Rescuing business rescue

Business Rescue needs rescue. This is the sentiment of many whose lives have been turned upside down by this innovation designed to save companies from collapse.

In the decade since business rescue first entered South Africa’s corporate lexicon, thousands of businesses have gone under the knife in the hope they could be saved. 

Some succeeded, like Edcon and South African Airways; others, like Comair, failed. A whole batch more, like Tongaat Hulett and Group Five are still mired in the process. This is ominous for firms like Murray & Roberts and Daybreak Foods, now in the process.  

Glenn Orsmond, the former CEO of the now-defunct Comair, has a damning view of the practice.  

In his book Crash and Burn – A CEO’s Crazy Adventures in the Airline Industry, Orsmond pulls no punches. The airline went into business rescue in May 2020, but it stumbled along for two years in that process, until it spluttered into liquidation two years later. 

Comair had been decimated by Covid, but it had already been facing other problems by the time the pandemic arrived: rocketing costs, a bloated workforce, dismal crew utilisation, and a nightmare $45m dispute over nine aircraft it bought from Boeing. 

Orsmond said the business rescue practitioners and the management cobbled together a rescue plan “without any buy-in from stakeholders” such as the creditors, employees, banks, and shareholders. The rescue process was expensive and rushed, he said.

If anything, it was the bankers who benefitted most. 

“The Comair rescue deal would not have happened without bank support, but in return the banks extracted more than their fair pound of flesh,” Orsmond writes. “Exorbitant debt-structuring fees were extracted, interest rates were fixed at loan-shark levels, and they demanded more than their fair share of Comair equity as an added sweetener.” 

Orsmond’s view aligns with critics who say business rescue practitioners often come in to oversee a business they have no understanding of. Nor do they, and their advisors, hesitate in levying chunky fees – grudge spending for a company already on its knees.

He describes how a large team of lawyers ate away at Comair’s rescue budget. While the two business rescue practitioners charged the approved tariffs, Orsmond says that between the airline’s lawyers, the shareholder’s lawyers, and the business rescue practitioners, fees amounted to R75m.

To hear critics who’ve been scalded by business rescue speak, the issue of fees comes up repeatedly. No one wants to put more money in; everyone wants something out. 

It’s a casual assumption that infuriates Siviwe Dongwana, a practitioner who has worked in a number of high profile rescues such as that of South African Airways.

“When people complain about the fees charged by business rescue practitioners, these are usually irresponsible and uninformed comments,” says Dongwana.

He should know: at SAA, he and his fellow business rescue practitioner Les Matuson were attacked on this issue by none other than former public enterprises minister, the late Pravin Gordhan, who accused them of milking R36m in the first year of rescue. 

Gordhan took issue not just with their fees, but those of the advisors: auditors PricewaterhouseCoopers were paid R25m for advisory services, lawfirm ENSafrica got R12.1m for legal advice, and US aviation consultants Alvarez & Marsal was paid R35m.

But Dongwana and Matuson defended their fees in a letter to creditors, saying the amounts spent were “not outside the norm”, and a complex turnaround of an airline like this required a “supporting team of highly skilled professionals.”

They argued that this work had led to SAA reducing its costs by R500m per month, from R2.5bn to R2bn – but more to the point, they had kept the airline in the air, rather than in the hangar. 

In the end, SAA spent nearly 18-months in rescue, from December 2019 to April 2021 — which cost the government R15bn in funding – but today, it is back in the skies, slimmer and with better odds of being sustainable. About R34bn in compromised debt has been wiped off its balance sheet. 

Dongwana says shareholders in companies will typically agree to blow millions on corporate advisors, yet haggle over R25,000 a day when a company is in business rescue, when so much more rides on the  operation restructuring, obtaining financing, and the strategy being correct. 

When it comes to fees, the reality is that some practitioners get far more. While the law limits practitioners to a maximum of R25,000 a day, this hasn’t been adjusted for inflation in years, so typically practitioners “negotiate” a higher fee with creditors.

“People generally have no idea what they’re talking about when it comes to business rescue. The fees, for one thing, are disclosed, tabled, and approved by way of a vote by all the creditors of a company. So if everyone is unhappy about this, how would this get passed?”

Years on the shelf

But it’s not just high fees; in some cases, the problem is that companies spend years in business rescue – while the company’s cash slowly erodes.

The Companies and Intellectual Property Commission (CIPC) has warned with concern that many entities remain in business rescue for years without even adopting a plan.

Basil Read, once one of South Africa’s nameplate construction firms, is the most obvious case. First placed under business rescue in 2018, having made a net loss for R1bn the previous year, it is now in its seventh year of business rescue. 

Damningly, there have been 46 “business rescue updates” – and, incredibly, still no resolution.

The last such update blames the fact that money owed to Basil Read has been “withheld”, as well as an inability to sell assets to raise cash.

“Notwithstanding market challenges, we, however, remain optimistic and continue to market these assets,” the report says. “It remains the opinion of the practitioner that a full implementation of the plan will achieve a better result than a liquidation.” 

Dongwana, as luck would have it, is also one of the business rescue practitioners for Basil Read. He concedes it has taken very long, but says there are reasons for it. 

“First, the company had to conclude a number of the construction projects and there were the normal delays associated with closing down projects of that scale,” he tells Currency. “Second, the plan had contemplated the sale of subsidiaries, which [then] failed [so] we undertook a sale of all the underlying assets and repaid the post-commencement finance and interest”. 

Yet Khathutshelo “K2” Mapasa , who was CEO of the Basil Read Group from 2017 until 2023, which includes five years of business rescue, has another view. 

