Dealing with debt in your business

As the majority of businesses return to normal operations, many will return to face a burden of accumulated debt as a result of restricted trading.

The latest studies have confirmed the impact of COVID-19 resulting in a devastating debt burden for South Africans. The debt holiday offered by the banks in late March 2020 had added R20.7 billion to the debt of the estimate 1.6 million South Africans who took advantage of this.

Credit bureau TransUnion reported that by August, 21% of those surveyed reported losing their jobs as a result of the pandemic; and nearly nine out of ten said they were concerned about their ability to pay their debt.

Companies who are in financial trouble often attempt to trade itself out of trouble, while the recurring monthly financial constraints and commitments makes it difficult, and often have the consequence that it cannot pay its debts.

The danger is that a Company or business’s attempt to trade out of trouble, is often tantamount to reckless trading or trading under insolvent circumstances, which  have the effect that the directors of a Company may be held personally liable for the debts of the Company.( Apart from the other contraventions of the Companies Act.)

Sadly, many of those businesses will be liquidated because of its inability to pay their debt as it becomes due, although the structure and business model is sound.

So, what happens when you find yourself in a position where you feel that you may be unable to meet your financial obligations? You may very well feel like you are drowning in debt, but before throwing in the towel, let’s look at the options available to you.

 

Business Rescue

This is often an expensive and tedious process during which much time and unnecessary costs are wasted.

In Business Rescue, a Business Recue Practitioner gets appointed who takes over the management of the Company, then meets with creditors, draft a business rescue plan, and then if the creditors accept the business rescue plan, has the task to trade the business out of trouble, until it is rescued.

It happens frequently that the Business Rescue procedure is not successful, and the Company get liquidated in any event.

My interpretation of the data contained in the most recent Business Rescue Process Status Report – as at 14 August 2020 is that of the total 3738 cases lodged since 2011, 698 ended in liquidation and only 468 were terminated as ‘not financially distressed’ any more.

 

Liquidation

Liquidation is very often the answer to the financial problems of a company, and the longer you wait, the bigger the problems, but it is not the only remedy. Liquidation means loses, not only for the business owner, but also for the employees, contractors, landlords and other creditors. On liquidation, the business closes down, a liquidator is appointed whose task is basically to sell all the assets and pay the creditors a dividend from the proceeds.

 

Compromise

An under-utilised alternative to Liquidation and Business Rescue, is to make use of the provisions of Section 155 of the Companies Act and enter into a Compromise with Creditors.

A Compromise means that a Company makes financial arrangements with its creditors, or some of its creditors, in an attempt to avoid Liquidation, or to become profitable again. Although there are many similarities between Business Rescue proceedings and a Compromise, the benefits of a Compromise in my view often outweighs that of Business Rescue.

The main benefits and differences are the following:

  • In a Compromise, the board of Directors remains in charge of the Company, unlike Business Rescue, where the Business Rescue Practitioner takes over management.
  • There are less formalities and timelines in the Compromise procedure.
  • A Company can at any time commence with the Compromise procedure, it does not have to be in financial distress, as is the case in Business Rescue.
  • In a Compromise, you can choose a class of creditors whom you want to Compromise with, it does not have to affect all the creditors.
  • There are fewer reporting requirements as it can be tailor made, and the Master of the High Court is not involved, as long as the Company is not liquidated.
  • The costs are also less than with Business Rescue because the Company does not have to pay a Business Rescue Practitioner its’ hourly- and administration fees. The fees for the Receiver in a Compromise is less burdensome.
  • You can initiate a Compromise after a Company has been liquidated. The effect hereof is that once the Compromise is sanctioned by the Court, the Company can be brought out of Liquidation.
  • Because there is no moratorium on legal proceedings against the Company until the proposal is sanctioned by court, it creates a sense of urgency from the side of the Company and from the Creditors to accept or reject the proposal and move forward.

 

In closing

So, if you find yourself in a position where the debt in your business is keeping you up at night, keep the following in mind:

  • If you have signed surety or gave security you cannot just close shop.
  • The longer you leave it the worse it will get. The business doesn’t have to be in distress before you act. Don’t hesitate, negotiate
  • You are not alone; we are here to assist you through this challenging time

 

If you or someone you know needs assistance with reaching a compromise on the debt in your business please reach out to me for assistance.