Proper planning for business rescue could save ailing construction ...

on January 8, 2013 at 11:43 am /

Tunga Changamire, claims and risk management executive at PCBS

A surge in construction companies ailing from a post-World Cup slump, has led to a dramatic increase in liquidations and highlighted the need for comprehensive business rescue plans in the industry.

A release from Statistics South Africa during October last year indicates that the total number of liquidations and insolvencies within the construction industry has nearly doubled from August to September 2012.

According to specialist guarantee construction underwriting management agency, Performance and Customs Bond Services (PCBS), the increase in liquidations can largely be attributed to many financially ailing construction companies applying for business rescue under the new Companies Act without proper planning before lodging their application.

PCBS?s claims and risk management executive, Tunga Changamire, says that many companies appoint business rescue practitioners with no pre-determined rescue plan in place, relying solely on the appointed business rescue practitioner to rescue or rehabilitate the company from financial duress.

?Essentially, the business rescue practitioner is coming in blind with no prior knowledge of the company?s financials and very often without valuable industry-specific knowledge. The problem is compounded by extremely tight time constraints, with the practitioner assigned a mere 21 working days to find a workable solution, or the company will be forced to go forward with official liquidation proceedings,? says Changamire.

Because the power to appoint a business rescue practitioner falls to the company?s board of directors, companies need to carefully consider who they assign the role to, and ensure that an agreed upon rescue plan is put in place prior to applying for business rescue. ?This will allow the practitioner to step-in and make decisions quickly and accurately,? he adds.

?Unfortunately, it is often a case of companies operating in complete panic mode due to the external pressures from creditors and shareholders. This often sees potentially financially viable companies with a realistic chance of continuing on a solvent basis making rash decisions, which ultimately leads to their demise.?

With an increase in construction companies applying for business rescue, this has brought about a new dimension to guarantee businesses operating in the sector. ?As part of the business rescue process, guarantors are increasingly replacing financially stressed companies with reputable alternatives in an effort to salvage contracts.?

While the replacement process offers companies the opportunity to minimise financial damage, many are unwilling to release contractual information until it?s too late. All guarantors require speedy and detailed access to the relevant information if they are to stand any chance of easing financial pressure through contract replacement.

Although the business rescue process is relatively new within the local context and still being tested, Changamire predicts a growth surge in construction companies opting for business rescue over the next five years. ?There?s no question that business rescue is a good option. However, it is essential that the company in question operates with transparency during the process and that careful planning takes place before the application is filed. After all, everyone stands to lose if liquidation goes ahead,? he concludes.

Look out for our January 2013 issue, where we chat to PCBS, as well as Lombard, Policy Provider and others, about the potential of performance bonds to mitigate the risks associated with the liquidation of construction companies.

Source: http://www.risksa.com/proper-planning-for-business-rescue-could-save-ailing-construction-industry/

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