Small, medium and micro-enterprises’ distress and factual evaluation of rescue feasibility

Abstract

Background: Entrepreneurs often face distress in their businesses; as one way to address it, they can file for business rescue. The Companies Act 71 of 2008 requires the appointed business rescue practitioner (BRP) to place before the court facts proving ‘reasonable prospect’. This often seems determined mainly by the subjective opinion of practitioners, who rely on their experience and knowledge in rescue and business management. This appears to be in direct contrast to the requirements for factual evidence set out by several court judgements. There are many questions surrounding the determination of reasonable prospect, as there seems to be no benchmark for entrepreneurs and BRPs to work towards or a prescribed process to be followed. Aim: This article investigates different methods of factually determining reasonable prospect and guiding the decision-making process during the pre-filing and initial stages of the rescue of small, medium and micro-enterprises (SMMEs). Setting: The study was conducted using South African case law and financial models relevant to SMMEs in South Africa. Methods: Qualitative analysis of existing financial models and case law to better understand how BRPs determine initial reasonable prospect when working with SMMEs. Results: The research report methods of determining financial distress and decline within the relevant case law. Conclusion: Reasonable prospect relies heavily on experience and opinion. Factually proving reasonable prospect remains problematic because of information asymmetry and the lack of data integrity. Affected parties (including entrepreneurs) could benefit from the insights obtained in this study. Identifying methods that could assist with the factual determination of reasonable prospect could contribute to entrepreneurial education, as well as address the current conflict that surrounds the subject.

Keywords

• Turnaround
• business rescue
• reasonable prospect
• SMMEs
• financial distress
• decision making