Where It Remains An Option And Where Changes Have Been Long Overdue…
As Sej Kesieman and Andani Thakhathi, Lecturer in Strategic, Ethical & Responsible Business Management at the University of Pretoria, argue in their 2022 published article, which also discusses whether it is a feasible and sustainable option for state-owned South African companies to be supported through up-to-date ‘business rescue practices’, that “business rescue is a process where insolvent companies are indirectly subsidised in an attempt to avoid liquidation”. Considering the huge impact of state-owned companies on South Africa’s economy and the socio-economic well-being of its population, business rescue has been justified by some commentators as a tool to preserve jobs. However, according to the above-mentioned researchers, such an argument makes no sense, especially in the light that business rescue practitioners (BRPs) are obligated to report when their initial assessment shows that chances for a business rescue are not too high. By ‘initial assessment’, it is referred to what Section 141(1) of the Companies Act No. 71 2008 stipulates,
“[a]s soon as practicable after being appointed, a practitioner must investigate the company’s affairs, business, property, and financial situation, and after having done so, consider whether there is any reasonable prospect of the company being rescued.”
Section 141(1) Companies Act No. 71 2008
As Section 141(2) continues, should a company not be deemed promising respectively ‘recoverable’ enough, the responsible BRP must report this to court and the affected parties to this case, and must submit an application for liquidation proceedings in place of the continuation of business rescue proceedings. Whereas the latter procedure sounds comparatively simple, this is not the case in practice. In their 2021 article which deals with ‘Valuation practices under business rescue circumstances in South Africa’, Conradie and Lamprecht argue that there is little research which deals with “the monetary benefit of business rescue”. Whereas non-monetary benefits are laid out to have been researched in-depth, the measurement of the monetary valuation of businesses has been somewhat more contradictory. As the researchers explain, one way to look at the monetary benefit is through the “‘reorganisation value’”, which is “the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after the restructuring”. And while the reorganisation value plays a role in business rescue in the US, the researchers argue that this is not the case in South Africa.
However, there are three additional valuation approaches, as Conradie and Lamprecht continue to explain, which are the income approach that includes the ‘free cash flow to firm’ (FCFF), the ‘modified discounted cash flow’ (MDCF) and the adjusted present value (APV) techniques; the relative approach (i.e. relies on comparing a business’ value with that of a similar company); and the asset (cost) approach (i.e. usually not applied to establish on overall value of a company; used to make estimations to ensure that liquidation is the less profitable option). Whereas the FCFF technique is said to orient itself at “future operating cash flows” and the MDCF technique has been pointed out to also calculate a value based on the effects of financial distress on a company, the APV technique has been argued to constitute a suitable tool to address “complicated tax situations […] and significant changes in the capital structure”. Overall, the researchers’ results have shown that valuation leaves some room for errors and the latter is approached differently depending on the motivation of BRPs to either ensure that a business further exists (i.e. through post-commencement finance – PCF) or opt for the ‘better return than immediate liquidation’ (BRIL) pathway.
Whereas the researchers described the first scenario as characterized by an overt focus on (possible) future returns, in the second scenario valuation becomes linked with how buyers interpret it, and that is mostly in terms of tangible assets. In the interest of clients, BRPs may sometimes choose to withhold information with regard to a company’s liquidation value. However, they have also been pointed out to be in a position, wherein they can theoretically abuse their power (i.e. through the sale of a company without respect for changes in ownership). With no further remarks being made in respect of the quantitative scenario of such abuses in Conradie’s and Lamprecht’s research report, further research should investigate whether there is a difference with regard to such abuses when it comes to BRPs who represent state-owned vs. non-state-owned companies. Whereas BRPs are usually independent parties to the business rescue scenario, Section 138(2/3) of the Companies Act No. 71 2008 reveal that the minister (i.e. “member of the Cabinet responsible for companies”) has some priority with regard to choosing a suitable BRP who can “promote sound principles and good practice of business turnaround or rescue” 138(3b). Arguably, the latter points at a gap in the law when it comes to ensuring that the business rescue of state-owned companies happens without the involvement of the management, unless the latter is competent to be involved in the BRP’s decisions.
