Business Rescue on the rise in SA leading to increased demand for funding
There has been a clear trend in 2012 with regards to the decrease in liquidation applications and the increase in Business Rescue applications. As such, the demand for short-term financing could rise significantly as funds will be required for restructuring companies in Business Rescue
This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says the decrease in liquidations can in part to be ascribed to the new business rescue process, which is gaining recognition as an appropriate mechanism for corporate restructuring.
“Recent statistics released by Statistics SA on the number of liquidations for the three months to February 2012 showed a 30,3% decrease compared to the three months to February 2011. Liquidations for the year to February 2012 registered a 49,9% decline. The fact that voluntary liquidations decreased by 53.6% supports the theory that business rescue is playing a role here,” he says.
Palmer explains that changes to Chapter 6 in the Companies Act of 2008, introduce an entirely new process of restructuring companies in financial distress - namely the Business Rescue (BR) Process, There were over 280 Business Recue Applications in the first 8 months of the New Companies Act being implemented.
According to Palmer, the Business Rescue Practitioner must show that there is a reasonable prospect of rescuing the company and that the results for the creditors after Business Rescue are better than in a liquidation.
“Business Rescue implies a viable process of rescuing a company from “financial distress”, as an alternative to liquidation and to replace the process of judicial management. Furthermore, a business rescue practitioner must be appointed to oversee the management, business and affairs of the company on a temporary basis, and to develop and implement a business rescue plan,” he explains.
Palmer says In line with companies overseas – particularly in the USA, South Africa will probably see an increase in Post Commencement Funding (PCF). “Even though this is not a major domestic trend now it’s likely that over the next few years, we might see increase in demand from business rescue practitioners for funding,” he says.
Palmer explains that PCF may be obtained during Business Rescue proceedings and any such financing may be secured to the lender by utilising any asset of the company to the extent that it is not encumbered; and will be paid in the order of preference set out in sub-clause 3(b).
As part of their role, Palmer says Business Rescue practitioners are likely to require short-term funding to get the business back on its feet. However, he warns that because the banks are moving away from secured lending, many Business Rescue practitioners may struggle to secure finance from the banks. In this case, Palmer recommends approaching second tier lenders.
“Companies in Business Rescue could secure short-term financing against the value of their building assets. This funding can be put to use by the Business Rescue Practitioner according to the Business Rescue strategy. A further advantage of this is that, at the point where the business is deemed to be in recovery, the structure of the funding could adapt accordingly,” explains Palmer.
Epic Communications (Pty) Ltd
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