SHARES

The parables of survival: Lessons from the Nova Sharemax debacle

Secured creditors are more likely to recover a claim from a business rescue or liquidation project than concurrent creditors.

Things for debenture holders in Nova Property Group (the Sharemax rescue vehicle) appear grim.

At last week’s meeting of debenture holders, chairman Connie Myburgh, architect of the rescue scheme, was far from celebrated as primus inter pares. ‘Hard questions’ relating to big-boosting achievements remain unanswered. So much so, that the debenture notes might be worthless.

Read:
‘We invited whom we could’
Nova may be a bigger failure than Sharemax

Nova debenture holders do not stand alone. It gets worse. Thousands of creditors find themselves in sticky slime when dealing with insolvency practitioners yearly.

Rosy assumptions and beguiling promises of recovery fall continuously short. The reason: practitioners make shoot-from-the-hip decisions that give the best possible outcome to feed their greed. To counter this, emphasis on battle-ready debtor recovery strategies are key.

Vital statistics

In South Africa, one out of six companies is currently affected by business rescue or liquidation proceedings. A quick look at debt in the private sector shows that the construction industry averages a debt-to-equity ratio of 3.3. This is cheerless, compared with its counterpart in the US, which averages a ratio of 1.09.

Statistics from the Companies and Intellectual Property Commission (in its Business Rescue Proceedings Status Report here) show that from April 2020 to October 31 2020, 233 companies commenced business rescue proceedings, indicating a rise from its pre-pandemic numbers. This number could validate our quasi-economic spring, but it does not explain the record 510 000 new companies registered in 2020-2021. CIPC commissioner Advocate Rory Voller attributes this phenomenon to “economic necessity”. He explains that people attempt to generate income in the informal sector during times of crisis.

Although industry experts partially agree with him, the overall picture is oddly malignant. Business owners tend to create new companies as backup plans if the debt in current companies becomes unserviceable: a gung-ho strategy to raise the phoenix from the ashes.

Concurrent creditors carry the brunt

South African businesses trade under the aegis of trust. At its heart is a ratchet mechanism that requires parties to honour verbal undertakings. It seems unwise to assume fair play within this trust machine.

As a result, most claims will fall in the concurrent tier when an insolvency event occurs. What comes next is the hard part: recovering your claim from the end of the queue.

Insolvency legislation ranks various claims against an insolvent estate: a titanic struggle for survival between classes of creditors. Proceeds of encumbered assets are applied to pay secured claims. The free residue gets pooled to pay remaining creditors. Experience suggests the latter is only theoretical. As the number of years lapses to wind up an estate, little will be left to pay creditors.

The price of recovery

Time, resources, and scope are fundamental constraints to a project. Accounting for these three constraints, calculate the value of the pre-defined objectives.

Research claims concurrent creditors can expect a recovery rate of 5% from liquidations.

Business rescue offers two alternative aims with different challenges: restructuring a company’s affairs [so it can] continue existing, or an outcome resulting in a better return than liquidation. Creditors require convincing since proposals get served with a bitter pill: compromised concurrent claims. A waterfall of six to ten cents in the rand, to be precise.

Brace, brace, brace

When the debt cycle turns, both asset prices and the real economy will be in for a shock. Defaults are inevitable. Business owners can draw optimism from one full-proof strategy: take security against exposure. The concept is for a debtor to transfer incorporeal rights to a creditor securing the principal debt repayment.

A study from the University of Pretoria found that secured creditors are 95% more likely to recover a claim from a business rescue or liquidation project than concurrent creditors. There are multiple types of security available to business owners. Examples include pledges, cessions, and general notarial bonds.

Securing your exposure improves your arsenal and advances you to capitulation.

Insolvency casualties

Concurrent creditors’ options are limited. Given these poor statistics, any ‘project’ aimed at recovery must be economically viable. Observation and communication can be helpful too.

Recovery departments in banks employ seasoned professionals. Because so many competing interests are involved, bankers will attempt to unscramble the debt mess to gauge the outcome. Concurrent creditors dead-set on recovering claims should engage bankers at statutory meetings. Or at least listen to what they have to say.

Until such time as the chickens come home to roost, liquidators and dubious business rescue practitioners will continue to systematically pillage estates. Be vigilant: the holes in these practices are plain to see. A quick Google search of the practitioner can turn up grubby escapades.

Alas…
The number one lesson from the Nova Sharemax matter: better debtor management [is essential]. It will ultimately act as a lifeline in times of debtor defaults. Business owners require diligence when managing risk during a negative economic outlook.

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Tiaan Herbst

The Southern African Advisory Company [SAAC]

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