CIARAN RYAN: There’s not a single company in South Africa that has not been impacted by the Covid crisis. Staff have been retrenched, costs have been cut and companies are looking for new sources of revenue. The crisis arrived unannounced and poses an existential threat to many companies. Business rescue is often regarded as the end of the road for a company struggling to pay its bills, but there’s a lot more to it.
More important is how to remain as a going concern, and joining us to discuss this is Imtiaaz Hashim, who’s a director of BDO. First of all welcome, Imtiaaz. Maybe kick off and explain the whole point about business rescue. Is this kind of the end of the road for companies, or are you more concerned about helping companies to remain and hold their status as a going concern?
IMTIAAZ HASHIM: Hi, thanks for that intro, and I appreciate it. I think it’s critical for businesses to remain in business and to remain going concerns. So I think business rescue is one aspect of the Companies Act legislation that allows businesses to stave off liquidation. The reason we believe that going concerns and keeping businesses in business is critical, is we need to kickstart the economy; we need to have people remain employed to be able to contribute towards the tax system – PAYE and income tax and Vat, and so on.
So I think we, as business advisors to our clients, try and assist them as much as possible to help them continue being a going concern.
CIARAN RYAN: Alright. So just to explain business rescue, this is of course allowed in terms of the Companies Act, the 2008 version of that. And that’s really to allow companies time to basically stave off the creditors and get back on their feet again.
But there are a lot of business rescue practitioners out there at the moment who are talking about, before you end up in that position, approach us and let’s see what we can do. In other words, this very point that you’ve been making about maintaining your status as a going concern. Is this something that you’re encountering?
IMTIAAZ HASHIM: Yes, a hundred percent. I think what’s very, very important is to maybe take a step back and understand that directors are responsible for running the companies. They’ve got directors’ responsibilities in terms of the Companies Act to ensure that they maintain levels of solvency and liquidity. And part of their job and their role and their responsibilities is to ensure and evaluate the cash flow and the working capital requirements of the business.
As we know, revenue is vanity, gross profit is sanity and profit is reality; but cash flow is absolute in terms of running the business.
So a good handle on the cash flows of the business and what the business requires to sustain itself is very critical. And I think a lot of directors maybe adjusted a little bit late to the lockdown, and how to try and manage their cash flows better.
I think a lot of businesses have had to rely on landlords to give them a reprieve with regard to a rent holiday, and so on. And some of them were slow to react with regard to maybe putting people on short time and looking at the non-essential expenses in their income statement to make sure that they cover the shortfall, because some in business effectively started under proper lockdown for 21 days [from] March 26, which was unprecedented – and you needed to respond and react.
For the following months you were not necessarily generating revenue, but the expenses were ticking over. So cash flow management was absolutely critical in that period, and businesses that adjusted very, very quickly, managing that cash flow, were the ones that were able to survive and remain as going concerns, and continue to remain going concerns.
CIARAN RYAN: Well, let’s just drill down into that a little bit. Cash is king. So a lot of these companies are finding that they’ve got head office expenses which they’re having to maintain despite the fact that they might’ve had a serious drop in revenue. Where are some of the obvious places that companies are looking, or should be looking, to cut costs and make sure that they have enough cash flow to meet their bills at the end of the month?
IMTIAAZ HASHIM: I think I’ve touched on a few of those, but I’ll maybe go over them again. I think what is really important is communication – communication with your stakeholders, your shareholders, your creditors, your financiers like your bankers and so on, and your staff. Those are some of the stakeholders in your business.
So, from a shareholder perspective, if you are fortunate enough to have a shareholder that is cash-flush and has the ability to capitalise the business further, that’s obviously one of the key elements that you could use to introduce more cash into the business.
And then your bankers. If there is debt on the balance sheet and you require a reprieve with regard to payments and payment holidays, certain banks have been amenable to those, and it was key to get those going early on, to avoid utilising a lot of cash that you could have utilised to generate further revenue rather than repaying debt. And maybe renegotiate payment terms, which I think the banks were quite comfortable with.
And then obviously I think landlords had to come to the party – and many of them did. They would want to have a tenant long term, rather than no tenant at all once the business goes into liquidation or closes down because they really can’t afford the rental.
So those are some of the areas that I believe businesses that responded well actually utilised very, very early on in the lockdown period.
And then there were businesses that looked at their staff complement and looked at whether they were overstaffed. There’s normally a lot of ‘dead wood’ in organisations – apologies for using that phrase – but people who float in the organisation. It was a good time for businesses to be able to take care of that dead wood in the organisation, maybe do some retrenchments, or maybe put staff on short pay to assist with the cash flow requirements. And if you had taken some of those initiatives, I think you would have been able to get through a lot of lockdown periods.
I must be honest with you, we implemented a lot of those strategies in our business and we were very fortunate that we could actually continue paying staff 100%. We continued to do so because we made some of those tough, hard decisions early on during lockdown.
