The number of companies in business rescue is set to spike in 2021 as the effects of continued Covid-19 trading restrictions bring businesses that may have held on last year to their knees.
According to the Companies and Intellectual Property Commission’s most recent figures, published in October 2020, 233 companies started business rescue proceedings between April and October 2020, from 216 in 2019.
Hans Klopper, head of business restructuring at public accounting, tax and business advisory firm BDO, expects the figure to rise significantly in 2021 as the effects of restrictions become evident.
“People are getting into trouble as we speak,” he says, adding that though he expects the retail and hospitality sectors to be hardest hit there would be an impact in “every conceivable sector”.
Ryszard Lisinski, a director at law firm Fluxmans, concurs. “There’s going to be a hangover from Covid-19. The longer the restrictions are in place, the bleeding will continue and there will be an increase in business rescue applications.”
Klopper says many businesses will try to survive but recommends that they take action early and begin the business rescue process. “If they see the light they should take action early before the train hits them.”
Liquidations on rise
The latest Stats SA figures, released in November 2020, show liquidations were up 30.7% in the three months ending November 2020, year on year. Liquidations of companies rose by 31 cases and of close corporations by 22.
There are two potential outcomes in a business rescue — either the business is restructured and sold or it is wound down to avoid liquidation.
The benefit to creditors in the winding down of a business is that they receive more money than in a liquidation, which may leave them with nothing.
Companies are also legally bound to take action. According to the Companies Act 71 of 2008, if a business expects not to be able to uphold its financial commitments in the six months ahead then it is duty-bound to seek business rescue.
Failure to do so, says Klopper, could be seen as delinquency on the part of the directors and they may be held personally liable for outstanding debts incurred by the business. Charges of fraud may also apply.
Eric Levenstein, chair of the South African Restructuring and Insolvency Practitioners Association and director of the insolvency, business rescue and restructuring practice at Werksmans Attorneys, says up until now the purpose of business rescue was to protect jobs and save companies, and for the most part that has been working.
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IN NUMBERS: 233- The number of companies that started business rescue proceedings between April and October last year.
Lisinski says the business rescue process provides immediate financial respite to a business by giving it “breathing space” to meet its financial commitments.
Business rescues in the retail sector have been particularly successful because of the sector’s ability to suspend, cancel and renegotiate lease agreements, which form a large portion if its expenses, Lisinski says.
Landlords are able to claim damages — they will be paid the same proportion of the amount owed as other creditors.
The sale of 371 Jet stores and 120 Edgars stores as part of Edcon’s business rescue saved 5,200 jobs but 22,000 jobs were lost.
The airline industry, for the most part, has also seen successful rescues.
SA Express, which exited business rescue and is now in provisional liquidation, may be saved by its purchase by Fly SAX. If the deal is successful a group of retrenched employees will hold a 25% stake and a 48% stake will be owned by a consortium of investors.
Levenstein says SAA is a peculiar case that has been going on since the airline was placed under business rescue on December 5 2019.
SAA is still in a bit of a mess, he says. “It might seem to be an epic failure but we may be surprised this year,” as hopes for the sale of a stake in SAA to investors is still on the cards.
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If [businesses] see the light they should take action before the train hits them.
He says the government’s role in the process has delayed the process.
According to Levenstein, the government is looking to raise about $400m (about R6bn) from the sale of a stake in SAA. The intention is to recapitalise the restructured national airline and it is hoped that interest in such a stake will be stimulated by SAA’s lucrative flying routes and valuable landing slots, which remain intact, such as at London’s Heathrow Airport.
Lisinski, who has been representing SAA’s pilots in the business rescue process, says the government’s behind-the-scenes involvement is causing the delay.
“The point of business rescue is to expedite the process in a couple of months,” he says. If this doesn’t happen then the business bleeds money and creditors such as shareholders, staff and suppliers are adversely affected.
Levenstein says companies with the funds to expand are benefiting from business rescue interventions as those operations in distress can be bought cheaply.
Purchasing a business at close to breakdown value has its benefits to potential buyers, says Klopper, not just because of the reduced price but because of the existing corporate structure that has taken years to build and allows the buyers to begin trading.
The breakdown value of a business is the value that shareholders or creditors will receive should the business and its assets be sold in a forced or fire sale.
A forced or fire sale is the amount the business would fetch in an immediate sale, not necessarily the highest price.
Klopper says the buyers are local investors, not foreign. “International buyers are not looking at SA at the moment.”
Edcon collapse has domino effect on suppliers
Edcon’s business rescue has had a cascading effect down the supply chain as some of the group's suppliers also seek business rescue or face liquidation.
Last week, Playtex, a 60-year-old underwear factory in Durban, went into liquidation. International investor Hanes SA pulled the plug on the business, leaving 735 people unemployed. Playtex was one of Edcon's suppliers.
Lance Shapiro, senior associate at Matuson and Associates, the consulting firm managing Edcon’s business rescue, said the company had more than 3,000 creditors and suppliers on its books at the start of the process on May 1 2020.
A number of suppliers were still being used by the retailer during the continuing rescue process as it continued to trade.
But Playtex isn’t the only Edcon supplier under financial duress.
The New House of Busby, which holds distribution rights to brands such as Guess, Aldo and Kipling, went into voluntary business rescue on July 29 last year, emerging as FrontierCo in November. The process saved 800 jobs.
Hans Klopper, head of business restructuring at BDO, who was responsible for the restructure, said the company was a casualty of Edcon, which owed it more than R40m.
Klopper said that Busby in turn had more than 300 creditors or suppliers, whose fate was unknown.
“The ripple effect of this will only be seen in months to come,” he said, adding that some businesses may be putting on a brave face but are likely to succumb to either business rescue or liquidation.
Edcon sold 371 Jet stores to TFG, which owns several retail brands including Foschini, and 120 Edgars stores were sold to Reliability. Retrenchment notices were served to 22,000 workers.
Shapiro said it would be difficult to determine the number of Edcon’s suppliers and creditors who would require business rescue or go into liquidation as a direct result of Edcon’s problems, as the effects of the pandemic would also have caused financial distress.
