FUNDING STRUCTURES IN BUSINESS REORGANISATIONS: LOCATING THE ROLE OF PRE-PACKAGING AS A RESTRUCTURING TOOL

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INTRODUCTION

Scholars in management sciences have over the years, widely documented the decline of businesses. Although not forming part of the expected normal growth of businesses, it is recognised in the normal growth curve and needs to be properly anticipated and corrected where it occurs. Oftentimes triggered by financial distress, the threat of business decline remains relevant to managers worldwide, especially in light of persistent weakness in the global economy. This often necessitates turnaround processes that several regimes have made possible in order to counter the negative effects to their economies (Trahms, Ndofor & Simon, 2013). Over the years, many regimes have introduced legislation to deal with resultant insolvencies and business shut downs.
In order to reduce the economic impact of such insolvencies and winding ups of businesses, many of these regimes around the world have adopted formal reorganisations/administration/plan of arrangements (to complement their insolvency/bankruptcy laws) in order to aid rescue efforts for companies facing financial distress (Pretorius & Rosslyn-Smith, 2014). Formal reorganisations have over the years assumed great importance as a form of saviour for companies that would otherwise face liquidations. Various tools are available during this process of saving or rehabilitating companies facing distress. This study therefore sought to examine one of the tools available in practice, namely pre-packaged funding solutions that are finding acceptance throughout the restructuring orientated regimes. As a relatively new restructuring regime, the developments pertaining to restructuring practices in many of the regimes also have an implication for South Africa (SA). It is with this in mind that this research was geared to study pre-packaging applications with a view to examine the impact on SA, and the measures needed to be taken to deal with these.

BACKGROUND

In order to deal with inevitable insolvencies and liquidations, most regimes, including SA, introduced appropriate legislations to deal with the interests of affected stakeholders in such processes, including creditors, debtors, employees and shareholders. The South African regime introduced Judicial Management as part of the Companies Act in 1926, to deal with distressed businesses that were not already considered insolvent and could perhaps be saved. According to Roodt Inc. (2017), this had an unintended consequence, as it became a kiss of death for companies under Judicial Management.
In practice, the managed company became doomed with an irreparably damaged reputation, and thus no one wanted to do business with them. According to Loubser (2010), several amendments were made to the original version of judicial management in the subsequent Companies Act 61 of 1973, but the general view remained that it was a dismal failure. In parallel, the Insolvency Act 24 of 1936 was introduced to govern the sequestrations of estates of individuals, trusts and partnerships that were deemed insolvent. The winding up and reorganisation of companies introduced in the Companies Act 61 of 1973, by reference, incorporates sections of the Insolvency Act in dealing with companies facing financial distress and unable to meet their financial obligations (van Zuylen, 2009).

Zone of insolvency

Chapter 6 of the Companies Act, which deals with business rescue and compromise with creditors, details the business rescue proceedings, the appointment, roles and dismissal of business rescue practitioners (BRPs), rights of affected persons during the business rescue proceedings, the development and approval of the business rescue plan, and compromise with creditors. Specifically regarding business rescue proceedings, the Act allows the directors of companies who believe that the company is under distress, to voluntarily file for business rescue (on behalf of the company), thus commencing the process. The basic tenet for this process to occur is that there must be a reasonable prospect of rescuing the company. This therefore makes it important to understand the zone of insolvency in which the distressed company finds itself. The zone of insolvency (ZoI) attempts to describe the level at which a company finds itself in the distress range, and thus whether it is possible at all, at that point, to rescue the business. It describes what could be regarded as the verge of insolvency of a business, or proximity to insolvency before formally recognised as insolvency (Schmitt, Barker, Raisch & Whetten, 2015; in Pretorius, 2017:59). Scholars suggest that a business that is a candidate for business rescue, whilst it is already in distress, has not yet entered an insolvent state (Pretorius, 2017). There is still lack of clarity as to when the ZoI begins, but it remains an important area to define when a business should commence business rescue, and by definition, partake in pre-packaging without violating insolvency regulations.

TABLE OF CONTENTS :

• ABSTRACT
• LIST OF FIGURES
• LIST OF TABLES
• CHAPTER EXPLORING PRE-PACKAGING AS AN ENHANCEMENT TO BUSINESS RESCUE PROCESSES: THE CASE FOR SOUTH AFRICA
  • 1.1 INTRODUCTION
  • 1.2 BACKGROUND
  • 1.3 BUSINESS RESCUE CONCEPT
    • 1.3.1 Declining trading conditions
    • 1.3.2 Stages of enterprise development and reorganisations
    • 1.3.3 Business rescue processes
    • 1.3.4 The Insolvency Act
    • 1.3.5 Zone of insolvency
  • 1.4 PRE-PACKAGING AS A PRACTICE
    • 1.4.1 The global practice
    • 1.4.2 Pre-packaging explained
    • 1.4.3 Framework for pre-packing in South Africa
  • 1.5 PRE-PACKAGING CONTEXT IN SOUTH AFRICA
  • 1.6 PROBLEM DEFINITION
    • 1.6.1 Progress (success/failure) of business rescue in SA
    • 1.6.2 Options for distressed businesses
    • 1.6.3 Need for pre-packs
    • 1.6.4 Problem statement
    • 1.6.5 Limiting factors affecting the problem statement
  • 1.7 RESEARCH QUESTIONS
  • 1.8 RESEARCH AIM
  • 1.9 RESEARCH APPROACH – FOUR ARTICLES (FORMAT)
  • 1.10 IMPORTANCE OF STUDY
  • 1.11 LIMITATIONS OF STUDY
  • 1.12 ASSUMPTIONS OF STUDY
  • 1.13 ETHICAL CONSIDERATIONS
  • 1.14 DEFINITIONS AND ABBREVIATIONS OF KEY TERMS
  • 1.15 CHAPTER OUTLINE
  • 1.16 REFERENCING TECHNIQUE
  • 1.17 CONCLUSION
• CHAPTER RESEARCH DESIGN AND METHODOLOGY
  • 2.1 RESEARCH SETTING
  • 2.2 RESEARCH DESIGN
    • 2.2.1 Research approach
    • 2.2.2 Research philosophy
    • 2.2.3 Grounded theory strategy
    • 2.2.4 Description of broad research design
  • 2.3 PILOT STUDIES
  • 2.4 POPULATION AND SAMPLING TECHNIQUES
    • 2.4.1 Business rescue population in SA
    • 2.4.2 Sampling
  • 2.5 DATA COLLECTION PROCEDURES AND ANALYSIS PROCESS
    • 2.5.1 Data collection and analysis
    • 2.5.2 Coding
    • 2.5.3 Research credibility
  • 2.6 CONCLUSION
• CHAPTER ARTICLE 1: PRE-PACKAGED APPLICATIONS IN BUSINESS REORGANISATIONS: INTERNATIONAL PRINCIPLES
  • 3.1 ABSTRACT
  • 3.2 INTRODUCTION
  • 3.3 LITERATURE REVIEW
    • 3.3.1 Pre-packs in the United States (US)
    • 3.3.2 Pre-packs in the United Kingdom (UK)
    • 3.3.3 Pre-packs in Australia
    • 3.3.4 Pre-packs in Canada
    • 3.3.5 Pre-packs in South Africa (SA)
  • 3.4 RESEARCH AIMS AND QUESTIONS
  • 3.5 RESEARCH DESIGN AND APPROACH
    • 3.5.1 Research approach
    • 3.5.2 Ontological positions
    • 3.5.3 Epistemological positions
    • 3.5.4 Research method
    • 3.5.5 Research setting
    • 3.5.6 Data analysis
  • 3.6 OBSERVATIONS AND FINDINGS
    • 3.6.1 Key observations
    • 3.6.2 The evolution of pre-packs
    • 3.6.3 Findings
    • 3.6.4 Gaps, inconsistencies and controversies
  • 3.7 DISCUSSIONS AND IMPLICATIONS FOR INDUSTRY
  • 3.8 IMPLICATIONS, LIMITATIONS, AND FUTURE RESEARCH
    • 3.8.1 Implications for business
    • 3.8.2 Research limitations
    • 3.8.3 Suggested future research
• CHAPTER ARTICLE 2: FUNDING STRUCTURES IN BUSINESS REORGANISATIONS: LOCATING THE ROLE OF PRE-PACKAGING AS A RESTRUCTURING TOOL
  • 4.1 ABSTRACT
  • 4.2 INTRODUCTION
  • 4.3 OVERVIEW OF FUNDING STRUCTURES FOR BUSINESS RESTRUCTURING IN SOUTH AFRICA
  • 4.4 PURPOSE OF THE STUDY METHODOLOGY
  • 4.5 RESEARCH DESIGN
    • 4.5.1 Research approach
    • 4.5.2 Research method
    • 4.5.3 Research setting
    • 4.5.4 Data analysis
  • 4.6 ANALYSIS OF FUNDING STRUCTURES IN REORGANISATION IN THE US, UK, AUSTRALIA AND EUROPE
    • 4.6.1 The United States of America
    • 4.6.2 The United Kingdom
