Covid-19 and the business owners predicament – Business rescue or liquidation

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06 Aug 2020

Whilst many looked forward to a prosperous 2020, South Africa experienced an unprecedented state implemented lock down in response to the worldwide Corona Virus pandemic. Businesses of all sizes were forced to cease trade or trade under different and limited conditions which has had a detrimental effect on their financial solvency. Notwithstanding the easing of lockdown regulations and the resumption of business, the lingering economic effects will be felt for years to come. Business owners are now faced with the tough decision as to how to survive financially. If the business is conducted through a company or a close corporation then Companies Act 71 of 2008 (the Act) provides two possible options.

1.  Business Rescue

The aim of business rescue proceedings is either the rehabilitation and saving of a financially distressed company or the winding down of the company in a manner more beneficial than formal liquidation.

In the first scenario the Act allows for a business rescue practitioner to be appointed and for the development of a suitable rescue plan. The plan will normally allow for debts of the company to be compromised or reduced and/or to be paid over extended periods of time. The plan must be sanctioned on by 75% of independent creditors to be approved. The second scenario would be the controlled closure of the company but in a manner which allows for assets to be realized to the best advantage in the normal course and not in a forced sale situation such as in liquidations.

Business rescue proceedings can be instituted voluntarily by the directors passing a resolution which is then registered with the Companies Intellectual Office or by way of an application to Court by an affected person described in the Act as either a director, employee, trade union or creditor. The main benefits of business rescue proceedings are:

  • A moratorium or breathing space for the company by suspending legal proceedings thereby protecting the business assets from execution by creditors.
  • Directors becoming subject to the authority of the business rescue practitioner.
  • The business rescue practitioner having the power to terminate or suspend contractual obligations of the company.
  • The business rescue practitioner is able to raise post commencement funding for the business.

The benefit of a successful business rescue is the saving of the business, the protection of assets and the retention of jobs. An unsuccessful business rescue is the converse, the failure of the company with the resultant loss in jobs and value.

2.  Liquidation

Liquidation proceedings involve the complete closure of the business. A court appointed liquidator is tasked with the realization and sale of the assets with the proceeds to be divided among the creditors in accordance with their statutory rankings.

  • Liquidation proceedings may be instituted voluntarily, at the instance of the shareholders by resolution or by a Court application instituted by the company or a creditor. The main benefits of liquidation are:
  • The directors and shareholders are immediately divested of all rights over the company and its assets and a liquidator takes control and preserves the assets for the benefit of the body of creditors.
  • All civil legal proceedings against the company are suspended.
  • A structured and controlled process of empowering the liquidator to realize and sell the assets and to pay creditors.
  • An interrogation into the affairs of the company to ensure that any improper or unlawful conduct by the directors or manager is exposed and monies are recovered.

It is imperative for a business owner to grasp the reality facing the business and to make an informed decision of what option to take. If the choice is business rescue, then fundamentally it must be a business capable of being saved and there must be a rescue plan that can be developed and be successful. It is always important, if a Bank is involved, to communicate early with the Bank and to make sure that the Bank understands why the process is being pursued and how this will ultimately benefit the Bank. This may also open the door to the Bank being agreeable to provide post commencement financing to the business which is often vitally necessary.

If the decision is to be liquidated, then this must not be left to the last minute and no new credit should be accepted once it has become clear that the company is unable to repay the credit. In addition, assets should be collected and be ready to be handed over to the liquidator once appointed.

The deciding question is whether the business has the potential to be rehabilitated and rescued, or whether it is an exercise of prolonging its inevitable failure. In most cases the business owner, with the inside knowledge of the business, is best placed to make this important decision.

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(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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