By Dr Kaizer M. Nyatsumba, Turnaround Strategy Expert and Chartered Director (SA)
Business Rescue and The Law
Unlike its predecessor (the Companies Act of 1973), South Africa’s Companies Act 71 of 2008 (hereafter called the Act) provides for the opportunity for companies to be placed in business rescue to save them from the ever-present possibility of liquidation. Through business rescue, which is provided for in Chapter 6, the Act provides “for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all stakeholders” (Section 7(k)).
However, by the time a company must consider business rescue, things have already gone too far. Unlike the implementation of a turnaround strategy as a company notices a trend of decline in its financial performance, a process which is voluntary and firmly within the company’s control, business rescue is a legal instrument with considerable implications for a company and all its stakeholders, including its management team, its Board of Directors and its creditors, among others.
Business rescue is statutorily mandated for all companies which are financially distressed, if their Boards are of the view that there is a reasonable prospect to rescue them (as defined in the Act). The Board of Directors of such a company is required by law to resolve voluntarily to place the company in business rescue the moment it realises that the company is financially distressed. Should a Board fail to resolve to place such a company in business rescue, then it is required, in terms of Section 129(7), to “deliver a hand-written notice to each affected person [including its creditors and shareholders],” explaining “its reasons for not adopting a resolution contemplated in this section.”
Continuing to trade at a time when a company is financially distressed, but without resolving to place that company in business rescue, makes that company’s Board of Directors guilty of reckless trading and exposes its Directors, jointly and severally, to the considerable legal liabilities listed in Sections 77(2) and 77(3) of the Act.
It is important to bear in mind that when the Board of a financially distressed company does not initiate business rescue proceedings, Section 131(1) of the Act grants any “affected person” the right to apply to a court of law for the company to be placed in business rescue. Affected persons could be a creditor, a trade union or an employee who is not affiliated to a union.
As explained in Section 128(f) of the Act, a company is financially distressed if i) “it appears to be reasonably unlikely that the company will pay all its debts as they fall due and payable within the immediately ensuing six months, or ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months”.
While it is vitally important, business rescue has serious legal implications for all of a company’s stakeholders. During business rescue, the Business Rescue Practitioner (BRP) – who is an officer of the court – has full control of the company’s affairs and is charged with the responsibility to investigate its affairs and to take the necessary corrective actions. Although they continue to remain in office, members of the Board of Directors of a company which is in business rescue are “subject to the authority of the [business rescue] practitioner” and are required to “attend to the requests of the practitioner at all times.” The BRP may delegate responsibilities to Board members or existing members of the Senior Management Team, and has the authority to dismiss members of the management team and to make new appointments in their place.
During business rescue, there is a general moratorium on legal proceedings against the company and its creditors may not take any “enforcement action” against it.
Implementing a Turnaround Strategy as a Wise Alternative
By the time a company gets to a stage where it is financially distressed, it may be too late to save it, even through business rescue proceedings. Therefore, it is important for a company’s Board and its Senior Management Team proactively to take steps, as soon as they notice a trend of decline, to arrest and reverse that decline, long before a company can be financially distressed. They can do so through the implementation of a turnaround strategy.
Like business rescue, implementation of a turnaround strategy requires that steps are taken to investigate the cause(s) of a company’s decline and that tough actions are taken, in good time, to arrest and reverse the decline. Depending on the cause(s) and severity of the decline, the company will need to implement either an operational (efficiency) turnaround strategy or a strategic (entrepreneurial) turnaround strategy. Either way, the company must embark on a cost-cutting exercise appropriate for the kind of stress that it faces.
Thankfully, implementation of a turnaround strategy is voluntary. All it needs is that a company’s Board of Directors and/or the Senior Management Team recognise when a company is going through a rough patch and decide timeously on an appropriate course of action.
