Business rescue is becoming increasingly familiar to the South African public. And as its potential becomes more apparent, people are starting to realize its effectiveness in appropriate circumstances. Business rescue practitioners and academics cite the following as critical factors for successful business rescue:
In this post, we'll focus on the third factor: Post-Commencement Finance. But before diving into the details, let's briefly explain what business rescue entails.
Business rescue was introduced into South African law in 2011, offering an alternative to liquidation for financially distressed companies — those unable to meet their financial obligations.
In essence, a business rescue practitioner, an independent expert, is appointed either by the company itself or by a court. Their role is to assume management control of the company and to develop a plan to revive the business. During this process, the company gains temporary protection from creditors' legal actions while the business rescue practitioner formulates the rescue plan.
Once the plan is published, creditors (and sometimes shareholders) vote on it. If the required amount of creditors support the plan, it becomes binding on all creditors, and the practitioner must proceed with implementation.
The Companies Act allows a business rescue practitioner to secure funding for the company in business rescue, which takes precedence over unsecured claims against the company. This financing is referred to as Post-Commencement Finance (PCF).
Companies undergoing business rescue often require PCF to cover their operating expenses temporarily and to settle historic debts. Without PCF, a business rescue is destined to fail. When a company finds itself in financial distress, it's rarely able to generate sufficient profits quickly enough to not only sustain itself but also settle its existing debts, highlighting the critical role of PCF.
South Africa has relatively few specialist PCF providers, possibly due to the novelty of the business rescue concept. Banks occasionally agree to provide PCF, especially when they have financial exposure to the company in business rescue and require it to continue trading to mitigate their own risks.
In some cases, trade creditors may opt to supply goods or services to the company in business rescue while deferring payment, considering these claims as PCF. Trade creditors may agree to this only if it will provide them with a better outcome than if they were to halt their supplies immediately.
In both scenarios, PCF serves as a defensive measure to protect the stakeholder's current position. This is distinct from PCF provided by third parties who aren't current creditors and who may see potential in the business and therefore an opportunity to provide PCF. In the United States, this type of funding is known as "offensive DIP funding" (debtor-in-possession funding in the US is akin to PCF in South Africa).
There are relatively few specialists in South Africa who offer "offensive" PCF. At Geddes Capital, we possess the expertise and background knowledge in business rescue to comprehensively assess both the risks and opportunities associated with PCF. Consequently, we belong to a select group of lenders willing and able to provide PCF to companies, even in what is often perceived as a high-risk industry.
In conclusion, Post-Commencement Finance is undoubtedly vital for the success of a business rescue. Its availability can make the difference between a successful turnaround or an unfortunate liquidation.
As the field of business rescue continues to evolve in South Africa, understanding and harnessing the potential of Post-Commencement Finance becomes increasingly critical. We encourage businesses in distress to explore these options and consider specialists like Geddes Capital for their Post-Commencement Finance needs.