In Eskom’s scenario, this might actually make a difference because its damaging influence on South Africa’s population demands for a more transparent business rescue process. And whereas “a controlled wind-down” is probably not what Eskom will opt for, the researchers’ findings show that, under such a scenario, the most profits can be obtained from rather open negotiation processes. The latter is based on the advantages of the work of BRPs as opposed to liquidators. As the researchers state, BRPs are more easy to afford and less timely with their business rescue while additionally having the ability to sell assets at a higher cost and ensure that trading happens in a more ‘controlled manner’. And whereas all of the latter criteria appear to speak for ‘business rescue’ and PCF, some critique has been exercised by Jitesh Jairam, CEO of the fintech start-up Virtual Advisor, who argues that traditional fees for BRPs in South Africa are set too low, with the consequence that BRPs have started to set the bar themselves and too high, actually. In addition to the latter argument, Jairam has remarked that BRPs may indeed not be as skilled as the above researchers deem them to be. Whereas Conradie and Lamprecht emphasize that the BRPs, whom they interviewed in South Africa, were creative, communicative, skilled leaders and data analytics aficionados, Jairam gives to think that MBA graduates lack the right skills to tackle business rescue in the same way as “Certified Rescue Analyst certificate” holders.
What can be concluded also considering the “minimum qualifications [criteria]” Section 138(3bi) in the Companies Act No. 71 2008 and the ‘minister appointment procedure’, is that entrance criteria for the BRP position may have to be renegotiated with a view for international standards and best practises as well as the integration of this profession into anti-corruption work in South Africa at the company level. Currently, the Companies Tribunal, which was established by the Ministry of Trade, Industry and Competition (DTIC) is responsible for any cases that arise with regard to business rescue, except for cases that relate to ‘external companies’, which the Companies Act No.61 1973 defines as such that have obtained “immovable property” in South Africa while representatives are “incorporated outside the Republic”. Whether or not BRPs are specialists, the findings of Conradie and Lamprecht show that state-owned companies could benefit from the above-mentioned controlled wind-down, even though there are some important restrictions. In a nutshell, the controlled wind-down allows companies to sell assets at a discounted price of the selling price. Based on this advantage over a liquidation, which relies on a discount on the cost price, it would allow state-owned companies to retrieve a larger extent of losses.
However, since South Africa’s economy is already in a bad state, and considering that Eskom was found to be South Africa’s largest company ‘debt burden’, it appears unlikely that enthusiastic bids would be made by anyone. As in the case of other state-owned companies, it might be interesting to think about how changes in ownership (i.e. public to private-owned; domestic to foreign-owned) could impact the country’s development and its self-sufficiency trajectory. Changes in ownership, as Conradie and Lamprecht have pointed out, can also be the consequence of business rescue as BRPs are entitled to make certain decisions without the management of a company unless it is qualified to be involved in the steps of the business rescue process. Under the scenario, wherein business rescue is aimed at ‘business continuation’, a critical trading analysis is usually carried out in the attempt to project a company’s cash flow over the course of three years. As Conradie and Lamprecht specify, in such a case applying for PCF becomes an option with the following structure: 1.) 51% acquisition by new equity partner with a “PCF equal to 3 to 6 months’ working capital need”, 2.) payback of PCF with respect to the applicable interest rate over the period of 3 years; 3.) reacquisition of the 51% by the company. And while South Africa’s state-owned companies may opt for this pathway, Kesieman and Thakhathi remark that there is a certain stigma associated with the choice for PCF itself. Whereas the ‘employment argument’ and positive past impacts of the work of state-owned companies on a particular society may be highlighted by such companies themselves to justify that the PCF trajectory is also in the interest of citizens, South Africa’s economic instability has been pointed out to scare off potential lenders with employees having been argued to become less productive as their jobs are, at least somewhat, at stake.
As Kesieman and Thakhathi’s findings reemphasize, sometimes political interference can be an obstacle in the way of a successful business rescue that prolongs the latter whether or not financial sustainability is finally achieved. This is different for state-owned and non-state-owned companies, because, as the researchers point out, only the first entities can utilize the Public Finance Management Act 1 1999 to their advantage and request a delay. And while Kesieman and Thakhathi talk about a delay as an advantage, a delay may only lead to the accumulation of additional debt. As the interviewed BRPs told the researchers, for both state-owned and non-state-owned companies, it was actually quite clear after 6 months whether business rescue would turn out successful or not. Rather than analyzing the success of a particular business rescue in relation with public interest scores, as the researchers continue, business rescue success is bound to financial sustainability. But what can the latter say about Eskom and other state-owned companies in South Africa right now? The case of Eskom is rather exceptional, but as for state-owned companies in general, business rescue can constitute a feasible option, when there is confidence that a business rescue will also combat non-monetary (i.e. not ‘purely’ financial) aspects of failure. In line with Kesieman and Thakhathi’s findings, such aspects could be commercial viability, whereby effective attempts to restructure the company and obtain insights about the motivation and trust of employees and the general public may also be important indicators of future success.