    • 4.6.3 Australia
    • 4.6.4 Europe
  • 4.7 DISCUSSION
    • 4.7.1 Variation of funding mechanisms found in vibrant distress funding markets
    • 4.7.2 Pre-packaging as complementary funding to other funding mechanisms
    • 4.7.3 Introduction of new shareholders with altered capital structures in pre-packaging
  • 4.7.4 Perception of good value for money as a driver of third-party investments
  • 4.8 MANAGERIAL IMPLICATIONS
  • 4.9 CONCLUSION
• CHAPTER ARTICLE 3: EXPLORING THE ROLE AND EXTENT OF SALES TRANSACTIONS IN BUSINESS RESCUE: A PRECURSOR FOR PRE-PACKAGING?
  • 5.1 ABSTRACT
  • 5.2 INTRODUCTION
  • 5.3 LITERATURE REVIEW
  • 5.4 RESEARCH OBJECTIVES AND QUESTIONS
  • 5.5 RESEARCH DESIGN
    • 5.5.1 Research approach
    • 5.5.2 Research setting
    • 5.5.3 Data collection
  • 5.6 FINDINGS AND OBSERVATIONS
    • 5.6.1 Findings
    • 5.6.2 Key observations
  • 5.7 ANOMALIES OBSERVED FROM THE STUDY RESULTS
  • 5.8 DISCUSSIONS AND IMPLICATIONS FOR INDUSTRY
  • 5.9 LIMITATIONS, FUTURE RESEARCH
    • 5.9.1 Research limitations
    • 5.9.2 Suggested future research
• CHAPTER ARTICLE 4: DEVELOPING PRE-PACKAGING FOR THE SOUTH AFRICAN BUSINESS RESCUE INDUSTRY: ANTECEDENTS FOR APPLICATIONS
  • 6.1 ABSTRACT
  • 6.2 INTRODUCTION
  • 6.3 LITERATURE REVIEW
    • 6.3.1 Antecedents for pre-packs
    • 6.3.2 Legislative vacuum for pre-packs
    • 6.3.3 Availability of multiple funding options
    • 6.3.4 Activity in the distress fund market (availability of distress funds)
    • 6.3.5 Access to reliable information on distressed companies
    • 6.3.6 Overview of the distress funding market in SA
  • 6.4 RESEARCH OBJECTIVES AND QUESTIONS
  • 6.5 RESEARCH DESIGN
    • 6.5.1 Research approach
    • 6.5.2 Research method and sampling techniques
    • 6.5.3 Research setting
    • 6.5.4 Data analysis
  • 6.6 FINDINGS AND KEY OBSERVATIONS
    • 6.6.1 Findings and interpretation
    • 6.6.2 Key observations from the initial exploratory interview
    • 6.6.3 Key observations from the expert contributions
  • 6.7 GAPS, INCONSISTENCIES AND CONTROVERSIES
  • 6.8 DISCUSSIONS AND IMPLICATIONS FOR INDUSTRY
  • 6.9 LIMITATIONS, FUTURE RESEARCH AND IMPLICATIONS
    • 6.9.1 Research limitations
    • 6.9.2 Suggested future research
    • 6.9.3 Implications for business
  • 6.10 THEORETICAL IMPLICATIONS
• CHAPTER CONCLUSION
  • 7.1 INTRODUCTION
  • 7.2 PRE-PACKAGED APPLICATIONS IN BUSINESS REORGANISATIONS: INTERNATIONAL PRINCIPLES
    • 7.2.1 Overview of article
    • 7.2.2 Findings and conclusions
  • 7.3 FUNDING STRUCTURES IN BUSINESS REORGANISATIONS: LOCATING THE ROLE OF PRE-PACKAGING AS A RESTRUCTURING TOOL
    • 7.3.1 Overview of article
    • 7.3.2 Findings and conclusions
  • 7.4 EXPLORING THE ROLE AND EXTENT OF SALES TRANSACTIONS IN BUSINESS RESCUE: A PRECURSOR FOR PRE-PACKAGING?
    • 7.4.1 Overview of article
    • 7.4.2 Findings and conclusions
  • 7.5 DEVELOPING PRE-PACKAGING FOR THE SOUTH AFRICAN INDUSTRY: ANTECEDENTS FOR APPLICATIONS
    • 7.5.1 Overview of article
    • 7.5.2 Findings and conclusions
  • 7.6 OVERALL SUMMARY OF FINDINGS AND THE RESEARCH IMPLICATIONS
    • 7.6.1 Summary of findings
    • 7.6.2 Managerial implications
    • 7.6.3 Research implications
  • 7.7 OVERALL LIMITATIONS OF STUDY AND THE SUGGESTED FUTURE RESEARCH
  • 7.8 CONCLUDING ASSESSMENT/OBSERVATION
  • REFERENCES
  • APPENDIX 

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