In the current economic climate, where many businesses struggle to keep their doors open, business rescue has become a rather attractive option for companies to avoid liquidation. Many South African insolvency practitioners have been appointed in recent years as business rescue practitioners in order to help rehabilitate failing companies and bring them back to a state of solvency.

However, just as many South African insolvency practitioners have been approached to assist with voluntary liquidations where companies have reached a stage of financial distress too severe to successfully save a company.

Commerce seems to favour business rescue over the normal liquidation proceedings and thus gives support in this regard. The reason is that creditors stand a chance to collect on money owed even when all legal proceedings against the debtor company are stayed when the company goes under business rescue.

With voluntary liquidation, the creditors do not necessarily stand to get anything. With forced liquidation, they still stand a chance to receive some of the money owed. However, the company must have enough assets to ensure the sale thereof can realise sufficient funds to pay creditors in order of preference as stipulated by the Insolvency Act. This means that some creditors may still end up with only a fraction of what is owed to them.

Also, with business rescue, the company is brought back to a solvent state. This means that apart from debt structuring and payment, the company can stay a client. The creditors thus stand to lose less than with liquidation.

With voluntary liquidation, the South African insolvency practitioners bring the application for liquidation on a semi-urgent basis. Only SARS must be notified beforehand. The rest of the creditors are notified after the provisional application has been made and then have 30 days in which to object.

One of the problems that creditors have with business rescue is that in some instances, the debtor companies use business rescue as a means to stay liquidation proceedings by the South African insolvency practitioners representing the creditors. This puts the creditors in a position of not being able to collect on debts owed. They have to rely on the South African insolvency practitioners appointed as business rescue practitioners to bring failing companies back to solvent states.

However, with liquidation proceedings, all civil actions must be stayed until the liquidator has been appointed, who can realise all the assets in the insolvent company’s estate and distribute proceeds by means of dividends. The assets are often sold at extremely low prices, causing creditors to get very little benefit.

Note that even if a company is under business rescue, it is not to say that it is safe. Where South African insolvency practitioners appointed to rescue businesses after careful assessment come to the conclusion that such businesses cannot recover, then they are obliged, by law, to let the court and shareholders know about it. This means the creditors can wait the entire time, just to have to wait longer for the appointment of a liquidator.

Since the law stipulates that a company does not need assets in order to be liquidated, company owners can easily move assets and thus deprive the creditors from receiving any benefit.

Specific legal procedures must be followed in the business rescue and liquidation application processes. Companies in financial distress should not wait until it is too late to apply for business rescue in order to stay solvent. Where the directors already know that even with business rescue operations the business cannot be saved, they need to apply for liquidation with the help of experienced South African insolvency practitioners.

Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.