Most companies do not have the expertise to develop and implement a turnaround strategy themselves, so they often engage experts like us to do so. Even where the necessary capability may exist, the fact remains that a company’s Senior Management Team may be too close to the action or may be the cause of the decline itself, hence companies benefit from engaging the services of turnaround strategy experts to work with them in the development and implementation of an appropriate turnaround strategy.
Differences Between Implementing a Turnaround Strategy and Business Rescue Proceedings
Following are the important differences between business rescue proceedings (whether initiated by a company’s Board of Directors or resulting from court action by an affected person) and turnaround strategy implementation:
Turnaround Strategy Implementation | Business Rescue Proceedings |
Turnaround strategies are implemented before a company becomes financially distressed. | Business rescue (BR) proceedings are triggered by financial distress, provided there is a reasonable prospect of rescue. |
A company implementing a turnaround strategy can equated to someone who is ill receiving medical attention in hospital. | A company in business rescue can be equated to someone who is critically ill in ICU in hospital. |
It is a voluntary process decided upon by a company’s Senior Management Team (SMT) or Board of Directors (BoD). | It is a legally mandated process, as explained in Chapter 6 of the Companies Act. |
The BoD remains in charge of the company. | The BoD is “subject to the authority of the [business rescue] practitioner.” |
The turnaround strategy expert reports to and advises the company’s SMT or BoD. | The business rescue practitioner (BRP) has full control of the company and the BoD and SMT report to him/her. |
The company’s fate is in its own hands. | The company’s fate is mostly in the hands of its creditors. |
The turnaround strategy expert has considerable business managerial experience. | The BRP may be a senior lawyer or a chartered accountant, without practical senior managerial experience. |
Turnaround strategy implementation is a normal part of business and there is no stigma attached to it. | There is considerable stigma attached to BR proceedings. |
A successful turnaround strategy requires two to three years. | Although the Act confines BR proceedings to a minimum of three months, they can take years, with the permission of the creditors and because of litigation. |
Implementation of a turnaround strategy does not affect the rights of a company’s creditors. | There is a moratorium on legal proceedings against the company, hence its creditors may not take any “enforcement action against” it. |
There are no legal controversies attendant to turnaround strategy implementation. | There can be litigation and counter-litigation in the case of BR proceedings. |
A high percentage of companies implementing turnaround strategies succeed. | So far, a high percentage of BR proceedings lead to liquidation. |
Act Soon to Avoid The Possibility of Business Rescue
Therefore, it is very important that companies act timeously to implement turnaround strategies. That means that Boards of Directors and Senior Management Teams should keep a hawkish eye on a company’s performance and engage the services of an expert to develop and implement a turnaround strategy as soon as they perceive a trend of decline. Failure to act on time may lead to a company ultimately being financially distressed, when it must legally be placed in business rescue – which means that its Board and Senior Management Team will lose control to a BRP and its creditors.
Contact KMN Consulting
At KMN Consulting (www.kmnconsulting.co.za), a Division of KMN Investment Holdings (Pty) Ltd, we are experts at the implementation of turnaround strategies and are also familiar with the business rescue process. Not only has our Managing Director, Dr Kaizer Nyatsumba, successfully implemented turnaround strategies during his tenure as Chief Executive Officer of the Steel and Engineering Federation of Southern Africa (SEIFSA), which was a loss-making entity when he joined it in November 2013, but he also holds a PhD in the discipline from the University of Johannesburg. Among the books that he has authored is one entitled Successfully Implementing Turnaround Strategies at State-Owned Companies: SAA, Kenya Airways and Ethiopian Airlines as Case Studies.
A Chartered Director (SA), Dr Nyatsumba holds an MBA from the University of Hull in the United Kingdom and is a member of both the Institute of Directors in South Africa and the South African chapter of the Turnaround Management Association. He has attended the TMA-SA-accredited Certified Rescue Analyst course at the University of Pretoria.
Contact KMN Consulting now for assistance with the development and implementation of your turnaround strategy. Send an e-mail to Kaizer@kmnconsulting.co.za or call +27-10-156-2906 now.
For more information, see www.kmnconsulting.co.za.