Valuation practices under business rescue circumstances in South Africa

Abstract

South African companies in financial distress may file for business rescue in terms of Chapter 6 of the South African Companies Act No. 71 of 2008. The Companies Act (RSA 2008:s150[b][vi]) requires, among other things, that an appointed business rescue practitioner (BRP) prepare a business rescue plan to show the benefit of adopting the business rescue plan as an alternative to immediate liquidation. The business rescue plan should indicate to the creditors that a company is worth more ‘alive’ than ‘dead’. In other words, that if the creditors file for immediate liquidation, they will receive less than they would receive through a reorganisation (in South Africa [SA] referred to as a business rescue) (Altman & Hotchkiss 2006:8). Thus, showing the benefits in the form of a valuation of the company in business rescue becomes a vital aspect of a restructuring process, since the estimated value of the company determines the size of the pie to be divided between the creditors and, if possible, the shareholders (Altman & Hotchkiss 2006:103; Harvey 2011:181; TMA-US 2016:202).