South African business rescue does not need more time. It needs better preparation and stronger stakeholder alignment.
This may sound counterintuitive in a market where complex restructurings often involve multiple lenders, public-interest considerations, employees, South African Revenue Service, trade creditors, landlords, shareholders, distressed boards, urgent liquidity gaps and sometimes litigation pressure.
But the central issue in many failed or value-eroding rescues is not that Chapter 6 of the Companies Act lacks the necessary tools and provisions. The issue is that the process often begins after the value-preserving decisions should already have been made. Stakeholders may often act with “self-interest” in pursuing recovery, contributing to this overall loss of value.
By the time a company formally commences business rescue proceedings, creditor confidence will likely have already deteriorated, supplier terms may have tightened, lenders may have reached the limits of informal forbearance, management credibility may be under pressure and liquidity may be so constrained that the first discussion focuses not on strategy, but on survival.
In such an environment, business rescue can quickly become a process of discovering the solution while funding the uncertainty. A pre-packaged business rescue (“pre-pack”) changes the sequence and can mitigate risk. It front-loads the commercial work so that commencement becomes the start of implementation, not the beginning of exploration.
This matters for lenders, other creditors, management and boards because time, professional fees and post-commencement finance (PCF) are not merely process variables. They are value variables.
A properly prepared pre-pack business rescue is consistent with the statutory purpose of Chapter 6.
At its most fundamental level, pre-packs and business rescue as currently envisaged have a common and core purpose – to rescue the company as a going concern and, in doing so, preserve value.
Chapter 6 of the Companies Act 71 of 2008 already contemplates early Board action by requiring a runway of at least six months when assessing whether debts can be paid as they fall due.
The problem in practice is that companies and directors often wait until business rescue becomes unavoidable rather than using it as a planned mechanism to implement an already-developed restructuring solution.
Pre-packs do not undermine creditor rights. They enhance the prospect of a meaningful rescue by ensuring that the company enters the process with a realistic plan, identified funding, stakeholder alignment and a credible implementation pathway.
The underlying principles of a pre-pack further place an important obligation on the business rescue practitioner (BRP) “in waiting” to consider all options for maximizing recovery and to consult key stakeholders during this process, while materially streamlining the process but ensuring transparency.
Put differently, a pre-pack is not a shortcut around process, it is a way of ensuring that once the statutory process starts, there is still value left to rescue.
What a South African Pre-Pack Could Mean
South Africa does not have a UK-style codified pre-pack administration regime. Rather, in a South African context, a pre-pack should be understood as a process where the principal elements of the rescue are substantially developed before formal commencement.
This may include a lender standstill, an agreed or indicative PCF package, an advanced transaction structure, creditor treatment principles, a liquidation comparator, valuation work, employee and supplier strategy and a draft of business rescue plan architecture.
The objective is not to deny creditors a vote or to present affected persons with a fait accompli.
The objective is rather to avoid commencing business rescue without a defined destination. Creditors should still receive proper information, be able to assess whether the plan offers a better outcome than liquidation and vote in accordance with the Act.
A pre-pack attacks the most expensive variable in the rescue equation—time.
The process should be used to implement a tested solution rather than to search for one while under severe liquidity pressure.
The cost of a protracted business rescue is not just about BRP and legal fees. Risks such as supplier support, creditor “ransoms”, litigation (even if stayed ultimately have a cost), operational and staffing issues are a few examples of risks which often increase as proceedings extend, adding to the cost and ultimately increase the overall PCF requirement.
