Sink or Swim – Business Rescue – The Art of Treading Water?

The new Companies Act No. 71 of 2008 (new Companies Act) provides an opportunity for companies that are trading under financially distressed circumstances, to apply for the temporary supervision of the company by a trained Business Rescue Practitioner, who would take over the management of the company’s affairs, business and property for an interim period.

If a company is financially distressed:
• it appears reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable in the immediately ensuing six months; or
• it appears reasonably likely that the company will become insolvent within the immediately ensuing six months.

Business rescue or liquidation

In the past, companies in financial distress in South Africa have had no alternative but to launch proceedings for liquidation. Unfortunately, once liquidated, a company’s assets are generally sold at fire sale values. From time to time, businesses are sold as going concerns by liquidators, but these instances are few and far between. Thus liquidation proceedings have historically resulted in very small or marginal dividends for creditors.

Under the new legislative framework, directors have a very difficult choice to make – to file for business rescue or for liquidation. If the board of a company has reasonable grounds to believe that the company is financially distressed, but the board decides not to adopt a resolution for rescue, a written notice must be delivered to all creditors setting out the basis upon which the company is financially distressed and why it is not proceeding with an application for business rescue.

This is a section 129(7) notice, the purpose of which is to warn all creditors that if they deal with a company that is financially distressed, they do so at their own risk, particularly when goods are supplied on credit.

The introduction of business rescue brings South Africa into line with overseas jurisdictions, such as the existing Chapter 11 judicial processes in the United States and the Administration processes in both Australia and the United Kingdom.

The aim

The aim is to provide a temporary moratorium on the rights of all creditors to proceed against the company during the business rescue period. Ultimately, the Business Rescue Practitioner (who has to be licensed by the Commission of Intellectual Property and Companies (CIPC)) is tasked with the development and implementation, if approved by creditors and other stakeholders, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis.

If this cannot be achieved, the aim would be to provide a plan which would result in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.

The main aim for efficient rescue and recovery of financially distressed companies is one which seeks to achieve the objective of balancing the rights and interests of all relevant stakeholders, particularly those of the creditors, employees, shareholders and the company itself.

Business rescue filings

Business Rescue has been available to financially distressed companies since 1 May 2011. Since the date of implementation of the new provisions, there have already been a significant number of filings. According to the CIPC, there have been 280 notices to commence Business Rescue since 1 May 2011. The procedure is open to all companies, namely private companies, public companies and close corporations. So far, private companies have been the majority in respect of rescue filings.

The CIPC have indicated that the number of companies that have taken the decision, either through resolution or through a court application, to apply for the commencement of rescue proceedings remains an ongoing process and one which demonstrates that rescue could possibly offer an alternative to liquidation. Recent liquidation statistics (as at December 2011), indicate that the number of liquidations for 2011, fell by 10.8% year on year and when compared to the same period in 2010.

According to the CIPC, the sectors which have filed for rescue are mining, property and real estate, quarrying, electricity, gas and water, transport, storage and communication.

From an analysis of the above, it is clear that the property and real estate industry have been at the forefront in respect of rescue filings. This is as a direct result of a decrease in property prices and general depression in the real estate market. Many of the companies that have opted for business rescue in the real estate industry have been limited to groups of investment schemes that were administered as property syndications which ultimately ended up in a financially distressed situation. There have also been rescue filings in the services sector which includes transport and logistics, tourism, hotel services and general services.

In the manufacturing industry various companies and close corporations have also filed for rescue and which are evenly spread out amongst the various sectors.

Conclusion

It has certainly become evident that rescue is an alternative option for companies that are facing insolvency. Rather than being placed in liquidation, business rescue does provide an alternative scheme for creditors to be settled within a reasonable period and in terms of the rescue plan.

Often, the dividend offered in a business rescue scenario is far greater than that which would be received in liquidation. Rather than sink, a company often needs to have the alternative of a moratorium period within which to restructure burdensome debt which threatens the solvency of the company. “Treading water” for the period of the rescue proceedings would often allow a company to be saved.

Just as the National Credit Act assisted in keeping individuals from being sequestrated, rescue proceedings should ultimately reduce the number of liquidations in the South African economy.

It has become evident that many businesses are filing for business rescue purely as a delaying tactic and in order to avoid having to make payment to creditors. It allows a temporary moratorium on debt repayment. Obviously the courts are dealing with those applications which are deemed to be an abuse of the process and which do not have the true objectives envisaged by the rescue procedure.

What is critical is the ability of the Business Rescue Practitioner to devise a coherent plan that creditors can properly understand and vote upon to finality.

Already a body of case law is being developed by our High Courts throughout South Africa in respect of providing rulings and guidelines to enable all stakeholders to understand the mechanics of the new provisions and the manner in which business rescue should operate.

One of the ultimate objectives is to save jobs and to reduce unemployment. Although, to date only six business rescue plans have been accepted by creditors, we remain in the system’s infancy and over time, particularly in 2012, should the need arise, rescue might very well become the norm rather than the resultant negative impact of liquidation.

Should You Hold International Shares in Your Investment Portfolio?

Invest in international shares for reduced risk …

Many individual investors, particularly do-it-yourselfers, do not hold international shares in their investment portfolios. Why would you, they ask – returns have been poor for almost a decade now.

But the argument for allocating part of your share portfolio to international shares is not based on returns. Returns cannot be reliably predicted – past performance does not provide a guide to future performance.

As part of your portfolio, international shares offer the prospect to reduce risk without affecting expected return i.e. increasing your risk adjusted rate of return. This is partly the “don’t put all your eggs in one basket” idea. But also because global share markets do not go up and down in tandem with the Australian market, international shares can reduce the variability of your share portfolio’s returns.

