Business Turnaround Strategies: A Lifeline for Struggling Businesses

The Challenge of Business Turnaround

According to the latest statistics from Statistics South Africa, the total number of liquidations in South Africa decreased by 14,0% in the first six months of 2023 compared with the first six months of 2022, which indicates that there were fewer businesses that closed down, wounded up or dissolved in 2023 than in 2022. The data further indicates that from January to June 2023, there were a total of 1,024 reported liquidations in South Africa, while from January to June 2022, there were 1,190 reported liquidations. The decline in liquidations may indicate an improving economic climate and a slow recovery from the impact of the Covid-19 pandemic. The industries that reported the most liquidations in 2023 were financing, insurance, real estate, business services, trade, catering, accommodation, and community services.

When a business faces challenges or hits a rough patch, there are two main avenues it can consider for relief and future growth: Business Turnaround (which was discussed in Part 1) and Business Rescue. These terms are often used interchangeably, all though they refer to distinct approaches to saving a struggling business. Understanding these differences is crucial for business owners, management, executive teams, and the relevant stakeholders as they decide on the best course of action.

What is a business rescue?

“Business Rescue” is defined in section 128(1)(b) of the Companies Act 71 of 2008 (Companies Act) as “proceedings to facilitate the rehabilitation of a company that is financially distressed”.

Business rescue is a procedure used to restore a financially troubled company and in South Africa, is governed by the Companies Act of 2008, Chapter 6 and enables a financially troubled organisation to be placed under the supervision of a business rescue practitioner while still being possibly viable and continue to trade under certain specific circumstances.

When is Business Rescue Applied to a Business?

Business rescue can be applied to in one of two ways: voluntarily or involuntarily.

• Voluntary business rescue proceedings– when the board of directors of a company passes a resolution to place the company under business rescue, of which the process is regulated by section 129 of the Companies Act. The directors of the company will need to have reasonable grounds for showing that the company is financially distressed and that there is the possibility of rescuing the company.

In terms of section 128(1)(f) of the Companies Act, a company will be financially distressed if:

• It appears to be reasonably unlikely that the company will be able to pay all its debts as and when they become due and payable within the immediately ensuing 6 months (commercial insolvency); or
• if its liabilities will exceed its assets within the ensuing six months (factual or balance sheet insolvency).
• Compulsory business rescue proceedings – when application is made to court to place the company under business rescue by an affected person (for example a creditor that has not been paid) of which the process is regulated by section 131 of the Companies Act. An “affected person” may a shareholder, an employee, a representative of the employees or a creditor and they may join the hearing of the business rescue application.

Information Included in the Business Rescue Plan

A business rescue plan needs to be created within 25 business days of the business rescue practitioner being appointed. Under the management of a business rescue practitioner (BRP) which temporarily takes over the business, a business rescue plan and or strategy must be prepared to take the business forward. They will need to create and implement a business rescue plan, which reveals how they will save the company.

The information to be included in the business rescue plan will be focused on reorganising the company’s debt, selling off assets, restructuring the company, optimizing operations, how contracts will be treated during the business rescue process and or securing new funding. The procedure of business rescue aims to try and save the business and to ensure the retaining of its employees.

As soon as the business rescue order is granted by the court, the business rescue proceedings will commence.

Legal consequences of business rescue proceedings

When a company has been placed under business rescue (voluntarily or by way of a court order), there are legal consequences for several of the company’s activities and stakeholders, including creditors. The objective is to protect the company while the BRP attempts to return the business to a viable position.

The primary consequences of business rescue proceedings on stakeholders can be summarised as follows:

• The disposal of the company’s property is restricted: The power of a company to deal with its property is restricted during business rescue and the company may only dispose of property if such disposal takes place:

• in the ordinary course of its business; or
• in a bona fide transaction at arm’s length for fair value approved in advance by the BRP in writing; or
• as part of an approved business rescue plan

• Civil legal proceedings against the company, including enforcement action, will remain until the end of the business rescue process.
• The refinancing of the company (new financing)  is facilitated by allowing for unencumbered company assets to be used to secure loans;
• Employment contracts are generally protected:  in terms of section 136(1)(b) of the Companies Act, any retrenchments in terms of any business rescue plan, must be conducted in terms of section 189 or 189A of the Labour Relations Act 66 of 1995, and other applicable employment related legislation.
• Other contracts of the company may be cancelled, or the company’s obligations may in certain circumstances be entirely, partially, or conditionally suspended by the BRP.

The alternative to liquidation, when there is no hope for the business to continue operating, is business rescue, which entails selling off the business’s assets and paying off its creditors with the proceeds. With business rescue, there’s still the possibility for a financially distressed organisation to continue to exist and be turnaround. While the process may be difficult, it offers hope to companies that would otherwise liquidate. Business rescue should not be seen as a failure of the company, but rather as an opportunity to restructure and organise the company’s affairs.