Business rescue in SA fails to deliver
South Africa has developed similar legislation as the US and Europe to save companies and even cities in financial distress, yet the level of success in South Africa remains limited.
The Companies and Intellectual Property Commission (CIPC) reported in March this year that since the introduction of business rescue proceedings four years ago, 1 654 business rescue proceedings commenced of which 771 were ended.
Figures from StatsSA shows that more than 360 companies were liquidated between July and August this year alone. More than 830 companies are still in business rescue proceedings (since 2011).
The main factors attributing to this lack of success with rescuing a company is a continued focus on liquidation rather than restructuring, a lack of experience and a lack of forgiveness for failure, says EY Africa Tax Leader Jim Deoitte.
He says investment funds of close to $25 billion have been raised by private equity firms for investments into Africa, yet only half of it has made it onto the continent.
Deoitte says one of the reasons is that investors can see the opportunities for investing into Africa, but they are not assured by the way in which matters are managed when things go wrong.
He says structurally the business rescue provisions in the US and South Africa are basically the same. “Why is it then that the US can save a city (Detroit) and a large motor corporation (GM) but SA may not be able to save its steel industry?”
He adds that a fundamental problem facing South Africa is the lack of experience in dealing with “bankruptcy restructurings”.
During the recent EY Africa tax conference it was pointed out that it was well understood in the US that companies had distinct life cycles and that restructuring was necessary to assist in resetting strategies and operations to embark on a new growth curve.
However, South African business is less mature, seeing the need for restructuring as a mark of failure. Companies wait too long before engaging in business rescue proceedings because of the fear of losing control over the process.
Robert Appelbaum, partner at law firm Webber Wentzel with more than 28 years’ experience in mergers and acquisitions and restructuring, said international investors want to invest in South Africa.
The problem is there is not a reliable and transparent database with information on the companies that are in business rescue and their assets, he says.
“They have to rely on someone who has relied on someone else. When they do get the information, it is already weeks too late.”
Appelbaum is hopeful about the process, but only if there is someone in government who realises that there are strategic issues that have to be dealt with, there are more skilled business rescuers and that a transparent database on business rescues is developed and published widely.
Emil Brincker, technical committee member of the South African Institute of Tax Professionals (SAIT), says a key issue pertaining to business rescue proceedings from a tax perspective is that the South African Revenue Service (Sars) does not have any preferent claims in a business rescue scenario.
However, its claims do rank preferent to concurrent creditors in a liquidation process. “Pursuant to this approach by the courts (where Sars is not treated as a preferred creditor), one sees that Sars generally does not support any business rescue proceedings unless its claims are dealt with adequately.”
Deoitte remarks that the modification of agreements during a business rescue process creates a “hornet’s nest” of tax issues.
“Governments all over the world are quick with a jeopardy (tax) assessment when they see a dying patient… If they see you are about to die they beat the inheritance group. They are first in line.”
Brincker, who is also the national head of tax at law firm CliffeDekkerHofmeyr, says the Tax Administration Act was amended at the start of this year to deal with a temporary write-off of a tax debt which is part of a business rescue process.
But, the moment the company comes out of business rescue the tax debt is reinstated. “The solution would be to introduce legislation that there are no tax consequences to the extent that claims from Sars or third parties or lenders are written off.”
SAIT deputy CEO Keith Engel says that most African countries in the region simply impose capital gains tax when creditors provide debt relief, thereby undermining the creditor debt relief given.
“The South African tax situation has improved somewhat given legislative changes supported by a recent draft Sars interpretation document.”
The question, though, is whether more needs to be done.
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