There was a joke during the global financial crisis that you could tell the difference between a pigeon and an investment banker because the pigeon could still make a deposit on a BMW. After the recent Business Rescue Summit I felt similarly about the future for business rescue practitioners (BRP). The problems in our system, introduced in 2011, are glaring and must be addressed.
Instead of facilitating the rescue of viable businesses it has become a bureaucratic quagmire, plagued by judicial overreach, weak regulation and an overreliance on a financial system that, quite frankly, doesn’t care.
High-profile cases such as Edcon and SAA may have clawed their way back, but for every success story there are countless others that have been pushed over the cliff, victims of a system that prioritises legal wrangling and creditor interests over job preservation and economic growth.
The recent Wescoal judgment is a perfect example of why business rescue needs a complete overhaul. In a shocking display of judicial myopia the court decided that post-commencement financiers — those who inject desperately needed cash into struggling businesses — don’t get to vote on business rescue plans.
Let that sink in. The very people who take on the most risk in these situations have no say in how the company’s future is decided. It’s like asking someone to build a house but telling them they can’t choose the materials. It’s absurd and it’s killing business rescues before they even start.
If the Wescoal ruling is allowed to stand it will be the death knell for post-commencement finance (PCF) in SA. Who in their right mind would fund a rescue if they have no control over what happens next?
The Wescoal decision effectively reduces PCF providers to mere bystanders. Sure, they get preferential treatment in liquidation, but that’s little comfort when the company collapses and they’re left holding the bag. Thankfully, the matter is on appeal at the Supreme Court of Appeal, and if justice prevails it will be overturned. But in the meantime damage is being done. Companies that could have been saved are sinking under the weight of legal mismanagement.
Other jurisdictions such as the UK and US have specialised courts that deal exclusively with corporate restructuring and insolvency matters. These courts move quickly, understand the nuances of business rescue and, most importantly, deliver consistent and predictable rulings. In SA we’re still stuck with a system where cases are delayed for months, and decisions vary wildly from one court to another.
But let’s be honest, it’s not just about creating new courts; the attitude of SA banks towards business rescue is another major hurdle. Simply put, they don’t like it. One banker said if you want to rob a bank best know who’s driving the getaway car. Banks are creditors first and foremost, and their priority is to recover as much as possible, as quickly as possible.
I sympathise. They are custodians of depositor funds first and foremost. That’s your and my savings. They have no interest in taking a longer-term view that might actually save the company and preserve jobs. In their eyes, liquidation is often the better option — it’s cleaner, faster and they get out with minimal fuss.
But this short-term thinking is detrimental to the economy. What’s the point of getting 15c on the rand in a liquidation when you could turn the business around and potentially recover far more in the long run? Unfortunately, the banks’ risk-averse nature means they prefer to cut their losses rather than work with companies to find a sustainable solution.
It’s time for a serious rethink of how banks interact with the process. One suggestion is to incentivise banks to support rescues through tax breaks or other financial incentives. Regulators also need to step up. The Companies & Intellectual Property Commission (CIPC) has been asleep at the wheel for far too long, allowing rogue business rescue practitioners to undermine the system with impunity.
If the CIPC actually enforced the regulations and held BRPs accountable, banks might be more willing to engage in the rescue process. But interestingly, one of the sections in the Companies Act section 22 (3) talks about the CIPC being able to say to a company, “You’re not paying your creditors, why are you not paying your creditors?”
The new trade, industry & competition minister would be well advised to ask why the CIPC is such a toothless regulator. The sooner a company enters business rescue the better its chances of survival. But SA directors are often reluctant to face the music, waiting until the last possible moment before seeking help. By then, it’s often too late.
The Institute of Directors in SA (IoDSA) recently issued guidance urging boards to act sooner when signs of financial distress appear. Yet even with this advice many directors remain in denial.
The Wescoal judgment, lack of specialised courts and reluctance of banks to engage in the process are all symptoms of a system that is failing. It’s time for reform. We need specialised courts, stronger regulation and a cultural shift in how we view business rescue.
But for that to happen directors need to engage with the process earlier and regulators need to step in sooner to prevent companies from trading recklessly while they circle the drain.
• Avery, a financial journalist and broadcaster, produces BDTV's Business Watch. Contact him at Badger@businesslive.co.za.
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