A framework for turnaround practitioners to assess reasonable prospect for ventures operating in the zone of insolvency

M Pretorius

doi:10.4102/sajbm.v48i4.43

Abstract

Turnaround practitioners (TPs) and business rescue practitioners (BRPs) are tasked with making the critical decision of whether a distressed business has reasonable prospect (RP) for reorganisation. Creditors often require the same determination because only businesses assessed to have a reasonable prospect can enter the rescue or reorganisation process. These determinations are difficult because they are made within a ‘zone of insolvency’ (ZoI). Going concerns operate on a solvent basis but may slide into the ZoI where conditions are ambiguous, unclear and uncertain. At the same, time, the specific conditions and contexts of distressed businesses vary widely despite some generic similarities that may exist. Therefore, the decision about reasonable prospect depends largely on how TP and BRPs perceive and make sense of the ambiguous conditions within the zone of insolvency. Finally, creditors and courts rarely agree with such RP determinations, but no generic tool exists to satisfy all stakeholders. Hence, the decision of whether (or not) a distressed business has a reasonable prospect to embark upon a reorganisation intervention involves both rational and subjective assessment to make sense of the conditions present in the ZoI. An affordance framework with guiding scores is proposed to determine reasonable prospect.

Highlights

Pretorius (2014) suggests ‘navigation’ as the ultimate assignment of the Business Rescue Practitioner (BRP) stating that it requires ‘plotting and ascertaining the current troubled situation ( starting within the zone of insolvency (ZoI)), determining the best envisioned endpoint and directing the reorganisation course to pursue through formulating strategies to affect a crossover
An important question remains namely: What are the critical objective and subjective measures/predictors/factors that can be used by BRPs to make decisions about reasonable prospect (RP) for turnaround when operating within the Zone of Insolvency (ZoI)?
As this paper contributes to enhanced understanding and attempts to expand practical theory of pre-insolvency activities, especially the event interpretation and commencement standard for a reasonable prospect (RP) during the ZoI, this section briefly summarises the context of business turnaround and rescue for the reader and explicates the complexity associated with the ZoI

Summary

Introduction

Pretorius (2014) suggests ‘navigation’ as the ultimate assignment of the Business Rescue Practitioner (BRP) stating that it requires ‘plotting and ascertaining the current troubled situation ( starting within the zone of insolvency (ZoI)), determining the best envisioned endpoint and directing the reorganisation course to pursue through formulating strategies to affect a crossover. Sense-making of the current distress levels within the ZoI is the major determinant of reasonable prospect. How these cases are judged depends strongly on ‘who makes the judgement’ which leads to significant interpretation differences and conflict amongst debtors, creditors, practitioners, advisors, courts and regulators alike. I identify both the subjective and rational measures/factors that BRPs and turnaround managers could use to support decision making. This is all about whether to commence with a turnaround of a distressed business. An important question remains namely: What are the critical objective and subjective measures/predictors/factors that can be used by BRPs to make decisions about RP for turnaround when operating within the ZoI?. While many contributing factors to the complexity of operating in the ZoI have been individually investigated in the various bodies of knowledge, there is a need for a comprehensive guideline or evaluation framework to explore the intricacies of the firm floating in the ZoI and facing decisions that may benefit all stakeholders. Tung (2006) quotes Smith (1976), who states that the ZoI remains an incoherent concept and that many firms are often operating in the ZoI because managers can always find a sizeable enough gamble that puts all the firm's equity at risk

Background to rescue and rescue practitioners

Methodology

Conclusions

Findings

Limitations and further research