by Tunga Changamire, PCBS
Published: January 10th, 2013
Construction companies implement comprehensive business rescue plans
The release of the latest liquidations and insolvencies statistics by Statistics South Africa in October 2012 indicate total liquidations within the construction industry almost doubled from August to September 2012. This can be partly attributed to many financially ailing construction companies applying for business rescue under the new Companies Act without proper planning before lodging their application.
Many companies appoint business rescue practitioners with no pre-determined rescue plan in place, relying solely on the appointed business rescue practitioner to rescue or rehabilitate the company from financial duress.
Essentially, the business rescue practitioner is coming in blind with no prior knowledge of the company?s financials and very often without valuable industry-specific knowledge. The problem is compounded by extremely tight time constraints with the practitioner assigned a mere 21-working days to find a workable solution or the company will be forced to go forward with official liquidation proceedings.
Because the power to appoint a business rescue practitioner falls to the company?s board of directors, companies must carefully consider whom they assign the role and ensure that an agreed upon rescue plan is in place prior to applying for business rescue. This allows the practitioner to step in and make decisions quickly and accurately.
Unfortunately, it is often a case of companies operating in complete panic mode due to the external pressures from creditors and shareholders. This often sees potentially financially viable companies that have a realistic chance of continuing on a solvent basis making rash decisions that ultimately lead to their demise. The company?s board must do its homework and be selective about whom they appoint as a practitioner and ensure they have a realistic and carefully thought-out plan in place.
The increase in construction companies applying for business rescue has brought about a new dimension to guarantee businesses operating in the sector. As part of the business rescue process, guarantors are increasingly replacing financially stressed companies with reputable alternatives in an effort to salvage contracts.? Unfortunately, while the replacement process offers companies the opportunity to minimise financial damage, many are unwilling to release contractual information until it?s too late. All guarantors require speedy and detailed access to the relevant information if there is to be any chance of easing financial pressure through contract replacement.
While the business rescue process is relatively new within the local context and still being tested, a growth surge in construction companies opting for business rescue over the next five years is likely. There?s no question that business rescue is a good option. However, it is essential that the company in question operates with transparency during the process and that careful planning takes place before the application is filed. After all, everyone stands to lose if liquidation goes ahead.
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