According to Rory Voller, the commissioner of the Companies and Intellectual Property Commission (CIPC) during a joint parliamentary committee meeting held on 12 May, over 140 businesses have gone into business rescue during the current financial year, with 37 companies having applied for business rescue since the beginning of the first phase of South Africa’s lockdown in March. With all sectors affected by the lockdown and with very few businesses able to generate income, keeping employees employed and earning a salary has become increasingly difficult, resulting in a significant number of retrenchments across all sectors and industries.
As a result, many South Africans find themselves in debt and with little indication of where and how they will repay it, there is a confusing mix for debt collection firms of “we need to collect money but the new rules of operation are unclear”. Following the likes of other countries, like Switzerland, Greece and the United States (although USA’s debt collectors have pushed back), who either partially or entirely suspended debt collection during their lockdowns, South Africa followed suit and under the Disaster Management Act 57 of 2020 also strictly prohibited debt collection under lockdown levels 5 and 4.”
In order to assist debtors and those finding themselves without a job during this unprecedented time of uncertainty, South African banks developed coronavirus finance relief options, entailing amongst other things, a case-by-case restructuring of loans through, for example, payment holidays/breaks to individual customers or deferments to companies to improve underlying cashflow for commercial, small and medium enterprises. All with a 3 to 6 months’ grace (relief) period.
The Banking Association of South Africa (BASA) has clarified the framework in which these relief measures apply, illustrated in a recent article in businesstech:
“Deposits extended as loans must be recovered to allow banks to repay, with interest, customers who expect their money on demand. The relief measures granted by banks do not envisage debt write-off, but rather leniency in terms of the repayment of loans for a period. We strongly encourage all customers to continue to meet their banking and financial services obligations as best they can, to help banks assist as many customers as possible”
And if they can’t, one would assume a debt collector would be required.
The normal role of the Debt Collector
Ordinarily, debt collectors would step in and assist companies with the recovery of outstanding monies. However, being prohibited from doing just that, debt collectors ironically find themselves in the same boat as those they would normally recover from. Prohibited under the Amended Regulations of the Disaster Management Act issued in terms of Section 27(2) at amended sub regulation 4A and again at Table 1 of Alert Level 4 Part H (2)(ix) to knock on the doors of debtors during lockdown levels 5 and 4, debt collection firms have certainly felt the pinch and just like many other South African companies, they’re struggling.
The implication from a debt collection standpoint is that a summons (being the actual procedural starting point for the litigation portion of the debt collection process) cannot be issued due to the face-to-face nature of this interaction. This inevitably causes a severe delay in the entire debt collection process, in a judicial system which is already notorious for lagging where swift justice is concerned (a contradiction in terms – yes).
An obvious knock-on effect here is that legal invoices remain unpaid due to clients being unable to afford to pay them. And an inability for debt collectors to collect on them.
So, how can the debt collector still operate under lockdown?
Whilst many law firms have resorted to online consulting solutions in order to keep the ball rolling, debt recovery firms are unable to fully fulfill their duties. Whilst debate raged as to whether debt collectors could still operate a call centre, in an article on Mondaq (read full article here) it was stated that debt collection was expressly excluded from the reference to “financial services” as defined under essential services. This left these firms in a quandary as to how they could actually go about collecting debt – they cannot call (as this can only be conducted from normal places of residence and this would vary in success), they cannot serve a Letter of Demand due to the restriction on physical movement and in-person document delivery nor can they issue a Summons to get litigation underway (due to the restrictions to urgent or essential matters, which does not include debt collection).
So how do they generate their own income and sustain their firms working overheads? And how do they take advantage of rising debt levels and the opportunity to scale their offering to align with the increased demand for their collection services?
The catch 22 here is that in order to enhance and scale up on service offerings, debt collection firms require the capital in order to support it. However, finding themselves in the same financial crisis as those they are poised to collect from, many debt collection firms find themselves caught between a rock and a hard place – the opportunity to grow but the inability to finance this due to decreased cashflow and the inability to fulfil key billable milestones.
Does lockdown level three pose an opportunity for debt collection firms?
On 24 May, the President announced that from 1 June the whole of South Africa would move down to level 3. This entails the easing of the more severe restrictions placed on the economy during levels 5 and 4 and includes the reopening of all sectors of the economy, with a few exceptions where the risk of transmission is high. By way of deduction, one would assume this includes the normal operations of the debt collector. However, this has yet to be absolutely clarified.
Keeping in mind the fact that the majority of South Africans still find themselves in a severe economic crisis (coupled with the fact that most payment holidays will come to an end), the role of the debt collector should take on a phased approach whereby a softer side of collection is done (at least for the immediate future). Rushing to court for overdue payments may seem too insensitive for the masses and will not do the debt collector any favours where the cooperation of debtors is concerned.
However, there is an obvious opportunity to grow and there is certainly money to be made. But how?
Specialist funding for debt collection firms
Many debt collection firms require immediate access to capital to simply keep their practices afloat. Counterintuitively, there is also a pressing desire to upscale their current services to take advantage of a greater need for their service, which adds an additional need for finance. Accessing this capital is often challenging for firms who pursue traditional lending channels such as banks, who simply don’t understand the business of law or recognise value indicators inherent in court orders, debtor’s books, fee agreements etc.
This is where third party funders such as Taurus Capital step in. Taurus Capital is in the business of providing funding to law firms and comprises a team with first-hand experience in the business of law. They understand the cyclical intricacies law firms face and are able to match repayment expectations with the cashflow cycles of the law firm. They assign value to intangible assets such as book debts, mandates, fee agreements, invoices, court orders and taxed bills of costs in order to secure loans provided to law firms. Banks will not do this.
Taurus Capital offers South African debt collection firms a working capital facility that can be used to sustain their firms overheads during periods of decreased cashflow. This capital can also greatly assist debt collection firms to scale up operations by hiring new staff, expanding office space and improving on IT infrastructure and software upgrades. With facilities starting from R250 000 and repayments matched to cashflow cycles, this presents a win-win solution to not only keep a practice afloat but to also expand and “make hay while the sun shines”.
Taurus Capital offers enlightened capital solutions to debt collection firms finding themselves in need of a financial partner to both sustain and grow their practice. Contact Taurus Capital in order to find out how they can help you.
This article was written by Alicia Koch for Taurus Capital.