Rescue or Ruin: The Critical Role of Business Rescue in South Africa

The need for effective corporate rescue mechanisms has never been more critical. However, the effectiveness and perception of business rescue are still beset by complex and multifaceted issues. The recent Business Rescue Summit brought together industry experts and stakeholders to address these challenges, emphasizing the urgent need for a collective re-evaluation of current practices. As companies face increasing financial pressures—particularly in the wake of South Africa specific economic stresses like load shedding, and exceptionally high interest rates and inflation resulting in subdued growth—understanding corporate rescue’s role in preserving companies and their supply chains is more pertinent than ever. This article explores the current state of corporate rescue in South Africa, the stigma surrounding it, the legislative framework, and the strategies needed to enhance rescue legislation, ultimately calling for a unified effort to safeguard jobs and drive/preserve economic vitality.

Complexities in Corporate Rescue

Corporate rescue in South Africa is primarily governed by Chapter 6 of the 2008 Companies Act, which outlines two main options: the formal business rescue process and the section 155 creditors compromise mechanism. Despite these provisions, the implementation of these options often encounters significant hurdles. The legal landscape for Corporate Rescue has only developed due to case law (not new or further regulation developments) and there have been a number of weak or poor judgements such as Wescoal Mining (surrounding whether post-commencement finance has a vote in the Business Rescue plan), which have sometimes undermined the prospects for successful rescues (and is currently being reviewed by the Supreme Court of Appeal. The rise in insolvencies among high-profile companies like South African Airways and Tongaat Hulett illustrates the need for ongoing and systemic changes within the current framework.

Stakeholder perceptions of corporate rescue are varied. While there is a growing recognition that corporate rescue can be a lifeline for businesses, skepticism persists. Many stakeholders remain influenced by past failures, leading to a reluctance to embrace business rescue as a viable and value preservative alternative to liquidation. This ambivalence highlights the necessity for a more robust and reliable corporate rescue process that can inspire confidence among stakeholders and provide a clear path forward for distressed businesses. In a new era of accountability and “consequence” management in government and the private sector, it is hoped that the current legislation on delinquent directors and noncompliance with the Companies Act will improve.

Overcome the Stigma to Unlock the Potential

The stigma surrounding corporate rescue is one of the most significant barriers to its acceptance. Misperceptions about the nature of business rescue often lead to resistance from boards and other stakeholders, who may view it as an admission of failure rather than a strategic intervention. To reshape this narrative, a concerted effort is needed to educate stakeholders about the benefits of business rescue for all stakeholders and the differences between rescue and liquidation. Advisors, statutory bodies and institutions like the IOD play a vital role in getting boards to know more about rescue, its features and facets and most importantly the need for earlier decisions. The absence of a strong legislative regime holding directors and boards responsible for failing to act has done little to incentivize them to grasp corporate rescue as a vital tool in value preservation and to balance the interests of all stakeholders.

Media engagement plays a crucial role in this effort. Responsible reporting and a deeper understanding of the business rescue process can help shift public perception. By focusing on successful rescue stories and the positive outcomes that can result from proactive intervention, the media can help demystify the process and promote a more favorable view of corporate restructuring and demonstrate it follows international norms providing greater certainty and incentive to investors (particularly international investors who have an expectation of such standards and norms).

Furthermore, the industry must work collectively to enhance the visibility and reputation of business rescue practitioners (BRPs). Establishing a culture of accountability and high standards within the profession is essential for building trust among stakeholders. As the industry improves its image, more businesses may be inclined to seek rescue options early, thus increasing the likelihood of successful outcomes.

Reforming the Legislative Framework

The legislative framework governing corporate rescue in South Africa has notable limitations. Current mechanisms lack the flexibility and support necessary to facilitate effective rescues. The absence of a moratorium on payment obligations weakens the section 155 compromise option, rendering it underused and often overlooked, albeit in certain circumstances (typically where there are fewer creditors in number) where it can be highly effective as a light touch alternative to business rescue.

International comparisons reveal that many countries, such as the United Kingdom, have adopted more innovative and effective restructuring tools. The UK’s introduction of a debtor-in-possession moratorium and other creditor-friendly measures has positioned its insolvency framework as a model for business rescue. These developments underscore the urgent need for South Africa to amend its laws to align with global best practices.

Legislative reform is not merely a bureaucratic necessity; it is vital for creating an environment conducive to successful corporate rescues. By addressing the gaps and ambiguities in the current legislation, policymakers can enhance the effectiveness of business rescue mechanisms, ultimately leading to better outcomes for distressed businesses.

Strengthening Stakeholder Engagement in Business Rescue

Enhancing stakeholder buy-in is crucial for the success of business rescue initiatives. To achieve this, a range of strategies must be implemented to effectively engage all parties involved, including creditors, investors and BRPs. One such strategy is the introduction of detailed pre-assessments, which serve as an evaluation of a business’s viability before entering formal rescue proceedings.

Pre-assessments can provide critical insights into a company’s financial health and operational viability, allowing stakeholders to make informed decisions regarding the rescue process. By requiring an independent pre-assessment before passing the section 129(1) resolution, boards can mitigate the risks associated with hasty decisions that may lead to liquidation instead of rescue. This proactive approach fosters a culture of diligence and transparency within the corporate sector.

Moreover, collective industry action is essential to promote successful rescue outcomes. Stakeholders must collaborate to advocate for reforms and share best practices, creating a robust support system for distressed businesses. By working together, industry can build a framework that not only protects jobs and economic stability but also fosters a culture of resilience and recovery.

The insights gained from, and debated in, the Business Rescue Summit underscore the complexities and potential of corporate rescue in South Africa. While significant challenges persist—including legal shortcomings and societal stigma—there is a palpable desire for reform and improvement within the industry.

As South Africa navigates its economic landscape, it is imperative for stakeholders to unite in fostering an environment that supports effective business rescue. By addressing misconceptions, enhancing legal frameworks, and promoting stakeholder engagement, the country can pave the way for a more resilient corporate sector. Ultimately, successful corporate rescues are not just about saving businesses; they are about preserving jobs and sustaining and increasing economic vitality.