Business rescue: Success or failure?

Business rescue was introduced into the Companies Act and became effective in 2011 with a view to saving and restructuring rather than liquidating companies deemed to have a reasonable chance of survival.

According to a 2022 Companies and Intellectual Property Commission (CIPC) report, 4 370 companies entered business rescue between 2011 and June 2022, with 19% of these reaching substantial implementation of the business rescue plans. Only 546 ended up in liquidation.

On the face of it, this looks like a one-in-five success rate for business rescue, which is hardly cause for celebration, though this is considerably better than the US equivalent, Chapter 11 bankruptcy, which has a success rate of about 10%.

Perspective

SA’s business rescue results improve if we consider ‘termination notices’ (formally ending business rescue). Between 2011 and December 2021, termination notices were issued to 938 companies in business rescue, with slightly more than half of these no longer deemed financially distressed.

Some 30% of these companies issued termination notices were ultimately liquidated.

Eric Levenstein, head of insolvency and business rescue at Werksmans Attorneys, notes that far fewer business entered business rescue in 2022 when compared with 2021. While this might be explained away by improving business conditions, the Statistics SA Liquidations report for August 2022 shows a disturbing 44.8% increase in liquidations over the same month in 2021.

“This indicates that companies may be assessing their financial position too late, with the conclusion that there is no reasonable prospect of a successful rescue. These companies had little alternative, but to file for liquidation,” says Levenstein.

“Additionally, far more companies are liquidated than enter business rescue. This is not an anomaly, and has been a consistent trend since 2019. In August 2022 alone, more than triple the number of companies were liquidated, than were placed in rescue.”

Between 2019 and 2022, several large companies entered business rescue, including Edcon, SAA, Comair and Ster-Kinekor.

Key assets in Edcon, placed in business rescue in 2020, were sold to The Foschini Group and Retailability (which acquired Jet and Edgars stores respectively), saving thousands of jobs in the process.

A scaled-down SAA, which entered business rescue in 2019, was returned to service in 2021, with the Takatso Consortium slated to acquire a majority stake.

Ster-Kinekor, which was smashed by the Covid lockdowns commencing in 2020, exited business rescue proceedings late in 2022 when it received a R250 million capital boost from UK’s Blantyre Capital and SA’s Greenpoint Capital.

Read: Ster-Kinekor exits business rescue [Nov 2022]

Those are some of the notable business rescue successes. But for every success, there are many more failures.

Comair and SA Express went into rescue and ended up in liquidation. Still up in the air are the fates of Andusalite Resources Mine, Optimum Coal Mine, Black Chrome Mine, listed property company Rebosis and Mango Airlines.

Read:

Have the pressures eased?

The jury is out as to whether we will see ongoing pressure on companies as we head into 2023, writes Levenstein.

“Energy issues, water and infrastructure pressures in South Africa might push companies over the edge, and as the economy contracts, with further pressure brought on by a very strong dollar and a weakening rand.

“Time will tell.”

Another category of companies in rescue have been locked up in court for close to seven years. Many of the Gupta companies – notably Optimum Coal Mine – as well as Vantage Goldfields have spent more time in court than in business turnaround.

Business rescue practitioners (BRPs) have been to court close to 90 times to fend off a slew of cases, some of them opportunistic, seeking to remove them as practitioners at Optimum or to liquidate the assets. Another former Gupta asset, Koornfontein Mines in Mpumalanga, was sold in 2019 to Makole Group’s Black Royalty Minerals and is now fully operational.

Dark side to liquidations

There’s a dark side to SA’s liquidation industry, exemplified by the Auction Alliance scandal a decade ago, where the company was accused of holding fake auctions to bid up prices, and paying kickbacks to lawyers, banks and liquidators in a massive enrichment scheme.

The staggering wealth accumulated by some liquidations practitioners has raised suspicions over the manner in which their wealth was acquired.

This perhaps explains the efforts made to liquidate Optimum and cash in on the 10% commissions typically paid to liquidators. All these efforts were successfully defended by the BRPs.

But the legal tussles are far from over. In March 2022, the National Prosecuting Authority (NPA) Asset Forfeiture Unit was granted a preservation order over the mine’s assets amid concerns that small pit operations allowed by the BRPs had denuded R6 billion in asset value.

The NPA, energised by revelations in the Zondo Commission of inquiry into state capture, was concerned that the Gupta brothers had acquired the mine in a corrupt deal with the state. The BRPs went to court to have the preservation order suspended on the grounds that the case was under appeal. It will now go to the high court, while the preservation order appeal will be heard in the Supreme Court of Appeal.

Silver lining

Bouwer van Niekerk, attorney for the Optimum BRPs, says though the battery of court cases is frustrating, some good may come of it.

“As an industry, we need greater legal certainty over the powers of BRPs, company boards and, in the case of Optimum, whether the NPA or the appointed curator have a right to interfere with activity at Optimum when the matter is under appeal, bearing in mind that the limited operations at the mine provide work for more than 2 000 people and support perhaps 28 000 dependents.

“We need the courts to provide that certainty, which will help business rescue practitioners going forward.”

Vantage Goldfields is another Mpumalanga mine under business rescue, for close to seven years, with roughly 700 workers hoping to one day return to work.

There are two bidders for the company assets – Macquarie Metals of Australia and Hong Kong-backed Arqomanzi – both of which are currently engaged in several legal battles over who gets to control the Barbrook and Lily gold mines that fall under Vantage. The company entered business rescue following a pillar collapse in 2016 that buried three mine workers and brought operations to an abrupt end.

Verdict?

Given business rescue’s patchy record, can it be deemed a success?

Yes, in the sense that there are some notable successes and tens of thousands of jobs have been saved in the process, says Van Niekerk.

Says Levenstein: “Although the number of [business rescue] filings has decreased when compared to a year or two ago, it is evident that business rescue is still a viable option for financially distressed companies.”

As Levenstein points out, companies do not read the signs of impending financial trouble early enough, and more companies could be saved if action is taken earlier.

Business rescue has the advantage of a court-sanctioned moratorium on credit claims against the company.

BRPs are appointed to supervise and manage operations and assets, and a business rescue plan must be agreed by creditors.

Wherever distressed assets are involved, legal skirmishes are inevitable as creditors jostle to protect their interests. Business rescue, at least in some cases, provides a more humane route to commercial longevity.

Listen to Fifi Peters discussing a successful business rescue exit with Ster-Kinekor deputy CEO Motheo Matsau: