The Future of Liquidation vs Business Rescue
Extracted from Erik Levenstein’s presentation
Dr Eric Levenstein, director at Werksmans Attorneys, specialising in litigation and dispute resolution, was one of the keynote speakers at SAIA’s AGM this year.
He shared his thoughts about the positioned of distressed companies, distressed assets and companies in need of an intervention ("a disruption"). He also discussed the business rescue process and the introduction of the new "professional", the business rescue practitioner.
“There is no doubt in my mind that the development of business rescue practice and the increase in its popularity to resolve the issue of struggling, financially distressed companies, must bring new opportunities for the auctioning industry in South Africa,” he said.
He told the audience that Werksmans had a session at the SARIPA annual conference in 2015, entitled "Liquidation v Business Rescue? To rescue or not to rescue, that is the question". The discussion focused on where delegates thought South Africa would be in the years ahead: will business rescue take over from liquidations, or will liquidations still be relevant in the South African marketplace? Delegates were asked to vote on their views and the SARIPA report produced after the conclusion of the conference showed that delegates had divergent views: “What became clear is that not every company is a candidate for a business rescue process. In some instances, liquidation might be the only realistic option. Many financially distressed companies are just too far gone down the path of insolvency for there ever to be the possibility of it being rescued. The general consensus is that there will always be a place for both business rescue and for liquidation … perhaps a harmonious co-existence for years to come!"
What is the significance of this for the auctioneering business? If business rescue is going to take over from liquidations, will there be liquidation auction work for auctioneers going forward? In February 2017, STATS SA released statistics of liquidations and insolvencies. It was reported that the total number of liquidations in February 2017 had decreased by 24,4% year on year. In March 2017, the total number of liquidations increased by 16,8% therefore we can see the statistics fluctuate from month to month. The question is what is the expected trend in the years ahead?
The aim is to achieve a better distribution to creditors in a business rescue, compared to a liquidation. If you can persuade creditors and the business rescue practitioner that there is indeed a realistic prospect of increased value to be realised on assets and if the auctioneering process is used effectively, there is no doubt that auctioneers will be recognised as important role-players in the business rescue process in the future.
Auctioneers must also consider how they can become involved in the important task of assisting the practitioner with comparisons between business rescue and the liquidation values of the business and assets of the distressed company. This information is included in each and every business rescue plan and is critical in the decision by creditors to vote in favour of the plan submitted by the practitioner. Auctioneer valuations of the business and assets of the distressed company, when the company is being considered by a third party buyer in business rescue, would also add great value to the process.
All of this envisages a "mind shift", where auctioneers recognise that there is a need to ensure that the nature of your services to the business rescue profession aligns with developments in the business rescue space. Standing still and not considering these new developments is, no doubt, a missed opportunity which, if not grabbed with both hands, will leave you behind the opportunity curve where you will lose out on what remains a rapidly developing and highly lucrative industry.
We all have to reinvent ourselves, our businesses and what we do from time to time, but complacency is not an option. Sometimes these new opportunities appear on the horizon of what we have historically viewed as the "desolate landscape" of liquidations, where "fire-sale" values for assets is the only outcome for creditors and where secured creditors walk away with the most value. By getting involved in the business rescue business, there is no doubt that auctioneers can participate in value creation like never before.