Beyond Balance Sheets: Redefining “Financially Distressed†for Effective Business Rescue

This article examines the limitations of current business rescue frameworks, which rely solely on a company’s balance sheet insolvency to identify financially distressed entities. This narrow definition overlooks companies with ongoing cash flow generation capabilities but burdened by high liabilities. Such companies, despite technical insolvency, may have the potential for successful turnaround. The article addresses this research problem by proposing a broader definition for “financially distressed.†We explore the limitations of the current balance sheet test through a scenario where a company with positive cash flow might be excluded from rescue programs due to insolvency. Examining alternative approaches in South Africa and a key UK court case, the article proposes a revised definition that incorporates both a company’s balance sheet health and its cash flow generation capabilities. This broader definition, we argue, would allow for the identification of a wider range of viable companies for rescue programs, ultimately leading to more effective business rescue efforts.