The risk reduction effect, or diversification benefit, is sometimes called “the only free lunch in finance”. But if this argument for holding international shares is accepted, how much should be allocated to them?

The purist financial economists say that you should not make a distinction between domestic and international shares. They suggest your portfolio should be approximately market weighted, with country weights dependent on the size of a country’s share market relative to all share markets i.e. the world market.

On this basis, an Australian share investor would hold only about 2% of their portfolio in Australian companies, more than 50% in North American companies, roughly 20% in European companies, 9% in UK companies and about 10% in Japanese companies.

The reality of “home bias”

But we do not know any Australian share investor that puts the theory into practice. Even large institutional investors show a strong “home bias”. Their weighting to Australian shares is far in excess of our share market’s proportion of global share markets.

And this “home bias” is seen in most countries. Is this behavior irrational?

Yes, if it is motivated by the view that the familiar will outperform the unfamiliar. Psychological research confirms this “familiarity” bias, but reality does not support its validity. It is simply impossible for everybody’s home share market to outperform!

But while a “home market” preference may not make sense to financial economists, there are at least two behavioural reasons why investors do not accept the purist view.

The first is that most investors do not want to be too different from other investors that they compare themselves with, particularly if the difference could result in an adverse outcome. They are prepared to accept increased risk of loss and volatility for lower “tracking error”.

A related second reason is that unless investors are “global citizens”, they want their share portfolio to help finance their home country lifestyle. They believe this is more likely to be achieved if their portfolio holds mostly companies that produce the home country’s goods and services.

Economists would argue with this logic, particularly over the long term. But investors are more concerned to act in a way they think will maintain their short to medium spending power in the home country.

Accepting reality …

The financial economists may be right in theory. In practice, the argument just doesn’t feel right for most people. Is there a basis for reasonable compromise?

Explanation:
Australian shares (“Aus”) represented by S&P/ASX500 Accumulation Index
International shares (“Int”) represented by MSCI World Index (net of dividends)
Based on monthly rebalancing; standard deviation calculated on a monthly basis and annualised

It shows that as the international share component increases from 0% to about 40%, volatility reduces. Beyond 40%, there is little gain from further increases in the allocation to international shares.

Pragmatism rules …

Based on this analysis, a pragmatic approach suggests that share investors hold at least 30-40% of their allocation in international shares. This will provide some diversification benefits and is likely to reduce the overall volatility of share portfolios.

But in following this approach, investors should not delude themselves that they are maximising their expected risk adjusted return. Why?

Because it implies that they continue to hold 60-70% of their share portfolio in Australian shares. However you look at it, this is a big bet on a market that only represents about 2% of world share markets!

At least investors are making the decision with their eyes wide open.

10 Important Listbuilding Tips For Your Profitable Online Business System

Making your online business system profitable depends on many things. One of the most important is your list building ability. That’s right, developing and securing a high quality list of active subscribers is key to your online business profitability and success. I have put together 10 of the more important strategies for anyone wanting to build and maintain a high quality email marketing list. Let’s take a look.

1) Creating an effective landing page is essential. You want this page to look professional as well as be viewer friendly in design. You may not have any skill in website or webpage design, if this is the case if it is in your budget hire a professional to do it for you or get one of the thousands of landing page templates available online. These templates vary in cost from free to hundreds of dollars.

2) Next, you will need to put a form on your landing page that makes it easy for your visitors to accept your offer to subscribe to your opt-in email list. In addition you should add a giveaway item to entice the visitor to opt-in.

3) To get the best response from subscribers to your email list you have to be sure that the free items that you offer are of the best quality, (no cheap stuff) these individuals will get a good or bad impression of you, your business, and your products or service by the quality of the freebie they received.

4) Be particular about the written content that you include for your visitors, be sure it is professional and interesting. If you only include a sales pitch in your content you will more than likely lose your potential customers, so give them relevant and interesting things to read.

To build long – term business relationships, loyalty and trust create content sites. For an optimum response to your email list building efforts link your sales page from your content site filled with fresh, relevant and interesting articles and valuable information. Remember to add web forms on your site and make the offer to subscribe to your list.

5) Keeping your customer’s information private and safe is of utmost importance. When you promise to protect your customers personal information, not to sell or share it with anyone, don’t do it period, keep your promise. Not only will this unethical activity destroy your good reputation, it may be illegal in some way, fashion, or form.

6) Invest the time to get to know your product or service offer yourself. Try it out. Make sure that what you are selling to others is something you would purchase yourself. Say you are promoting your own book, be sure that it has interesting and helpful benefits to the target niche market that you intend to sell it to.

7) Give your customers the best customer service possible. This is a surefire way to secure customer satisfaction. When you make your customers happy by fixing any product or service related problems or answering any questions the may have quickly as possible you build their trust and loyalty.

8) Show appreciation to customers who refer others to you by giving them some type of reward or benefit. This also is a way of building a lasting and trusting customer relationship.

9) If ever your customers have complaints or inquiries you should deal with them immediately. You must keep in mind that keeping the customers on your email list satisfied is keeping the customer.

10) To continue to ensure that your list building efforts are successful be ethical in every aspect of the email marketing list methods and techniques that you use. Your potential customers as well as the subscribers to your opt-in list can easily tell between a scam and the real thing. Keep your dealings with them honest.

The above tips have helped me keep my opt-in email list active and growing, if you use them in your list building efforts I am sure you will have the same positive results.