Home Accounting and Auditing If your company is in distress, see a ‘turnaround’ practitioner

If your company is in distress, see a ‘turnaround’ practitioner

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Speaking on a recent Moneyweb podcast on business rescue, SA Institute of Business Accountants (Saiba) CEO Nicolaas van Wyk suggested we should rather refer to business “turnaround” rather than “business rescue”.

“Most companies in trouble wait too long before they reach out for help,” said van Wyk. “Especially in times like these it is better to start talking to turnaround specialists to help you avoid having to go under business rescue.”

Business rescue is a remedy under the Companies Act for those enterprises in distress. It was introduced in the 2008 amendment to the Act to prevent large numbers of potentially viable businesses going into liquidation.

What is financial distress? It’s when a company doesn’t have enough cash to cover its debts, explained Coert Grobbelaar, a business rescue specialist and CEO of Grobbelaar Accounting.

“Covid has left many companies in distress. A company with cash flow issues is a good candidate for business rescue because debt can be restructured, along with a restructuring of the business to ensure longer term viability.

“We will not accept a business rescue appointment if we don’t believe a company can be rescued. Once we’ve got access to information and do an assessment to see if the business can be saved, then we will accept an appointment. Some businesses cannot be saved, in which case liquidation is the route to go.”

According to attorney Nicolene van der Walt, one of the main benefits of business rescue is that it places a moratorium on all legal proceedings, including enforcement actions or execution of legal processes. “Effectively, the company (under rescue) gets some breathing space without having the sheriff banging on the door to execute on a court order or attach goods or bank accounts and other assets. There are some exceptions in terms of the Act, but creditors will be advised of business rescue proceedings that have been initiated.”

Saiba’s van Wyk says the Companies Act makes it clear that creditors must be protected, but this must balance this with the ability of company to continue trading. His advice is for companies to look at engaging turnaround specialists as early as possible, before trading conditions and debt get out of hand. “Management needs to sit down and look at their business models, and engage an experienced busines rescue practitioner to see how to see if the business can be saved.”

Get certified as a business rescue practitioner

Saiba now offers a certification for business rescue practitioners, which you can find out about here.

“This is the true calling of accountants, which is to move into turnaround,” says van Wyk. “We cannot lose thousands of companies due to lockdown. The economy cannot afford it. Other countries have long favoured this approach, so we say ‘Do business rescue – it is the normal thing to do’. In fact, the Companies Act makes this a rather practical approach. Grobbelaar Accountants have experience of this and we can recommend them.

“We’ve teamed up with University of Johannesburg and other universities to offer accredited courses, with an exam set by industry experts. Part of the certificate requirement involves a learnership under experienced business rescue practitioner. Saiba is one of largest professional accounting bodies in SA and we have an ethical code that guides practitioners, and the practitioner must be subject to this code. We also have accreditation with the CIPC (Companies and Intelectual Properties Commission), which is the body responsible for licensing practitioners.”

Grobbelaar says accountants entering this field will find it immensely rewarding, but not without its challenges. “Be prepared for some tough battles with creditors, landlords and the like. But in this environment we need to save businesses rather than liquidate them, and it is very gratifying to be able to save a company and jobs.”

Nicolene van der Walt points out that it costs nothing to get a business evaluation from Grobbelaars Accounting, so there is no need to wait for business conditions to deteriorate.

She adds that retail companies are good potential candidates for rescue, while an asset-holding company, such as a property company, might be better off in liquidation.

The role of accountants

Regarding the role of accountants in business turnaround, van Wyk says accountants should first be generalists and then start specialising. “Our entry requirements are 3-4 years of articles, and then at least three years’ experience in practice before applying for a specialist licence, such as business rescue. We’ve seen too many recent scandals where accountants were involved, where the numbers don’t reflect the facts. That causes chaos in the economy.”

He adds that accounting bodies must start to raise the quality of services and ethics in the profession. “We need to save companies and accountants can make a big contribution to the recovery in the economy. Turnaround is not something that accountants are generally trained in, which is why we started to offer this as a certification. It needs more than an understanding of accounts. It needs business acumen and an ability to deal with people.”

Is this available to small businesses?

Grobbelaar says smaller businesses are better candidates for business rescue and debt restructuring because it’s easier to bring about a successful result.

What is the role of directors under business rescue?

Van der Walt says under business rescue, directors work with practitioners and assist with the running of the company, but the practitioner will have the ultimate say. In liquidation, the company is closed down and the director is no longer involved.

Who bears the cost?

The costs of business rescue must be paid by company. There’s a prescribed fee scale: smaller companies have smaller fees of R1,250/hour for smaller companies, while medium-sized companies pay the practitioner R1,500/hr, ranging up to R2,000/hr for larger companies.

Can a creditor block the business rescue process and pursue their options through the courts?

Says van der Walt: “There’s a moratorium on all legal proceedings under business rescue (BR). The Act does allow creditors to ask court to cancel the BR proceedings and rather go for liquidation, but it would have to prove to the court that it has information that BR is a hopeless cause. This is why the BR practitioner is important – he can oppose the application and give the court the correct information. “Creditors can only speculate, as they do not have all the information about the company. If court gets the right information and sees there is hope of rescue, it will not grant applications made by creditors for liquidation.”

What is the success rate of business rescue?

Says Grobbelaar: “I’ve been in BR for seven years and I believe accounting is a tool to help entrepreneurs make better decisions. We were involved in Spar Group (which owns the Build-It franchise with more than 380 stores).  I was involved in several stores where retailers failed to pay their creditors (and the biggest creditor was Spar). Spar did a bond perfection where they take control of the stores. We got into benchmarks such as expenses as a ratio of turnover, employees as a percentage of turnover, rental as a percentage of turnover and other measures. We were successful in all the stores I’ve been involved with, all creditors were paid and no employees lost their jobs. If we feel it can’t be turned around, we don’t get involved.”

How long does it take?

The process to get a BR plan approved is three months. The practitioner can apply for an extension of time, and provide creditors with details of the rescue plans for them to consider their options. Much depends on the nature and size of the company, as well as the number of creditors. To get five people to agree to a plan is easier than getting 50 people to agree.