Business rescue to the rescue

When the Covid-19 pandemic hit the South African economy last year, the country was already in a technical recession where, for two consecutive quarters, gross domestic product (GDP) declined. At the time, the last registered unemployment figure (third quarter 2019) stood at 29.1%.

For the full year 2019, real GDP growth was only 0.2% – not necessarily an environment that could withstand the abrupt halt that hit the economy when the government, in accordance with practice around the world, began to implement progressive blockages to limit the impact of the novel coronavirus at the time. As a result, real GDP contracted by 8.2% in 2020.

In this incredibly difficult environment, South African businesses have struggled to stay open and afloat. A to study by financial services firm FinFind, conducted in conjunction with the Department of Small Business Development and based on a survey of 1,489 businesses, showed that the events of last year forced 42.7 percent of businesses to close. small enterprises.

Tabisa Nkohla, Head of Business Support at Absa, said her department immediately saw an increase in the number of new customer cases being transferred to her team’s environment for support and management.

“While the immediate shutdown took a toll on business operations in March 2020, declining revenues resulted in the inability of most customers to meet their daily, weekly or monthly obligations and we saw an increase in the number of client cases referred to our division, ”she says. .

Commercial support is part of the relationship banking risk division at Absa and while the front line team, being relationship bankers, credit analysts and credit managers, can help temporarily when business clients experience financial difficulties. (whether to authorize a temporary overdraft or increase credit facilities), the Nkohla team is called upon when the solution must be medium or long term.

“It has become very clear that we will inevitably see these sometimes unforeseen dips. The bank cannot escape this reality and must stand alongside its corporate clients, ”she said.

The process is less aggressive or invasive than it was three decades ago, when a business customer was immediately transferred to a bank’s collection environment once payment obligations were not met. and, as a result of the failure, in a recovery process so that the bank can see how it could minimize its own risk.

The stigma still hangs on

Even with the transformation in the way things are handled now, clients are still hesitant to be open and honest with their bankers early in the process. Nkohla believes that it would be very helpful if there was more trust in business support structures, as it could very well be to the benefit of a struggling corporate client if the challenge is met early on.

Nkohla jokes that his department is not the most popular.

“When it comes to business rescue procedures, for example, it’s critical to quickly identify that the business needs help or is about to be in distress. We generally use the sick analogy; the prognosis is significantly higher if they are diagnosed early, ”she says.

If a customer advises their banker early on, then the bank can seek alternatives and support the formal business rescue process to stop any legal business proceedings that might be initiated by creditors or suppliers, as this would hamper often more the company’s ability to pull.

The last year put the process of rescuing companies in the projector, with large companies such as South African Airways, SA Express, Edcon and Busby, all requesting the formal corporate bailout procedure stipulated as an option under Chapter 6 of the Companies Act 2008.

“The procedure gives the corporate client a break, while the management team as well as the corporate rescue practitioner examine the possibilities of assisting the business,” explains Nkohla. “It also helps to bring all interested stakeholders around a table with the goal of achieving a common goal to see how the business can be assisted in weathering the storm. “

Nkohla further notes that “if the informal rescue process is undertaken by individual stakeholders, it tends to focus on safeguarding the interest of some stakeholders over others, which could lead to legal action. against the company by stakeholders who think their interests have been overlooked ”.

Still some flaws to iron out

If the business rescue is not used in time and effectively for the purpose for which it was designed – to be triggered while there is still hope for the patient (to use the analogy proposed by Nkohla ) – it does not always work.

“If our patient is already in intensive care, there is very little chance that anyone will be willing to provide post-opening funding to help the business take over,” she explains.

“The negative aspects of the procedure were unfortunately more publicized than the positive ones.

“Although several efforts by industry players have been made to improve some of the weaknesses in the bailout process, there is still a long way to go. The law itself was very ambiguous, which required several court cases to establish clarity and case law in terms of various clauses. This created a field day for lawyers specializing in insolvency law, to such an extent that the whole process has now become very legalistic instead of being commercially sensitive and flexible.

Another negative aspect is that the credibility of the proceedings has been called into question over time, with various people claiming to have the skills to save businesses.

“We have former and current liquidators, insolvency lawyers, auctioneers, accountants, former bankers… Most of these people did not respect what they knew, and this led to the business rescue to be mistakenly called another form of liquidation or liquidation delayed from its original intention to actually save the business, ”said Nkohla.

What is clear is that early identification of a potential risk is the key to a successful rescue, and Nkohla encourages companies to constantly assess their business needs and operating environment and then take action. necessary if distress looms on the horizon.

“As an entrepreneur, you understand your business better than anyone on our team. You need to make sure that the first point of contact is your banker and let them know about the situation. The bank holistically subscribes to the fair treatment of its customers and understands the current circumstances very well, each case is treated on its own merit, ”she said.

Presented by Absa Business Banking.

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