Choice between rescue and ­liquidation yours

2017-09-06 06:00
Maureen Odendaal

Maureen Odendaal

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Question:

My family business has been operating successfully for nearly 20 years. Over time I have 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 it is decision time about the future of the business, but am wondering whether liquidation is the best route – or must I rather look at business rescue?

What is the difference between these two options?

Answer:

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 if it appears reasonably likely that the company will become insolvent in the immediately ensuing six months.

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 financially 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.

Business rescue compared to liquidation provides for the company’s debt to be managed and contracts restructured and reorganised 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, a court application can be done 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 pros and cons of these legal options for your company.

– Maureen Odendaal, associate, Phatshoane Henney Attorneys

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