By Roxanne Webster
The prospect of Republican Donald Trump returning as President adds more uncertainty across the globe with his ‘America First’ agenda.
With the US involved in so many areas of the world, its highly probable that the outcome of their election will result in political and economic uncertainty for many countries.
For South Africa, while it appears likely that the African Growth and Opportunity Act (Agoa) - which promotes economic growth through duty-free access to the US market - will be renewed by the US administration in 2025, the elections pose some threat to this.
Back at home in South Africa, are we headed for tougher economic conditions with higher interest rates especially after the outcome of the elections, or are we finally headed for greener pastures with some reprieve for consumers and businesses?
During December last year, the Reserve Bank Governor, Lesetja Kganyago, noted that the coming elections will pose a risk to the already struggling economy and politicians adopting a populist tone may create uncertainty among foreign investors.
With political analysts divided on the possible outcome, the uncertainty is palatable. This will undoubtedly place a lot more pressure on corporate South Africa to mitigate some of the economic fallout that is on the horizon.
On the good side, economists predict that interest rates and fuel prices should slowly decease having painfully peaked in 2023. This will effectively mean more money in consumers and businesses’ pockets with the ability to lend at affordable rates. This will greatly assist businesses in circumstances where the shoe is beginning to pinch.
Despite this, economists predict that South Africa’s outlook for this year may still be grim as the economy struggles to grapple with domestic and global trends.
In addition, it is clear that the state of South Africa’s state-owned companies (SOCs) will continue to cripple our economy and nullify any potential growth.
The logical question for businesses, is where to from here? Businesses may have been fortunate to weather the storm in 2023, but can they do so now in 2024 with the added political uncertainty, insurmountable distrust in our state owned companies and failing infrastructure?
We all know that timeous intervention is key and can ultimately be the difference between staring down the barrel of liquidation or rising from ashes of financial distress. But what does that timely intervention actually entail?
Restructuring outside of any formal process may be the answer depending on the circumstances of the business and the level of distress.
Restructuring should essentially navigate a business away from financial distress and insolvency into, hopefully, calmer waters. It is often the first timely intervention that should be considered when distress begins to persist.
These restructuring measures can include capital rising, assets sales, downscaling or debt restructuring. Which measure will work best for a business will ultimately depend on the circumstances.
If a restructure outside of a formal process is not possible and aggressive creditors are knocking at the door, business rescue may be the best option.
The added benefit of business rescue is that the usual restructuring methods (capital rising, assets sales, downscaling or debt restructuring) can be used, while having the benefit of a moratorium on legal proceedings whilst in business rescue.
This presents companies with the necessary space to implement the restructure effectively. Another useful feature of business rescue is that onerous contracts affecting the profitability of the business or negatively affecting the operations of a business can be suspended for the duration of the business rescue proceedings, allowing companies further space to implement a restructure.
A successful business rescue therefore has the potential of restoring the company to solvency and preserving jobs. Many large companies have successfully used business rescue and have returned to solvency.
A common misconception of business rescue lately is that it can only be used in instances where the desire is to return the company to a state of solvency, forgetting the second aim or purpose of business rescue.
If a return to solvency is not possible – for example, the business’s financial distress is bordering on insolvency or there are no interested investors/ financiers – the aim or purpose of business rescue will still be met if, through the business rescue proceedings, a better return for creditors can be secured than in liquidation.
This type of business rescue is commonly referred to as a wind down and involves a sale of the assets or, alternatively, the entire business. Whilst this may not be ideal, in certain circumstances, it may be the only solution.
As a last resort, and if all other options have either been explored or exhausted, liquidation may be the only option. Liquidation effectively entails the closure of the business, but it is still possible to sell the assets or the entire business through the liquidation process. The benefit is that this hopefully deceases the liability due to creditors especially in circumstances where directors have signed personal sureties.
It is important for businesses to know what their options are so that management is in a position to make informed decisions which could decrease their chances of director’s liability and increase their chances of achieving a restructured/ rescued business.
Finally, constant vigilance in these economic conditions and growing uncertainty is a must. Directors need to remain alert to subtle changes in their businesses and industries and, when faced with financial uncertainty, to immediate seek assistance.
*Roxanne Webster is a partner at Bowmans.
** The views expressed herein are not necessarily those of IOL.