Business rescue: Adapt or die

Abstract

Background: The low success rate of business rescue has prompted debate relating to the effectiveness and continued suitability of business rescue as a mechanism to rehabilitate financially distressed companies. Although this legislation was implemented in May 2011, statistics indicate that the success rate for business rescues is only approximately 12%. A feature of the business rescue environment in South Africa is the lack of knowledge, necessitating more research in the field.Aim: This study focused on changes required to ensure the survival and increased success of the business rescue legislation.Setting: This research was undertaken in South Africa between 2015 and 2017.Methods: A mixed-methods research approach was utilised for the study. The approach entailed interviews with 7 of the top 10 business rescue practitioners to diagnose reasons for business rescue failure and establish factors that would contribute to successful business rescues. A survey was conducted with the membership of the Turnaround Management Association of Southern Africa.Results: The survey was mailed to 130 members and the response rate was 54%. This study found that the causes of business rescue failures are mainly attributable to the skills deficit of the business rescue practitioner or the practitioner’s abuse of legislation. There is also a negative impact of appointing a liquidator as a business rescue practitioner. Other factors contributing to the failure of business rescues are management’s delay in filing for business rescue, either due to the resistance of filing or their lack of awareness of their distressed status. This study also provided the ranking order for business rescue success factors with the accreditation of a business rescue practitioner being ranked as first.Conclusion: The study chiefly focused on diagnosing and understanding the reasons for business rescue failure. The original contribution of this study to knowledge is the ranking of an accreditation framework for practitioners as the most important factor that would contribute to a successful business rescue. This study not only explains the low success rate of business rescue but ways to improve and succeed in rescuing ailing businesses.

The State of Business Rescue Practitioners Professional Accreditation

“…The business rescue manifests the shortfalls of limited liability and credit extension activities in the economy (Verdoes & Verweij, 2018). Rajaram et al (2018) maintain that the term “rescue” comprises cases where the business recovery is complete resulting in the business that is intact and capable of being managed successfully from the point where rescue interventions began. Therefore, business rescue is a study field relevant to organizational management and attracts researchers, training facilitators, bankers’ associations, and practitioners.…”

South African business rescue regime

“…Pretorius (2018) postulated that no indication is articulated in the Act concerning the explicit knowledge, skills, and capability or proficiency prerequisites for BRPs. There are no explicit requirements for qualification/s to be held by those who want to be BRPs in South Africa, i.e., there is no scheme of accreditation for BRPs (Bagwandeen, 2018;Rajaram, Singh and Sewpersadh, 2018;Levenstein, 2015;Pretorius, 2013). Even though the CIPC (Companies and Intellectual Property Commission), which is the regulator of the business rescue framework in South Africa, has indorsed some professional institutions to which the BRPs should belong that are acknowledged by the South African Qualifications Authority (Bagwandeen, 2018), it is regarded as not adequate.…”

“…71 of 2008 (the Act), which was introduced in April 2009 and became effective starting 1 May 2011 (Ismail, 2020;Burke-le Roux and Pretorius, 2017;Bezuidenhout 2012), offers reprieve to corporates in financial distress since it deals with appropriate business rescue requirements of the modern-day South African business landscape (Conradie and Lamprecht, 2018). Rajaram, Singh and Sewpersadh (2018) propounded that the Act considers two pre-insolvency procedures, i.e., section (s.) 129 (Business Rescue), and s. 155 (Compromise with Creditors), to give a financially distressed firm a chance to dodge liquidation and pursue firm reorganisation. Interestingly, the Act, which is debtor-friendly, is in line with international standards.…”

“…The BRP must design and apply a business rescue plan, which the BRP uses to execute the business rescue proceedings. A rescue plan attempts to take the corporate forward in a way that brings the sense of balance as far as the privileges and interests of all appropriate stakeholders are concerned (Naidoo, Patel and Padia, 2018;Rajaram, Singh and Sewpersadh, 2018;Bradstreet, 2011). The BRP starts the business rescue process by scrutinising the financial position and undertakings of the firm.…”

Valuation practices under business rescue circumstances in South Africa

“…Even if one assumes that a better price can be obtained when selling a going concern in business rescue, business rescue costs such as practitioner fees and employee remuneration may erode the benefit, and the company could just as well have gone into liquidation straight away. To complicate matters, the BRP is also under tremendous time pressure to publish the business rescue plan (Pretorius 2016:491;RSA 2008:s150), as there is a negative correlation between the time that elapses and the asset value in a distressed company (Rajaram, Singh & Sewpersadh 2018). It may therefore not be possible to perform a comprehensive valuation of the company using the conventional valuation techniques.…”