How Will The Medium SizeD Business Survive The Short And Long-Term Effects Of The Lockdown?
20th April 2020
By: Libongo Ndabula
Business Rescue Practitioner and Director at Boqwana Burns Incorporated
1. The combination of generally unfavourable economic conditions in South Africa, the devastating effects of Covid-19 and the eventual downgrading of the South African economy, have placed South African businesses in a tailspin. This has dire consequences for South Africans in general and will require short and long-term responses.
2. Many companies are already in distress. Their prospect of retrenchment, downsizing and eventual closure is now a reality. In order to survive, businesses are:
- forced to draw on their reserves and other forms of savings,
- developing innovative ways of conducting business and radically reducing costs, whilst somehow serving customers.
3. However, for thousands of businesses, this is impossible. It is for this reason that the Government has announced several interventions for businesses who, as a result of COVID-19, are struggling financially. These interventions include stimuli such as:
- Lower interest rates,
- Tax holidays,
- Business growth and Resilience facility,
- Relief Finance Scheme,
- Sefa-Debt Restructuring Facility,
- Temporary Relief Scheme (C19 Tiers).
4. It is important that communication regarding eligibility and the process of accessing these benefits are clear and unambiguous.
5. While these efforts are to be applauded, they will still leave out the majority of South African businesses. Therefore, companies must still explore other options such as negotiating terms of payments / delivery to creditors, retrenchment and severance packages with employees and overall business restructuring.
6. For companies in financial distress, Business Rescue might be the best way to navigate through these turbulent times. It is important that Business Rescue be understood as a possible solution to return companies to some level of normality and profitability; rather than as a precursor to liquidation or asset-stripping, in avoidance of liabilities and accountability.
7. It is going to be a logical consequence of the lockdown that, many companies will not be able to pay some or all of their debts as they become due in the next 6 months; and/or that most companies’ debts will exceed their assets in the next 6 months. The lockdown will have a direct and, in some instances, an immediate impact on a business’ ability to meet their solvency and liquidity requirements or thresholds. It is under such circumstances that Business Rescue becomes a practical response.
8. The advantage of Business Rescue is that it places a moratorium on legal proceedings against the company, therefore keeping creditors at bay and allowing the business time to recover. The Business Rescue Practitioner takes over the daily operations and strategy of the company, whilst overseeing the rescue and restructuring process of the company. Effectively, the Business Rescue Practitioner becomes the company’s primary decision-maker.
9. For the rescue process to succeed, the Business Rescue Practitioner must be well-acquainted with the type of business that is being rescued and avoid a one-size-fits all approach which may not be appropriate for certain specialized businesses. The idea of Business Rescue should be used, in particular, by the Small and Medium Sized companies. This is to dispel the idea that Business Rescue is only applicable to big corporates that are financially struggling.
10. All the efforts must be made to protect the interests of shareholders, employees, creditors and other stakeholders, by avoiding liquidation; which must only be used in the severest of circumstances and as a last resort.
11. Whilst Covid-19 is a health crisis, to which a solution must be found as quickly as possible, its long-term effects will be felt in the economic devastation it leaves in its wake. Business Rescue Practitioners have a critical role in making the latter situation somewhat more bearable.