Don’t Be Left Exposed As More SA Companies Turn To Business Rescue
According to SME South Africa, a report by Deloitte conveys that business rescue in South Africa is still the most sought-after solution for financially distressed companies.
The restructuring survey Deloitte released, found more businesses were turning to business rescue because of a stagnating economy. The survey also shows that the sectors most likely to suffer financial distress were manufacturing, retail, resources and construction.
What is business rescue?
When a company is financially distressed, or unable to pay its debts, it can look at business rescue – a legal process to assist with the rehabilitation of that company. Chapter 6 of the Companies Act 2008 (Act 71 of 2008) provides for the efficient rescue and recovery of financially distressed companies.
A business rescue practitioner, nominated for this purpose, will offer short-term supervision of the company, particularly by monitoring the company’s affairs and properties. The practitioner will also develop and implement a business rescue plan to save the business by restructuring its property, liabilities, equity and any other commercial affairs.
The purpose of business rescue
Companies undergo business rescue in an attempt to either maximise the likelihood of the company continuing as a going concern; or to result in a better return for the company’s creditors than would ordinarily arise from liquidation. Unfortunately, however, business rescue affects a number of stakeholders, including its creditors.
Two recent examples of companies applying for business rescue are South Africa’s national oil company, PetroSA; and 159-year-old high-end retailer, Stuttafords.
PetroSA’s R2.2 billion losses result in the board applying for business rescue
Business Day reported in May 2017 that PetroSA’s board had approached their holding company, the Central Energy Fund, to place the organisation under business rescue.
Due to a severe financial situation resulting from losses experienced over the last three years, PetroSA projected a loss of R2.2 billion for the year to March 2017, and a net operating loss of R14,6 billlion in 2014/2015.
It would however be unprecedented for a State-Owned Entity (SOE) to be placed under business rescue. SOE’s have traditionally been bailed out by Treasury loan guarantees to ensure that they continue as going concerns.
Stuttafords applies for business rescue – owing almost R836 million to its creditors
Stuttafords announced their application for voluntary business rescue in October last year as stated by Fin24. The retail group cited that they failed to mitigate the effects of the tough economic climate and the impact of customer migration to lower-priced products.
In February of this year, business rescue practitioners presented a revised business rescue plan to the creditors. It was revealed, Stuttafords owes a total of R836 million to its creditors.
When presented however, nearly 30% of the creditors rejected the business rescue plan, as they would see an estimated 77% write-off of what they were owed, resulting in serious financial losses.
Nedbank, the retailer’s key banker, is reportedly owed R147 million (reduced to approximately R120 million through the plan proposed). However, unlike most other creditors, Nedbank will get most of their money back as their debt is secured.
Don’t be left in the lurch
Junk status and the stagnant economy has seen many companies struggle to make ends meet in South Africa. As a result, if you sell goods and/or provide services on credit terms, you may find that some of your debtors may become unable to pay their debts.
Unfortunately, the more sales you make on credit, the more you are exposing your business to risk. If your customers fail to pay, you could be left in the lurch.
Secure your debt with domestic trade credit insurance by Credit Guarantee
If you have a company that sells goods or services on a credit basis, with an established credit control department or credit management process in place, you can apply for a credit insurance policy from Credit Guarantee to secure your debt.
Under qualifying conditions, should your customer undergo business rescue, your Credit Guarantee policy will provide your company with cover resulting from the non-payment of your debtor. Your policy will also cover you for non-payment if your customer undergoes insolvency, liquidation and protracted default in South Africa.
Contact Credit Guarantee to find out how you can secure one of your most valuable assets – your debtor’s book.
Protect your business and get covered today.