Recommend: Commencing work as a business rescue practitioner

In previous articles1 2 I explored the steps required when deciding to appoint or accept an appointment as a business rescue practitioner (BRP) to a company in distress. In this article I will explore the critical initial work that needs to be undertaken by the practitioner within the first ten days of the appointment.

TIMELINES
The Companies Act 71 of 2008 recognises the fact that urgent intervention is required in rescuing a distressed company. It further recognises the very real stress that all affected persons experience in relation to the company being rescued. With this in mind, the timelines set out and envisaged in Chapter 6 of the Act are extremely constrained. (It was in this context that we advised in our previous articles the importance of the distressed company and the prospective practitioner ensuring that they made the correct fit in terms of needs and skills!)

Once the BRP has been appointed, there is extreme time pressure on all parties involved. The directors must as soon as practicable provide all books and records relating to the company in their possession to the BRP and confirm where any other books and records are located.

From the date of his appointment, the BRP has 10 days in which to call meetings of both the creditors and the employees. In those meetings the BRP will need to inform the affected persons whether, after applying their professional judgement, they are satisfied that there is a reasonable prospect of rescuing the company.

As can be seen, the first 10 days from the appointment is a critical period that could determine the success or failure of the rescue.

From the date of appointment, the BRP is empowered and takes over full management control in substitution of the existing board and management structures of the company. At the same time, the BRP is an officer of the court with corresponding reporting duties to the court and assumes the responsibilities, duties and liabilities as a director of the company in terms of sections 75−77 of the Act.

From appointment, it is therefore critical that the BRP learns as much as possible about the business in order to manage the business on a day-to-day basis and arrive at an opinion as to whether the company can be rescued. The initial focus is therefore on gathering as much information in as short a time period as possible.

To manage the business, the BRP will need to consult widely with all role-players to understand the core business processes and identify which aspects operate efficiently and which processes do not. Importantly, in undertaking this review it will be important to review all the financial cycles to understand the controls in place, including the accuracy and speed with which financial transactions are undertaken and recorded.

In reviewing all the business processes the BRP will be attempting to identify not only the skill and competency with which they are performed but also the inherent integrity and trustworthiness of those charged with authority and responsibility.

It is always difficult to assess such critical operational infrastructural matters in a short period of time, but given the level of responsibility entrusted to the BRP, an ability to rely on functional support within business operations whilst attending to the development of a business rescue plan is critical. The Act acknowledges these challenges and allows the BRP to delegate any of his or her powers or functions to a person (or persons) who was part of the company’s board or management structures. The BRP is also empowered to remove any member of the pre-existing management structure and to appoint such a person (or persons) to the management team.

Through discussions with management, key suppliers and customers the BRP must make fast decisions that will provide the company and the BRP with a management team capable of continuing to run the operations of the company efficiently during the rescue period. Through reliance on the management team with sufficient reporting and control structures in place, the BRP can now focus on analysing the financial position and prospects of the company.

THE ANALYSIS
This analysis is made up of the following steps:

1. Review the financial records to identify the scale of financial distress.
2. Review the financial summary pack compiled by the directors and provided to the BRP within five days of appointment and talk to the management team to identify what has caused the financial distress.
3. Meet with other players in the market, including key customers and suppliers, to ensure that the business model of the company is sustainable – in other words, ensure that the distress is not caused by the fact that the business no longer has a market due to circumstances beyond its control.
4. Discuss the business processes and infrastructure with both internal managers and external experts to identify whether there are operational aspects that should be addressed to pivot profitability.
5. Meet with the company’s auditors to try and get an understanding from their perspective as to what might have caused the financial distress and how they believe it should be addressed. Similarly, it is critical to review the auditor’s report to management on audit findings to see if there are any matters that would highlight the reasons for the distress and matters raised that have not been addressed.
6. It can also prove very insightful to review the minutes of directors’ and shareholders’ meetings, which should include the documented solvency and liquidity tests as prescribed by the Act. The minutes will also indicate any problems that were being experienced and steps that were being taken to address these problems.
7. Meeting with the company’s bankers is important not only from the perspective of enquiring about any problems they had encountered on the account, but also to establish the levels and types of security that they hold and to build a relationship with the banks to allow for their support through the business rescue process and hopefully their commitment to supporting the ultimate business rescue plan once formulated. This will also be a good time to explore the option of using the finance houses and their appetite to provide post-commencement finance.
8. Meeting with key suppliers, especially those that may be financially exposed to the company, will again alert you to any securities they may hold, and at the same time the ability to trade may in some cases be totally dependent on their ongoing support. It is important at this stage to alert them to their ability to supply credit, which will be seen as post-commencement finance and hence have a preference in the plan presented.
9. Often overlooked is meeting with key customers, depending on the type of industry. Their ongoing support of the business may be critical to any future rescue plan and you may be able to explore more favourable payment terms with both customers and suppliers in order to reduce the working capital needs of the business.
10. The employees are critical to any business and although retaining key staff may be important in the establishment of an effective business rescue plan, the staff at all levels can often provide great insight into what the company is doing right and, importantly, what it is doing wrong! Through these discussions, the BRP will gain great insight not only into long-term prospects but also into short-term operational management.

The above list is not exhaustive, and every business will have different role-players having different levels of importance, but it is likely that the parties in 7−10 above − with the possible addition of the South African Revenue Service − will form the majority of the affected persons. Consequently building relationships with them will be an enabler in the success of the business rescue.

Now being in a position where the business is operating, the BRP must begin the process of analysing all the information gathered and applying professional judgement to satisfy the question of whether or not the business is distressed and if so, if it has a reasonable prospect of being rescued.

Although the above question is one that the BRP must answer in the creditor and employee meetings held within 10 days of appointment, it should be remembered that if the finding is that it can not be rescued, the BRP must immediately inform the court and all affected persons and discontinue the business rescue and place the distressed company into liquidation. Similarly, if the finding is that the business is not distressed, then the BRP must apply to the court or file a notice to terminate business rescue proceedings.

CONCLUSION
The first 10 days of any business rescue are intensive, requiring a lot of research and implementation of operational processes, but when done correctly, this period builds a strong base for an ultimately successful business rescue.

NOTES
1 From distress to success: appointing the right business rescue practitioner, ASA, April 2021.
2 Accepting appointment as a business rescue practitioner, ASA, October 2021.

Author
Dave Rich CA(SA), Partner and Director, MD Accountants and Auditors Inc