Except when business failure occurred solely because of financial issues, a comprehensive ‘restructuring operation’ accompanied by in-depth and continued efforts to market research should accompany the business rescue process. Although Kesieman and Thakhathi highlight that BRPs thought that non-state-owned companies are a little bit more shy when it comes to the PCF pathway, whereas representatives of state-owned companies feel somewhat immune to public criticism, public protests and dissent may trouble companies such as Eskom quite a bit. What may be particularly interesting about the case of Eskom is that the duration of PCF would never be enough for it to competently restructure its operations and commitment to sustainability. In the case that state-owned companies find themselves in the need of business rescue as they operate in a domain, wherein sustainability is of profound importance for South Africa’s health and future, business rescue should arguably be bound to a range of ‘restructuring commitments’ with regard to environmental duties. South Africa’s Green Finance Taxonomy, which was established between March 2020 and March 2022 through consultations of the Taxonomy Working Group, specifies that policy- and law-makers should “[m]easure and account for aligned financial flows at different economic levels and improve and align tracking systems”. Arguably, this should also account for analyzing investment flows at the domestic level as equity partners in business rescue operations, including the government, should have certain responsibilities to base their actions on green and sustainable finance.
In 2021, the International Monetary Fund (IMF) published a paper, which provides a model respectively “A Holistic Approach to Green Public Finance Management”. Whereas one of the four pillars of this approach relates to the “[p]ublic participation at all stages of the budget cycle”, the model’s fiscal transparency cycle fails to specify that beyond parliamentary oversight, climate watchdogs and Ex post green audits, there is also a need for ‘business (rescue) oversight’. In the case of South Africa such an oversight would need to be carried out after the establishment of a cooperative relationship between the Companies Tribunal and an independently established and impartial research unit on ‘Business (Rescue), Strategic Financial/Operational Restructuring and (Environmental) Sustainability’ or alike. A position informed by green budgeting and environmental assessments should certainly influence the decision whether state-owned companies can opt for PCF, lastly because of their huge impact on society and citizens. Especially because the BRP interviews of Kesieman and Thakhathi have shown that state-owned companies are more confident when asking for PCF, it should also be discussed whether the Public Finance Management Act 1 1999 should be adapted to prevent state-owned companies from unfairly extending and delaying business rescue at citizens’ costs. As Kimanzi reminds,
“[c]orruption in SOEs is prevalent, especially in South Africa […which] calls for better corporate governance practices, and for the appointment of SOE board members to be done in a professional manner”
Kimanzi (2021) ‘Covid.19 And Economic Recovery In South Africa. How Can State-Owned Enterprises Be Reformed?’, SSIRC 2021 Conference Proceedings.
Last but not least because state-owned companies have been positioned to create employment opportunities in South Africa along the lines of the country’s National Development Plan (NDP), as Kimanzi emphasizes, state-owned companies and good governance also needs to be rediscussed. This argument has been further highlighted in one of our recent articles, which has lobbied for a reconceptualization of ‘grand corruption’ and ‘state accountability’ in the light of what state-owned Eskom has run South Africa’s population into. As Kimanzi sums up, what South Africa needs are both achievements when it comes to corporate governance and an actual market entrance that allows for competition. Furthermore, as the researcher underlines, the “ownership and control of SOEs” should be split so that political patronage is prevented from taking over. Rather than allowing the Minister of Public Enterprises to have a final say on the board composition of state-owned companies and rather than allowing the latter to determine what adequate principles of good company governance are in line with Section 138(2/3) of the Companies Act No. 71 2008, reforms of management, innovation and expertise should be consulted and invited from different domains in society and professionals from the fields of research and business. Whereas this article will not discuss what ‘good corporate governance’ might imply with reference to South Africa’s state-owned companies, our next article will add insights starting with Kimanzi’s mention of the World Bank’s ‘Corporate Governance of State-Owned Enterprises. A Toolkit’ publication from 2014.
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