It’s a difficult fact to face that we are in very difficult economic times. Many companies are having to come to terms with making challenging business decisions. In the past, businesses in financial trouble have turned to company liquidation. The Companies Act 71 of 2008 (“Companies Act”), gives us an alternative – business rescue.

The Companies Act

Business Rescue serves as an alternative to liquidation for companies. It aims to rehabilitate companies that are unable to pay their debts.

The Companies Act determines a business to be in financial distress. This is if the company is not likely to be able to pay all its debts as they become due within the following six months. It may also appear likely that the company will become insolvent within six months. In this case, the company is in financial distress.

A company in financial distress must consider filing for company liquidation. Otherwise, they must decide whether to undergo business rescue or not. It is important to understand both to make an informed decision for your company’s future.

Under certain conditions, the board may elect to begin the rescue process. Upon reaching this consensus, the court appoints a practitioner.

Fate of the Business and its Assets

Business liquidation aims to dispose of a company’s assets. The money gained from this then pays off its creditors. Creditors receive payment in a legal order of preference. Business rescue, though, aims to rehabilitate the company financially.

It implements a plan to help the company to trade on a solvent basis once more. One can launch liquidation and rescue proceedings voluntarily. Otherwise, creditors or affected parties can also make a court application.

Details Involved in Business Rescue and Company Liquidation

If a company liquidates, it must decide on a date for company liquidation to begin. From this date, the company may not incur any further debt, but may continue trading. Any income from this point will go towards the insolvent estate and the company may not use it. After selecting the date, the company shareholders must make a special resolution. This resolution is to place the company under liquidation.

The company must then submit an application to the court. The court will then grant a provisional liquidation order. After this, they will issue the final order. All the company’s creditors must receive notice before granting the final order. The provisional order is then granted. No creditor may begin any legal action against the company after this point. Following this, the Master of the High Court will appoint a liquidator. They will also handle the process after which they close the matter. This process includes:

• determining the assets of the company
• holding meetings with creditors
• collecting outstanding debt
• selling assets
• paying creditors
• finalising the estate

Limitations

Voluntary business rescue proceedings can’t begin if liquidation proceedings have already begun. As with liquidation, no legal action may take place against a company during rescue. An appointed business rescue practitioner (BRP) will institute a rescue plan. The affected parties must vote on this plan, and all affected persons must accept it. It must prove that creditors will fare better than if the company liquidated.

The BRP will temporarily oversee the management and restructure of the company. This will continue until the company is back on its feet. If rescue is unsuccessful, the BRP may apply to court to liquidate the company. Business rescue is often the last lifeline to turn a company around. After this point company liquidation is usually the only remaining option.

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