Liquidation or business rescue – what is the difference?09 August 2017
“My family company has been operating successfully for nearly 20 years. Over time I’ve also managed to get a few investors into the business. The last year however has been tough and we are struggling to make ends meet. I feel its decision time about the future of the business, but was wondering whether liquidation is the best route or must I rather look at business rescue? What is the difference between these two options?”
In difficult economic times, many companies are having to come to terms with making tough financial decisions. Filing for liquidation, has in the past been a route considered by many companies. The Companies Act 71 of 2008 (“Companies Act”), introduced another intervention mechanism, namely business rescue, as an option to be considered by a company that is in financial distress.
In terms of the Companies Act, a company will be considered to be in financial distress, if the company is not in a position to reasonably pay all of its debts as they become due and payable within the immediately ensuing six months or it appears reasonably likely that the company will become insolvent in the immediately ensuing six months. Once it has been established that a company is in financial distress, it must then be considered whether to file for liquidation or undergo business rescue.
To make this decision, the objective of each option must be considered as well as the process to be followed by a company.
With liquidation the objective is to dispose of the assets of the company and apply the proceeds thereof to pay the creditors of the company in terms of a legal order of preference. The purpose of business rescue on the other hand is to rehabilitate the financially distressed company and to rescue it by means of a plan that will help the company to turn its financial distressed position around and trade on a solvent basis again. Liquidation and business rescue proceedings can be launched either voluntarily or by way of an application to court by creditors and affected parties.
To initiate the voluntary liquidation process a company must decide on a date for the institution of liquidation proceedings. As from this date the company will not be allowed to incur any further debt but can continue trading. Any income then derived will go into the insolvent estate, and may not be used by the company. Once the date has been selected the shareholders of the company must resolve, by special resolution, to place the company under liquidation and an accompanying court application has to be submitted to the High Court. The court will first issue a provisional liquidation order before issuing the final order and notice must be given to all creditors before the final liquidation order is granted. Once the provisional liquidation order is granted no creditor may institute any legal action against the company and any legal action instituted will be suspended. The Master of the High court will appoint a liquidator who will determine the assets of the company, hold meetings with creditors, collect outstanding debt, sell assets, pay creditors and finalise the estate, after which the matter will be closed.
To initiate business rescue proceedings voluntarily the board of the company may resolve to place the company under business rescue if the company is financially distressed and there appears to be a reasonable prospect of rescuing the company. The resolution may not be adopted by the board if liquidation proceedings have been initiated by or against the company and will have no force or effect until it has been filed with the Companies and Intellectual Property Commission (“CIPC”). The company must notify all its creditors and appoint a business rescue practitioner (“BRP”) within five days after the resolution has been adopted and filed with CIPC. During business rescue proceedings no legal action including enforcement action may be instituted against the company, except with written consent thereto by the BRP or with leave of a court. The BRP is responsible for assessing the affairs of the company, holding meetings with creditors, other affected persons and management of the company and compiling a business rescue plan which needs to be voted on and accepted by all affected persons. The business rescue plan must indicate amongst others the probable dividends creditors would have received if the company was placed under liquidation and must prove that under business rescue the company is able to generate a better monetary return for its creditors than in the event of liquidation. The plan must further set out the advantages of business rescue over liquidation. Once the business rescue plan is adopted it binds the company, creditors and holders of any securities against the company.
Business rescue compared to liquidation provides for the company’s debt to be managed and contracts restructured and reorganized in order for the company to continue to trade on a solvent basis rather than selling off all of the company’s assets and the company being shut down as in the case of liquidation. If it does happen that business rescue is unsuccessful, the BRP may apply to court to have the company liquidated. The business rescue process is therefore a last lifeline to try and turn a company around before it has to close its doors when liquidated.
In your case, your views on the potential to rescue the company and the degree of financial distress the company is in, will determine which of these proceedings are the most appropriate route (if any) to be followed. Consider enlisting the help of a legal practitioner to help discuss in more detail the pro’s and con’s of these legal options for your company.