CIARAN RYAN: Okay. Of course, the one creditor who is not going to say ‘I’m fine with you delaying payments’ is the taxman – am I correct? So, what are you going to do about the taxman? How do we sort him out?
IMTIAAZ HASHIM: I think the taxman obviously is a key player. As you know, we’ve got a very small tax base and it’s shrinking all the time, with capital flowing out of the country, emigration and so forth. So he needs to balance the books and make sure that he keeps collecting the taxes. And with people closing down businesses, there’s no tax being paid, or PAYE, if people are being retrenched. So there was certainly pressure.
That being said, the taxman also provided some relief to taxpayers, allowing taxpayers to claim more deductions on donations that they made to, for example, the Solidarity Fund, where normally there was a cap in terms of tax deductions, taxpayers were allowed to claim further deductions.
With regard to provisional tax – which is a bane of a lot of businesses come August for the first provisional, and then February for the second provisional tax payments – if you earned R100 and you needed to pay over R28, previously by your second provisional payment you’d have to pay over the full R28. Now they would say that you only have to pay over 65% of that. So you were allowed another 35% reduction with regard to the payment, which obviously meant that you had some additional cash flow to play with.
Those are some of the examples of where the taxman has come to the party. Obviously, if there were late payments and so on, the taxman would not necessarily impose penalties and interest in certain cases.
And with regard to Vat as well, where you were paying over Vat on a quarterly or bi-monthly basis, or every two months, but you had Vat inputs or refunds due to you, you would be allowed to switch to be able to submit those Vat returns on monthly basis. So that hopefully would leave cash flow coming back into the business.
So yes, the taxman certainly kept the noose around us quite tightly, but at the same time where businesses were good tax-paying businesses, they definitely had opportunities to claim back money to get further reductions.
So I think the taxman came to the party in a certain respect, and wasn’t there to almost put a final nail in coffins. But the taxman was also wary of the fact that if a business closes down, that’s completely closing a tap with the potential of getting PAYE, income tax or Vat from that business. So some sanity did prevail. But yes, the pressure definitely is on businesses and taxpayers as well.
CIARAN RYAN: Okay. So, the taxman has come to the party. Now, just very briefly, talk about the responsibilities of directors under the Companies Act. There are liquidity and solvency requirements that are written into the Act. So just talk about that very quickly.
IMTIAAZ HASHIM: That’s been the case for many, many years. Sometimes directors don’t realise the importance of making sure that their balance sheet is solvent, and they are liquid, and they can pay creditors in the ordinary course of business. I think there were definitely uncertain times in the last period, and I guess directors could be forgiven when they found themselves in situations where suddenly liquidity wasn’t there, and the solvency ratios weren’t what they needed it to be.
But they do have responsibilities nonetheless, because otherwise they’d be trading recklessly and there could be liabilities for them if they are trading recklessly and we know that they will not be able to pay their creditors and continue doing business.
So I think it’s more important now than ever for directors to really understand that responsibility. And this is where business rescue can really help. It definitely staves off a potential liquidation but, more importantly, it keeps the creditors at bay. So, when you go into a business rescue process, you have the ability to be able to go and renegotiate with creditors, instead of paying them, or them forcing you [to pay] 100 cents in the rand, and maybe then getting paid zero cents on liquidation. When you have a proper business rescue practitioner in play, they could probably get 50 cents in the rand, or 80 cents in the rand, depending on how well the business rescue practitioner can arrange a turnaround, or restructure the business and have a turnaround strategy.
I think a lot of people end up going the business rescue route sometimes too late, when the damage has been done and has gone too far along, because they see it as a sign of weakness.
But it’s a sign of strength to be able to hold on and secure that business long term because, if it’s done properly, you can come out of business rescue pretty quickly as well.
So I think directors should also consider that when they see the business faltering and they are struggling with meeting their obligations in the ordinary course of business.
CIARAN RYAN: Okay. Final question on business rescue – we’re back to that subject. Can you do a voluntary business rescue application? Can you go to your creditors without having declared an act of insolvency? In other words, you say, listen, we’re going to have trouble at the end of this month or the end of next month, so we’d better start negotiating with our creditors now. How should they do that?
IMTIAAZ HASHIM: Yes. You can do that; you can go into voluntary business-rescue proceedings. There’s a form that needs to be completed. You’ve got to liaise with the Companies [and] Intellectual Property Commission [CIPC] – it’s Form CoR 123.1. This must be accompanied by a Resolution of the Board of Directors from the company to inform their desire to commence with business rescue. And then there are some other notifications and publication requirements in terms of the Act. But certainly, that is something that they can do. And I think it is the responsible thing to do when they know that they’re heading in a direction down the route of potential liquidation.
CIARAN RYAN: Okay. Imtiaaz Hashim, who is a director of BDO, we’re going to leave it there. Thanks very much for coming on.
Brought to you by BDO South Africa.