by Karl Gribnitz and Robert Appelbaum

If your business was trading successfully prior to the COVID 19 lockdown, the lockdown will have partially or wholly destroyed your working capital. When the lockdown is over and you commence with trading, creditors, landlords, and banks will all be calling for payment, and you, in turn, will be chasing your debtors for payments. Unfortunately, your clients are in the same boat and will also be scrambling for working capital and cash.  What do you do?

The answer is simple, file for business rescue and appoint a competent practitioner to allow the business to recover over a period of time.

Your business may only achieve 25% to 50% of the turnover of pre-COVID 19 levels for the first three months before activity ramps up. Thereafter, your turnover will grow but full recovery will only be achieved over an extended period of time, it may take up to 18 to 24 months for your business to achieve pre-COVID 19 levels.

The problem is that your business cannot sustain the pre-lockdown fixed expenses it was incurring at these new low turnover levels. Your business needs time or breathing space to recover. Finding the money from one funder to pay another is near impossible, as funders want to provide funds against future trade activities such as stock, debtors or other assets. Their reasoning is simple, there is collateral against the funds advanced and they are not in the business of funding losses.

Business rescue places an automatic moratorium on the pre-commencement creditors and allows the business rescue practitioner to declare a moratorium on ongoing fixed expenses. This enables the competent practitioner to create “funding” from the creditors, landlords, and creditors for a period of time. Like with all things in life it is not simply a matter of declaring a moratorium on an indefinite basis. It is the Practitioner’s responsibility to ensure that the business is not trading recklessly, which means that he has to calculate what level of debt can be incurred and what the ability is to repay this debt on an ongoing basis. Your business must make proper margins and turnover levels must grow at an acceptable rate, to offset against the debt which your business is incurring on a post-commencement basis.

To fund the working capital requirements, a competent practitioner can obtain secured or unsecured post-commencement funding from various sources, which may include creditors, banks, or other funders. The practitioner can provide security for these loans against any secured assets which your business may have. This is where post-commencement funders usually look for security over the debtors, stock, and work-in-progress, which means new assets are created with the funding provided.

In certain cases, some pre-commencement funders will lay claim to existing and future debtors as security. This can be problematic for your business as this may preclude the providing of debtors as security to the post-commencement funder. Post-commencement funders do not want to fund debtors which will be used to settle debt owing to pre-commencement funders.

Here again, Section 136 of the Act provides certain solutions in dealing with contracts that are not just and equitable. A competent practitioner can suspend the obligations of your business, where such a clause relating to future debtors as collateral in favour of pre-commencement secured creditors is suspended. Should they object to such a suspension, the practitioner may approach the court on an urgent basis to have this clause altered or cancelled, in part or as a whole.

The competent practitioner can use the same provision to negotiate with banks and landlords to achieve a reduction in amounts owing to enable your business to survive, failing which the practitioner may approach the court on an urgent basis as set out above.

Ultimately, business rescue is about finding a negotiated solution between the various affected parties. Creditors make the final decision whether the business must be saved or not, this they can only do if they are presented with a business rescue plan that is prepared so as to fully inform the creditors of their options. Presenting a plan requires very comprehensive business knowledge, and seasoned accountants make the most competent practitioners.  

To save your business you must appoint a competent practitioner to provide you the highest chance of success.