Indicators of potential distress to watch for that should trigger proactive action and seeking assistance
The placing into business rescue of Edcon, one of Southern Africa’s largest nonfood retailers, which has operated for 90 years, has consequences for retail in SA as well as for stakeholders, including thousands of employees, creditors and shareholders. The outcome of this process will not be known for some time.
But this turnaround plan was undermined by economic and political challenges, constrained consumer spending and competition, and these difficult trading conditions were compounded by the Covid-19 crisis.On March 26 Edcon announced that turnover had fallen 45% compared with the same period the previous year. Its failure to meet its March sales targets and expected difficulties in collecting on its debtors’ book meant the group only just had sufficient liquidity to pay salaries.
The business rescue process brings about a legal moratorium, subject to certain exceptions, where broadly no creditors of Edcon can institute or proceed with legal proceedings to enforce their rights. The moratorium does not prevent any creditor from enforcing rights against any guarantor of the company in business rescue.
Secured lenders will have some form of security to rely upon and from which to obtain payment, though there is always a risk of a shortfall, depending on the nature and value of the secured assets. Employees face a particularly difficult time given that their continued employment is uncertain and there is a muted job market. The Companies Act provides them with some protection, because the business rescue practitioner is not allowed to suspend or cancel any term of their employment contract.
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