COVID-19: As a board at what stage should we be having the business rescue conversation?
Sirdar’s Carl Bates recently teamed with RS Advisors’ John Evans to explore the implications of the “worst case” scenario and how to manage a business in distress.
Everyone is experiencing challenges times at the moment as the world responds to COVID-19, and as businesses we work out how we’re navigating the blizzard – the challenge – that has been put upon us. At the Sirdar Group, have decided to help businesses rise to this challenge by exploring the concept of business rescue.
Firstly, at a board level, you need to consider cash flow all the time. You have fairly onerous requirements to assess liquidity through the year which helps you to make this assessment. We will now explore what business rescue is, and how the Companies Act defines being “financially distressed”.
What is “business rescue”?
Business rescue refers to proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
- The temporary supervision of the company, and of the management of its affairs, business and property
- A temporary moratorium on the rights of claimants against the company or in respect of property in its possession, and
- The development and implementation (if approved) of a plan to rescue the company by restructuring its affairs, business property, debt and other liabilities and equity in that manner
The key objective of business recue is to develop and implement a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing its existence or to achieve a better return than from the immediate liquidation of the company.
This is achieved through an independent expert who will come in and assess and guide the business through this process. They provide a plan that is intended to rescue the business.
When is a company “financially distressed”?
Being financially distressed as a business means that:
- It appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediate ensuing six months (or)
- It appears to be reasonably likely that the company will become insolvent within the immediate ensuing six months.
What are the risks, and what can business rescue achieve?
Before taking a decision to explore business rescue, the board must consider the risks and benefits of a formal business rescue process. This can be done by asking three key questions:
- What will be achieved (or made different) by a business rescue process?
- Moratorium (breathing room) will be enforced by law
- Third party supervision will be enacted on the affairs of the company
- You will need to assess how business rescue will affect the viability of the business
- You will need to review any potential structural changed needed to restore viability of the business
- How will business rescue affect customer and supplier contract?
- Will the customer have a right to cancel contracts?
- Will suppliers continue to supply the business?
- How will business rescue be funded?
- Suppliers may demand “cash on delivery”
- Will the business assess be encumbered?
Important to keep in mind is that the business rescue practitioner will become the supervisor of the business, and the board will effectively have to report to this person. To that end, it’s vital that the business act early to be able to seek out and appoint someone who they will trust to lead the way during this process.
Can you navigate through the crisis without business rescue?
The first consideration here is: Who are the key stakeholders that may be affected? These could typically include shareholders, lenders and investors, creditors and employee and trade unions. You will need to take a look at the nature of the relationship between the company and its stakeholders, you will need to assess the value split within the creditor body, and you will need to understand how dependent customers and suppliers are on the company.
A crisis management framework
Even if business rescue is not something you’re going to explore, the current global situation has shown us that a crisis management plan is something all businesses should have. This entails having a clear and defined strategy on dealing with any crisis, and the development of a process therein.
Below we have outlined a framework that outlines the key elements of successfully navigating a crisis. It has been split into six states, namely: evaluation, stakeholder negotiation, control systems, cash management (to create liquidity), reporting (the basis for turnaround), and ongoing cash management (for medium-term control). Our framework is outlined below: