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.

Turnaround and the Timeline of Financial Distress

Informal Turnaround Processes (outside of the legal framework provided by the Companies Act and Insolvency Act)

Formal Legal Processes

Chapter 6 of the Companies Act No. 71 of 2008

Insolvency Act

Emerging problems

Acute and worsening problems

In financial distress but economically viable

In financial distress and not economically viable

Management-led correction

Informal creditor workout

Business rescue

 

Liquidation

Turnaround in the absence of creditor pressure.

There is no 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.

This is 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 to reduce indebtedness.

Creditors are normally banks and institutional lenders.

Management remains in charge, but the agenda is determined by the workout agreement.

Turnaround characterised by the temporary supervision of the management of the company, a temporary moratorium on the rights of claimants against the company, post-commencement finance, cram-down of dissenting creditors, and a business rescue plan.

Chapter 6 of the Companies Act no. 71 of 2008 replaces judicial management (Sections 427 - 440 of the Companies Act No. 61 of 1973) and its Section 311 Compromise with Creditors.

No turnaround - realisation of the distressed company's assets and the distribution of proceeds to its creditors.

Business rescue types

Pre-packaged

Business rescue plan including funding largely negotiated prior to commencement of business rescue proceedings.

Free-fall

No pre-negotiation.

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:

Comparing cost and success rate

Timeline of financial distress

 

View the timeline of financial distress diagram.

 

 

Restoration of corporate value

 

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.


Search internet or web site

Timeline of financial distress downloads

Contrasting informal turnaround with turnaround during insolvency 2006 (Wits Business School turnaround management conference) (770k)

The Ostrich's Guide to Business Survival (333k)

Contact group on the legal and institutional underpinnings of the international financial system - trends in the area of insolvency laws - September 2002:

Read more about processes applied to troubled companies internationally, as compiled by participants from Italy, Japan, the Netherlands, the United Kingdom and the United States, as well the BIS, ECB, IMF, OECD and World Bank. (672k)

Business rescue options available in South Africa (Wits Business School turnaround conference)  (102k)