Timeline of financial distress
Informal turnarounds vs. formal legal processes
As a troubled business, not eventually turnaround around, moves along the timeline of financial distress, costs increase, and the success rate and management power decrease.
Timeline of financial distress |
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Informal turnaround processes (outside of the legal framework provided by the Companies Act and Insolvency Act) |
Insolvency processes (within the legal framework provided by the Companies Act and Insolvency Act) |
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Emerging problems |
Acute and worsening problems |
Insolvency but possible viability |
Insolvency and unlikely viability |
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Management-led correction |
Informal creditor workout |
Business rescue - pre-packaged |
Business rescue - free fall |
Liquidation |
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Turnaround in the absence of creditor pressure since the financial situation is not yet critical. |
Turnaround when the financial situation is already critical, but in the absence of creditor pressure, due to support from benevolent shareholders. e.g. distressed government organisations, SOEs and companies with financial support from holding companies. |
Turnaround given an informal agreement, between management and creditors (normally banks) to reduce indebtedness. |
Turnaround in terms of business rescue legislation as per Chapter 6 of the Companies Bill, 2007. |
No turnaround - realisation of the distressed company's assets and the distribution of proceeds to its creditors. |
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Present: none |
Present: judicial management and Section 311 Compromise of Creditors |
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Future: Business rescue proceedings commenced in terms of Chapter 6 of the Companies Bill, 2007 when not insolvent yet. |
Future: Business rescue proceedings commenced in terms of Chapter 6 of the Companies Bill, 2007 once insolvent. |
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Informal turnarounds occur outside the legal framework provided by the Companies Act and Insolvency Act.
Informal turnarounds have the highest success rate in terms of business survival, job retention and claimholder recovery.
If the turnaround is the result of management-led corrective action, creditors don't play a major role, if at all.
In the absence of severe creditor pressure and insolvency legislation, management retains the initiative and is in control of the agenda.
In contrast, in a creditor-led process, banks' terms of the workout agreement dictate the agenda of the turnaround.
Formal insolvency processes are court-driven and therefore relatively inflexible and expensive.
During insolvency, the agenda is the result of a legal process.
Formal insolvency processes have hitherto had a rather dismal success rate, but new business rescue legislation is set to change that.
You can read more about the individual processes by clicking on the links below:
- Management-led correction.
- Informal creditor workout.
- Insolvency: business rescue and liquidation, separately discussed below.
- Business rescue.
- Liquidation.
Comparing cost and success rate
View the timeline of financial distress diagram.
View the restoration of corporate value at different levels of company health.
The two informal processes and the two formal processes have costs and success rates that lie on a continuum between the extremes.
Costs increase as processes follow the Management-led correction->Informal creditor workout -> Business Rescue -> Liquidation sequence.
The success rate follows the reverse sequence, starting on a high level with management-led correction and ending up with a negligible liquidation success rate.
To which processes do turnaround apply?
Turnaround applies to a management-led correction by definition, and also to a workout where the intention is to trade a distressed company out of trouble.
If the workout intention is to merely restructure the distressed company, aspects of turnaround management such as crisis management and financial restructuring will apply, but fixing the business will be out of scope.
There is normally little "turnaround" methodology applied during judicial management and liquidation other than crisis management.
Changing the capital structure of a distressed company by means of a Section 311 compromise of creditors may be underpinned by a turnaround plan to also fix the business.
New business rescue legislation provides for the distressed company to be in the hands of a supervisor charged with determining a business rescue plan.
Business rescue, however, can - in similar fashion to a workout - be affected by financial restructuring without fixing the business. Alternatively, business rescue can be affected by selling the business, leaving financial restructuring and turnaround to the buyer.
Business rescue will, for the first time in South Africa's history, allow turnaround to play a proper role within a formal process.
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