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Spark! Reasonable Prospect Diagnosis

If you refer to the Act or use the high-level process that we describe, one key step after a board has passed a resolution to enter business rescue, is the appointment of a BRP who must accept in writing the appointment, which has implicit in it, an assessment of the reasonable prospects of rescue planning being accepted, and rescue succeeding. There has been a fair amount of controversy about more than just a few instances, where the view on reasonable prospect has been rescinded and insolvency processes have then been followed, against the spirit of the act. Soon, sanction will be taken, and to help avoid this, here is Spark!'s approach to assessing reasonable prospects. We hope it helps boards and business make good decisions.

As always, where you see a diagram, clicking on it will open up a higher resolution version with more detail in it.

Spark Reasonable prospect decision tree

Instructive Decisions handed down by the High Court

Judge Eloff dismissed the application for business rescue (Southern Palace Investments 265 (Pty) Ltd v Midnight Storm Investments 386 Ltd.) He held that “ is difficult to conceive of a rescue plan that will have a reasonable prospect of success of the company concerned continuing on a solvent basis unless it addresses the cause of the demise or failure of the company’s business, and offers a remedy therefore that has a reasonable prospect of being sustainable. A business plan which is unlikely to achieve anything more than to prolong the agony... by substituting one debtor for another without there being light at the end of a not too lengthy tunnel, is unlikely to suffice”. The court went on to state that the applicant must deal with “concrete and objectively ascertainable details in support of business rescue and which facts are beyond mere speculation”. These facts should include:

  • “the likely costs of rendering the company able to commence with its intended business or to resume the conduct of its core business”;
  • “the availability of “cash resources” to enable the company to meet its daily expenses and the nature of the funding on which the company will rely;
  • “the availability of any other necessary resources, such as raw materials and human capital”; and
  • “the reasons why the proposed business rescue plan will have a reasonable prospect of success”.

The court went on to state that without such details, a court is not only unable to consider the prospects of the company continuing in existence on a solvent basis but is also unable to consider the alternative aim of securing a better return for the creditors of the company than would arise from a liquidation.

So with these standards set, would it not be reasonable to engage before the board passes the resolution, so that an informed opinion can be offered and substantiated?

Early engagement

Can a BRP who has engaged with the company, creditors or shareholders prior to the commencement of business rescue be appointed as a practitioner?

Section 138 of the Act sets out the requirements for qualification as a business rescue practitioner. In particular Section 138(1)(e) provides that “A person may be appointed as the business rescue practitioner of a company only if the person...(e) does not have any other relationship with the company such as would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that person is compromised by that relationship”.

A business rescue practitioner will not, merely by virtue of his prior engagement with creditors or shareholders, be held to lack independence. Something more, some “other relationship” will need to exist.

Our key Questions.

We need to present the inputs into how we form an opinion on the 4 key reasonable prospect considerations.

  • We must assess and substantiate the realistic prospects of planning and implementing BRiL (Better Return than in Liquidation (S128(1)iii)
  • we must assess to at best a single sigma the Quantum of PCF (Post Commencement Finance (funding))
  • We must assess any accounting for PI (Public Interest) extenuating circumstances.
  • We must form a practical view on being able to implement the rescue plan (skills, costs and alignment) with the team at hand and no additional funding requirements

Reasonable Prospect Report - Inputs required.

Spark!'s analysis and written view on the reasonable prospects of a rescue will require the following section inputs.

Executive Summary

To set context and to summarize our view

  • Summary of events leading to present circumstances
  • Time-lines
  • Immediate priorities
  • Key risks to be managed
  • Obstacles to success that need removing
  • Red flags

Market Viability

You need to be able to have a convincing view of the reason for the existence of a business, Here are some considerations to explore on Market Viability unfortunately some businesses are in declining markets and must be allowed to fail, unpleasant as this is. either way you must have an independent view which allows you to explore other players in the market and alternatives distressed debt investor opportunities..

  • Industry Summary
  • Market Landscape
  • Competitive Environment
  • Regulations/Environmental Issues

Business Model Viability

This is key to answering questions of scale, and exploring restructuring opportunities. Here are some considerations to explore on Business Model Viability Some business models, despite the product they serve to the market are just not viable, and need review.

  • Business Model
  • Product or Service
  • Marketing and Sales Strategy
  • Technology
  • Intellectual Property
  • Strategic Contracts

Operating Model Viability

This is key to providing insights into possible rescue tactics which may not appear obvious, Here are some considerations to explore on Operating Model review these include rehabilitation efforts, removal of waste, restructuring, value chain analysis, outsourcing consolidation, asset disposal etc

  • Facilities
  • Value Chain
  • Inventory
  • Data & Systems

Economic and Financial Model Viability

Obliviously key to providing a view on whether creditors can expect a significant benefit if a rescue is supported. Here are some considerations to explore on Economic and Financial Model Viability

  • Risk management
  • Balance Sheet
  • Income Statement
  • Self funding dynamics

Organisation Viability

The ability to successfully deliver on a rescue plan, without any calls for additional funding, Here are some considerations to explore on Organisation Viability and using the resources of the business itself is a key consideration. Of course, anything can get done with a limitless budget, but our guiding principle is to not have to seek additional funding for whatever reason.

  • Leadership
  • Management
  • Alignment
  • Org structure

Using these inputs we will be able to generate an informed opinion which meets the High Court standards as set out by Judge Eloff.