Is your company struggling to pay its debts? Does the firm struggle with immediate cash-flow problems? Is it likely that if the debt is temporary stayed and the company restructured that it would be able to operate in a solvent state within six months from the date? Is it in need of debt rescue?
If you have answered yes to any of the questions, your company is indeed in need of debt rescue. The next question to be asked is: “who can apply for business rescue?”
WHY BUSINESS RESCUE RATHER THAN IMMEDIATE LIQUIDATION?
It is not in the interest of employees, shareholders, and creditors to have a company liquidated. The creditors stand to get only a small portion of what is owed to them. With liquidation procedures often being expensive, the creditors know that a firm without tangible assets is worth more if it is kept afloat.
Employees know that a company that is liquidated means large-scale job losses. Even with retrenchment packages, the employees would still prefer the stability and income from having jobs at the company. If they see the company is in trouble, they can apply for such in order to prevent liquidation.
Shareholders stand to lose their investments if a company is in financial trouble. Any of the affected persons can apply to have the firm placed under a debt rescue plan to prevent the need for business liquidation.
The board members have a legal obligation to take steps in rescuing the company or to liquidate it rather than just to keep on managing it in the hopes for a turn-around.
WHY CAN A BUSINESS BE IN NEED OF DEBT RESCUE?
External factors outside the control of normal management can cause a company to become insolvent.
Several power outages were experienced earlier in 2019. For some companies, the loss of productivity and products and the inability to deliver on time may have caused excessive cash-flow problems. Such companies may want assistance to become solvent and able to pay their debts.
A natural disaster can, for instance, cause a railroad to become unusable. The tourist rail operator using the railway suddenly has no income until the rail is repaired. The repairs may take months, causing the company to lose its competitiveness while it also has to carry business expenses for the entire period. This can lead to a state of insolvency. However, with the reopening of the rail, there is the possibility that the operator can become solvent again if the debt is stayed for a while. In these and similar instances, businesses can benefit from business saving plans.
HOW DOES THE PROCESS WORK?
Any of the affected persons, such as the creditors, board of directors, employees, trade unions, or shareholders can apply for business rescue if they find that the company is in need of help in order to prevent liquidation. A business rescue practitioner is appointed to supervise the business and the debt is stayed for a period. The business assets, debt, and employment profile are restructured to bring the business back to a state of solvency.
WHAT IF THE BUSINESS IN NEED CANNOT BE SAVED?
The practitioner is under legal obligation to notify the affected parties and the court if the business still fails and cannot be reasonably expected to become solvent and able to pay its debts within six months. In this instance, the liquidation proceedings commence.
WHERE TO GET HELP IF A BUSINESS REQUIRES IT?
Call our attorneys for legal guidance and professional assistance regarding debt and liquidations in South Africa.
Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.