He admits that delays in construction projects ultimately felled the company, and even though it then got a bridging loan and debt standstill, its management didn’t give themselves enough runway to trade out of distress. 

But Mapasa argues that part of the problem with business rescue is that the practitioners are often not business people at all, but are accountants, lawyers or “people who work in banks”.

There are no explicit requirements for qualifications to be a practitioner, so the industry has been swarmed by liquidators, lawyers, and accountants all jostling for business. The problem is, they often have little to zero knowledge of the particular sector.

Mapasa says this is why it’s critical that the company’s management work closely with them in drawing up a business rescue plan.  “If there’s no collaboration, you might as well just put the company in liquidation,” he argues. 

In Basil Read’s case, Mapasa says he ended up having to negotiate with the firms unwilling to pay the builder.

Nonetheless, and controversially if you’re a Basil Read shareholder, Mapasa still considers the business rescue to be a success. “Rescue success for the lenders, doesn’t mean the business necessarily has to come back,” he says. 

It’s bizarre, but true. The business rescue act has two definitions of a ‘successful’ rescue operation – one that brings the business back to life as a trading entity, and one that winds down the company and pays out their creditors. 

The idea was always to wind down Basil Read in a way that bank guarantees weren’t called, while allowing its projects to be passed onto other companies. But the real fly in this ointment is that the business rescue process has still not been wrapped up.

“The system is being gamed” says Mapasa on this point. Cynically, he adds that the business practitioners are “accountants who need to maximise their returns”. 

A success story

It seems you can’t throw a rock without hitting some executive who has a lot to say about the failures of business rescue. But, occasionally, you’ll find the posterchild for what business rescue could look like, if done well. 

Take Edcon, the one-time credit retailing behemoth of South Africa that was placed under rescue in April 2020. Within six months, the practitioners had wrangled a deal to sell 120 Edgars stores to the Durban-based clothing retailer Retailability for “an undisclosed amount”. Though 65 of the loss-making stores closed, this deal saved 5,200 jobs and kept the Edgars flag flying.

The rescue was done by Piers Marsden and Lance Schapiro, who capped their success by also then selling Edcon’s Jet business to rival retailer TFG for R480m, saving 371 stores and 4,800 jobs in the process.

Grant Pattison, the CEO of Edcon at the time of its collapse, tells Currency that the business rescue of the group was just about “perfect.” 

Pattison had taken the CEO role two years before it hit the wall – a process accelerated by the Covid lockdown. He says the holding company “was rotten” with terrible contracts, too much debt, too many employees and too little remaining talent.

“And these poor little companies sitting in the middle of them – Edgar’s and Jet – were absolutely fine.” 

This was a moment for business rescue to shine: the best operations were sold quickly, and the stock was sold for cash, which was used to repay creditors. It was “a mechanism for the good bits of a bad business to survive.”

The rescue of Murray & Roberts, handled by Peter van den Steen, Joshua Cunliffe, and Denis Chifunyise, has arguably been just as successful. Placed in rescue in November, its largest arm – the mining business – was sold to Differential Capital in April. 

Here, unsecured creditors get 5c-10c for every rand they are owed, better than the 0c-1c they would have got under liquidation, while 2,800 jobs were saved. 

Pattison says the ingredients for a successful rescue are a decent board that does not duck responsibility, as well as a competent and ethical business rescue practitioner. 

“It is unfortunately a position of power that can be abused,” he says. “Get the wrong person in there, and they can manipulate the situation to maximise their own fees.” 

Worryingly, if you happen to get a bad practitioner, Pattison says there few ways to prevent them from doing precisely that. 

The good, the bad, and the ugly

The question remains: does business rescue even work? And if it doesn’t, why pay extra in fees if it’s going to make no difference? 

Evidence is hard to come by. As University of South Africa academic Frank Matenda, writes: “in practice, the problem of what institutes a successful business rescue remains topical but unsolved in South Africa. There are limited research efforts on the identification and ranking of business rescue success pointers.”

One way to assess this is to compare trends in liquidations – and here the number of companies being wound up has been steadily decreasing over the past six years, even though South Africa’s economy has still struggled to breach 1% GDP growth. 

This suggests business rescue is having a positive effect. Nonetheless, there were still 1,500 liquidations last year, which also implies that if rescue works, it should be happening far more often.

Closer to the source, figures provided in 2022 by CIPC showed that over the decade since the inception of business rescue, about 4,370 companies entered rescue. Of those, 1,649 were still active, with 546 ultimately liquidated. 

The good news is that the CIPC numbers suggest about half the number of rescues succeeded; the bad news is, we have no knowledge on why these worked.

“Some people make this throwaway assumption that business rescue doesn’t work, but I don’t think the evidence is there to say that,” says Dongwana. “It’s true that some don’t work, and often, this is because those companies are being put into business rescue too late, when it’s a lost cause already.”

Dongwana argues that to make a real assessment of business rescue – its strengths and weaknesses – the information gap has to be closed.

“People simply don’t have the evidence either way to say ‘business rescue doesn’t work’ or ‘these fees are too high’. We need better information to close the expectation gap of what business rescue can genuinely deliver,” he says.

Better information will also highlight the exceptions that give the rest of the industry a bad name – like the endless rescues that only seem to enrich the lawyers. 

In the case involving Shiva Uranium – a company once owned by the Guptas – it took 30 months to even finalise the appointment of practitioners, for example. 

That seems about as ludicrous as the never-ending Basil Read process, where you’d probably have better luck rescuing aviator Amelia Earhart. But The imperative to fix this is clear, given the value that successful rescues have brought to South Africa. 

As Dongwana puts it: “If one company like Edcon can save thousands of jobs, can you genuinely say that business rescue isn’t working? I don’t think so.” 

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