In understanding business rescue, it’s important to understand liquidation and the liquidation process. These two procedures interact in many ways. Indeed, they share differences, similarities, and have various interactions. This is especially as they relate to financially distressed companies.
This article will expand on these different aspects. In doing so, its value over company insolvency will become clear. Indeed, South Africa is moving away from liquidation for insolvent business to rescue.

Differences Between the Liquidation Test and Financial Distress Test

Company Liquidation and rescue differ in various fundamental ways. Liquidation is a valuable part of the Companies Act No. 71 of 2008. This applies to companies that experience, or will experience, financial distress. It states that a company will meet the test for liquidity and solvency given two factors:

• The assets, or total assets of a company, fairly valued, equal or exceed its liabilities. If it does not, this is then factual insolvency.
• The company expects to pay its debts in the 12 months following the test. If it does not, this is then commercial insolvency.

When it comes to the test for distress, it differs for businesses. It depends on whether the business meets the test for insolvency or not. A company must be “financially distressed” to meet this test. This is a business which is not considered factually or commercially solvent. Further, it may be viable for business rescue if the company continues as such for the ensuing six months.

Liquidation as a Viable Option for Financially Distressed Companies

Liquidation for an insolvent business is a valuable part of Section 7(k) of the before mentioned act. One of the aims of the act are to accommodate rescue of potentially insolvent business. This, or businesses facing distress. This avoids the liquidation process. But, it must occur in a way that balances the rights of all business stakeholders.

Since the introduction of the act, there has been a notable shift in culture. Indeed, many facing company liquidation see business rescue as an attractive alternative. The liquidation process exists as a last resort for businesses.

Interaction Between the Liquidation Process and the Rescue Process

Liquidation and rescue can interact in various situations. Specifically, this interaction exists for companies experiencing financial distress. For example, if liquidation proceedings for an insolvent company have already commenced. In this case, a court application for rescue will suspend the liquidation proceedings.

The suspended proceedings continue as such until the court adjucates on the application. The suspension may also continue until the rescue process has ended. The act also states that the court can grant the order at any point during the proceedings. Thus, rescue exists as a possible option for financially distressed companies throughout.

Appointing the Business Rescue Practitioner as Liquidator

Section 140(4) of the Act is clear in regards to this topic. The practitioner appointed for business rescue may not act as the liquidator. The person appointed for the company liquidation must be different.

The same act, though, doesn’t state that a liquidator may not be the rescue practitioner. This is if the insolvent business enters rescue proceedings following the liquidation process. Indeed, if the liquidator meets requirements, he may become the appointed rescue practitioner.

Avoid an Insolvent Business with Corporate Business Rescue

We are Corporate Business Rescue. We specialise in the rescue of companies in financial distress. To this end, we always challenge ourselves to provide more to our clients. Thus, if your financially distressed company is in need of business rescue, we can assist.

Contact us for further queries.

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