Managing a farming business in financial distress

Your farming business is in a one-way financial cul de sac. What remedies do you have at your disposal to solve the problem? Johan Botha, an attorney specialising in insolvencies, and agricultural consultant, Pietman Botha, offer some advice.

Managing a farming business in financial distress
The recent drought throughout South Africa has had, and will continue to have, a dramatically detrimental effect on South Africa’s agricultural production.
Photo: FW Archive

It is not uncommon for farmers to find themselves in financial distress at some point in their careers. Drought is not uncommon either, and the effect of this year’s drought will be felt throughout the South African economy. Here’s some tips from Johan Botha, an attorney specialising in insolvencies, and agricultural consultant, Pietman Botha, on managing a farming business in financial distress.

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It is expected that the number of companies filing for bankruptcy during the first quarter of this year will increase by 53% from 119 to 182, with most of these being in the agricultural sector.

The question now is this: what should you do in such a situation to see your business through this difficult time? Should you let your business go bankrupt or are there other remedies?

A farmer in financial distress needs to understand is that recovery requires a process instead of a simple quick fix and it is important to know which steps need to be taken and when.

The first step is to determine how big the problem really is.

Is there still a possibility, with help, to recover and repay the debt over time, or is there no hope of repaying creditors? This can only be determined with the help of a balance sheet, expected income and expenditure statement, and cash flow.

Before we discuss the process to determine the financial position of a business, let’s first look at what alternatives are available for a business in distress.

  • For a one-man business, debt counselling and sequestration is a possibility.
  • Companies or close corporations may utilise business rescue or liquidations.
  • For both a one-man business and a company, the repayment possibility and timing will determine what pro-active actions to take.
  • Always make use of expert advice to help with this decision and protect your wealth as far as possible.

Seeking debt counselling
During 2007, the National Credit Act established statutory debt counselling for the purpose of assisting individuals who are over-indebted, as an alternative to the processes of sequestration and administration.

Rehabilitation of the consumer is the main focus of the process. A loss of assets is prevented and a stay in legal recovery proceedings is granted, whilst no negative credit listing is made.

The applicant has to show that he or she will probably have sufficient income to make regular and sustainable payments to creditors through the appointed counsellor.

Although not necessarily a cheap process, it is simple, and fees may be levied only in terms of a set tariff.

Should the consumer default on agreed payments, the creditor may withdraw from the agreement and proceed with the normal debt recovery processes at his or her disposal.

The appointment of a debt counsellor should be carefully considered.

Take into account the debt counsellor’s qualifications, experience and registration.

After completion of the rehabilitation process, the counsellor will issue a certificate to this effect and the debtor is returned to the status prior to counselling.

Sequestration
Sequestration is the process of turning personal assets into cash to be distributed amongst creditors in a fair and just manner by a curator appointed by the Master of the High Court in terms of an order made by the High Court.

Where the debtor is unable to show any probability of satisfying outstanding debt to creditors, sequestration will take preference to the normal debt counselling process.

Should the debtor’s liabilities further exceed the value of his or her assets to the extent that there is no apparent benefit to creditors, the court may order the debtor to pay a cash contribution to his or her estate.

Business rescue
The Companies Act (No. 71/2008) facilitates rehabilitation of companies in financial distress by external supervision, which means that management of its enterprise, property and business is done by a business rescue practitioner.

A temporary moratorium is placed on the rights of creditors of the company and assets are protected during the development and implementation of a business rescue plan through restructuring the company’s operations.

The aim is to operate the company in a solvent manner to the benefit of creditors, with better prospects than if the company were liquidated.

To limit damage to creditors, the process should be initiated at the first signs of financial distress of the company. It can be brought about by the companies’ directors (a voluntary process) or by any of its creditors by way of application.

The rescue plan usually spans a period of three months, whilst the company functions as normal, but under the supervision of a rescue practitioner.

Liquidation
Liquidation is the structured process for a company or close corporation to turn business assets into cash for equitable distribution amongst the companies’ creditors through the intervention of a liquidator appointed by the Master of the High Court.

The liquidator will be responsible to the Master of the High Court.

When the reasonable outlook for the company predicts that it may not be able to settle its debts promptly and in the normal course of business within the immediate future, there may be no other alternative than to liquidate the business.

Process to follow
In order to determine what action to take, any producer or businessman must follow a structured process that will include the compilation of a new balance sheet, expected income and expenditure statement and new cash flow.

With these documents, it will be possible to calculate the solvency, liquidity and profitability of the business.

If a business is still solvent and the debt ratios are within the accepted norms for the type of farming enterprise, it will be possible to restructure the debt of the business.

In order to determine these figures correctly, an up-to-date balance sheet is needed.

Normally a farming business in stress will experience liquidity problems. This means that short-term debt cannot be
repaid with short-term assets.

In the normal run of a business, loans are used to finance medium-term assets and in a drought year the repayment of these loans becomes problematic. With this type of problem, the debt ratio is a critical aspect to take into account.

The profitability of the business and enterprises over the long run must also be calculated. This information will be used to determine the repayment of possible loans that the business needs to overcome the year’s difficulties.

But this information will also determine in what enterprises the business must expand and what enterprises must be terminated. It will also determine the origin of the financial problems.

The effect of a long-term cash flow forecast will determine what will happen over the short, medium and long term.

It will also provide a total view of the business; what needs to be paid when, as well as when the income can be expected.

For every industry, set norms are available. One of the first indicators of problems is the debt ratios.

Table 1: Maximum debt ratios for different types of farming enterprises in the summer rainfall area
Farming TypesAfter harvestJust before harvest
Irrigation farming45% – 50%55% – 60%
Mixed farming30% – 35%45%
Dryland sowing (medium potential)25% – 30%43% to 50%
dryland sowing (high poential)30% – 35%60%

Table 1 gives an indication of the maximum debt ratios for different types of farming businesses in the summer rainfall area. These are only norms; they should always be seen together with profitability, liquidity and repayment ability.

In the case of major differences from these norms, and if financial difficulties are experienced, it will be wise to make contact with financial and legal experts to prepare a financial plan to protect the wealth of the business and that of the creditors. This could limit damage to your enterprise and may even lead to its survival.

Phone Johan Botha on 082 606 1098 or Pietman Botha on 082 759 2991 

This article was originally published in the 10 June 2016 issue of Farmer’s Weekly.