Stanford economist Paul Romer once said, “A crisis is a terrible thing to waste” – a quote that resonates with me. I often use it as an opening remark in consultations with prospective clients. In times of crisis, the fear of failure dulls clarity. Man fears failure more than death itself. Do not be conned: Crisis can be a beautiful phenomenon that presents absolute opportunities.
In 2008 the new Companies Act was proclaimed, and with that, a new insolvency regime was born – business rescue. Companies in financial distress have an opportunity: a technology wherein ingenious thinking can avert insolvency. But for reasons unknown to the author, this opportunity remains misunderstood and underutilised.
Before Chapter 6, companies’ options in financial distress were limited: the business files or is placed into liquidation, secured creditors receive payment, and the estate’s balance is thrown as a bone to the liquidator and their band of pals. [This fraternity of hyenas, ‘het geen skaam’]. The period during which an estate is liquidated can be categorised as monstrous – liquidators steal from the poor, with low-ball moral fibre. They manufacture ways to enrich themselves while lopping off a piece at a time of our society’s integrity. And if you want to report malpractice, you must knock on the door of the Master of the High Court, an office that governs with impunity.
Liquidation is a stinky business.
In the 1970s, some 14 000 kilometres from our shores, a few economists designed a pro-debtor recovery regime that pathed the way for the modernisation of bankruptcy legislation globally. It is commonly known as Chapter 11 under the Bankruptcy Act of 1978 in the United States. In short, it protects a company from its creditors while giving it a chance to reorganise in hopes of a return to profitability. It was designed on the back of the formation of UNCITRAL (United Nations Commission on International Trade Law) in 1966, aiming to overcome disparities relating to cross-border trade legislation.
Some 38 years later, UNCITRAL released its model law for countries to adopt a modernised insolvency regime. Under this model law, the following eight principles set the tone for a robust insolvency regime:
- The provision of certainty in the market to promote economic stability and growth.
- The maximisation of the value of assets.
- Striking a balance between liquidation and reorganisation.
- Ensuring equitable treatment of similarly-situated creditors.
- Provision for timely, efficient, and impartial resolution of insolvency and rescue procedures.
- The preservation of the insolvent estate to allow equitable distribution to creditors.
- Ensuring a transparent and predictable insolvency law that contains incentives for the gathering and dispensing of pertinent information.
- The recognition of existing creditor rights and establishing of clear rules for the ranking of priority claims.
Based on these principles, Chapter 6 – Business Rescue was designed and eventually proclaimed in South Africa in 2008. It is in direct contrast to our current archaic insolvency legislation.
What it means: instead of giving in to the crisis, a business can disprove its adversity, by restructuring its affairs to restore the company as a going concern or providing a better return to affected persons than what would typically have occurred in a liquidation scenario.
Suppose you are facing a situation where you understand that it would become unlikely for your business to service its financial obligations within the ensuing six months. My advice is to seek guidance sooner rather than later.
Mistimed filing of business rescue is directly linked to the rate of failure.
There is an abundance of options besides liquidation. Utilising these options is paramount to success.
Despite popular belief, business rescue is a branch of finance. And like finance, it is a technology that can be used as a force for good or evil. Unlike its nemesis, liquidation, it is an opportunity to be a force for good.
Seize your crisis, do not waste it.