Success factors for business rescue in South Africa

Abstract

In 2011 a new Companies Act, No. 71 of 2008 (RSA, 2008), was implemented in South Africa. A feature of this Act was the introduction of business rescue legislation. Although this legislation was implemented in May 2011, statistics indicate that the success rate for business rescues is approximately 12%. The low success rate prompted debate relating to the effectiveness, and continued suitability, of business rescue as a mechanism to rehabilitate financially distressed companies. A feature of the business rescue environment in South Africa is the lack of knowledge, necessitating more research in the field. This study was undertaken with the initial objective of diagnosing and ranking reasons for failed business rescues in South Africa. Thereafter, the study focused on improving the success rate by establishing and ranking a set of factors that will improve the chances of a successful rescue. Due to the importance of the business rescue practitioner in the overall success of a rescue, the research also focused on competencies required to be a successful practitioner. A mixed methods research approach was utilised to address the problem of the low success rate. A survey was conducted with the membership of the Turnaround Management Association of Southern Africa. The survey was mailed to 130 members and the response rate was 54%. The survey was complemented by undertaking an interview with seven of the top ten business rescue practitioners, according to the number of practitioner appointments. The original contribution to knowledge of this study is the ranking of a lack of post rescue funding which has the highest impact on a failed business rescue; the ranking of an accreditation framework for practitioners as the most important factor that will result in a successful business rescue; and the fact that an accounting qualification and effective cash management skills must be possessed by a successful practitioner. The study recommends the establishment of an independent self-regulator to implement the identified success factors for an improved success rate. The knowledge generated from this research will benefit business rescue practitioners, the financial sector, stakeholders of companies intending to go into business rescue and the Companies and Intellectual Properties Commission.