is followed to determine the business rescue value. The study supports previous research by Pretorius (2016) and Pillay et al (2020) regarding the agency problem. Business rescue practitioners might decide to sell a company under Goal 2 in order to save a business, even if it means that current shareholders will lose ownership.…”

“…An agency problem often occurs between the shareholders and management of a company, as well as between the shareholders and providers of finance (Correia et al 2015). In the context of business rescue, Pillay, Rajaram and Ramnanun (2020) argued that because agency theory describes the affiliation between agents (BRPs) and principals (the companies they assist), business rescue falls within the agency theory. Pretorius (2016:483) agrees that an agency problem exists between the various role players (shareholders, BRPs and creditors) in business rescue, due to the different degrees of the risk appetite of these role players.…”

A qualitative exploration of the bidding processes used in business rescue

“…Previous authors Loubser (2008) and Pretorius (2016), Pillay, Rajaram and Ramnanun (2020) identified an agency problem in business rescue between agents and principals. Although the directors or shareholders (as the principal) appoint the BRP (as the agent), a 'practice principal' appears, namely, the creditor body, which is driven and controlled by banks as the primary creditors (Pretorius 2016:11).…”