This is where business rescue can come in – skilled business rescue practitioners can be appointed to take control of the affairs of your business to plan for an escape from liquidation. However, this is not the best plan for everyone.
Nobody wants to see the business that they built up by the sweat of their brow go under. But the unfortunate reality is that there are too many businesses who, for this reason, keep struggling when there is, in fact, no way to escape liquidation.
It has long been documented that an instinctual response to stress and fear resides within us all. As a survival mechanism, danger produces a flight-or-fight response. The fight response refers to the instinct to tackle a threat head-on in order to overcome it, while the flight response is to flee to safety in the face of impending danger.
When a business enters survival-mode and the threat of insolvency becomes a reality, it is left with the same two options as in our traditional survival response. It can either fight and place the business under business rescue or flee, liquidating the business and minimising its losses.
A good example of a company that has been struggling for years is South African Airways (SAA), where the proverbial warning lights have been flashing for the airline since 2009. Through mismanagement and poor investments, SAA has repeatedly been playing catchup on their debts.
However, as a state-owned entity, SAA has constantly been bailed out with taxpayer money. Without government help, the constant back-and-forth between SAA and its creditors would have led to forced liquidation a long time ago. Despite its financial distress, the main reason that SAA has stayed fighting for so long is that liquidation would mean massive repayments of debts by the government that it really could not afford.
Ever since the trouble started, SAA has remained a subject of scrutiny in the media. However, the disastrous state of affairs at the national airline reached a boiling point in December 2019 when it had very little option other than to enter business rescue.
The first rescue plan was due to be unveiled at the end of February, but delay after delay has meant that a final rescue plan is still not ready. The biggest obstacle for the business rescue practitioners has been agreeing on a compensation package with trade unions for those who will lose their jobs as a result of a restructuring of the business.
Latest reports indicate that if the airline is to be rescued, it will probably be in the form of a new airline being established with a wind-down of proceedings from what is now still SAA. SAA have simply been found wanting and will be unable to consolidate their position with their creditors unless they can find the R26.7 billion in funding reportedly needed to keep doing business (at the time of writing).
It is becoming more and more probable that SAA, as we know it, will soon come to halt. Whether that means a restructuring into a completely new entity or eventual liquidation is still unsure. And even if it were to be restructured, it comes at an incredible cost, with no guarantee that the survival-fight won’t be prolonged ad-infinitum.
One thing is clear: SAA’s business rescue proceedings have come far too late for it to be satisfactorily saved. Had SAA been liquidated much sooner, the damages would not have been that great. SAA chose a fight response when they should have chosen a flight response.
A word of caution
SAA serves to provide a cautionary tale of what goes wrong when financial distress is met with a refusal to let go. This is especially true for the average business that does not enjoy the same state privileges that have kept SAA afloat for so long.
Had SAA been a private entity, creditors would long ago have triggered business rescue or liquidation proceedings. The resulting damages would have been insurmountable. Yet despite all the warning signs, SAA kept fighting despite making continued losses.
If your business finds itself in financial distress, it should not be overlooked in the vain hope that somehow things will turn around. Very often, businesses take too long to admit that they need to be rescued, at which point business rescue becomes unviable and liquidation inevitable.
Your immediate fight-or-flight instinct may not be the best route for your business. Some businesses fight for far too long and are left in ruin, while others flee too quickly when there is enough time to be saved. Consult with an attorney that specialises in liquidation and business rescue so that you can make the best decision for your business.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)