Is Business Rescue the answer?

Unable to pay your creditors due to the COVID-19 pandemic? Will government provide you with much needed capital to survive the lockdown? Will financial institutions extend your credit facilities in this trying time?

Most SMME’s will unfortunately not be in possession of the cash reserves to pay their creditors, suppliers and other services providers in these trying times, nor will they be able to raise the necessary capital to do so.

While in lockdown, the doors to the Court’s are closed and therefore there is a reprieve on the immediate cash-flow requirements. However, once things have returned to normal, the indebtedness or cash-flow requirements would have extrapolated or compounded, and your creditors will demand payment which will be followed by legal action if you are unable to pay or make an acceptable payment arrangement. This action may include the liquidation of the business.

What is important to bear in mind is the effect of this pandemic on commercial leases. An article will be released on this by Enderstein Van der Merwe Attorneys in the week to come.

Is Business Rescue the answer?

Simple answer – It may be in these unique times!!

Business Rescue has, to date, been unsuccessful in South Africa since being adopted. The reasons herefore are three-fold:

Companies usually go into business rescue once the company is already in an insolvent state. These companies have already attempted to restructure and trade themselves out of “tough times” and have been unable to do so. The business rescue is a “last-ditch” attempt to buy more time and avoid the consequences of an immediate liquidation.
The unavailability of “post-commencement finance”. Financial institutions, as a rule in RSA, are hesitant to provide any form of post commencement finance.
Public scepticism. Once a company is placed under business rescue, most suppliers, service-providers, clients of a business believe that it is only a matter of time before the doors of the business will be shut and therefore they immediately mitigate their risk by limiting or ceasing commercial transactions with the business that is in distress.

In the case of COVID – 19 however, your business may be a profitable one, which was not in distress prior to the lockdown. The distress it now faces is purely of a cash-flow nature and the business just needs time and a bit of intensive care.

The main advantages of business rescue in such circumstances:

A company can be placed into business rescue by a simple resolution from its directors, which resolution is registered at the DTI. Note, that once a liquidation application has been issued, the company will have to approach the Court for permission to commence with business rescue, so ensure you act as soon as possible.
A moratorium is placed on liabilities / obligations. In other words, no legal action can continue against the company except in limited circumstances.
Once a business rescue plan is adopted by the creditors and fulfilled, the debt or obligations are extinguished in toto. This has a myriad of potential benefits such as the avoidance of interest, penalties etc.
Pending the finalisation of the rescue, the company can continue to function as normal. Employees do not necessarily need to be laid off, contracts can continue etc.

There are unfortunately also a number of disadvantages and therefore business rescue should be considered carefully before making a decision in this regard. At Enderstein Van der Merwe, we have qualified professionals available to extensively discuss your company’s unique circumstances with you and advise you on the appropriate course of action in its particular circumstances.

You can contact Director, Mr. SW Pienaar on 0846268690 or sean@endvdm.co.za for more information.

Note that the above is not intended to be an academic exposition of the law of business rescue, its implementation and its consequences. Same is too vast to cover in an article of this nature and therefore no person should take the content above to be advice of any nature or effect.