Liquidation V Business Rescue and its Benefits
As a small business owner, confronting an economic recession is a harsh reality, especially in South Africa. The current economic climate has weathered a massive storm, resulting in an aftermath of extreme financial distress. Knowing what your legal options are can provide a great amount of relief to small business owners.
CASE STUDY #1: James and Belinda
James and Belinda own a family business in Cape Town which they have built up from the ground. They have spent countless days and nights trying to grow their business, and both partners are proud of their accomplishments. Unfortunately, the couple find themselves in troublesome times as the recession and Covid-19 has meant they had to close their business, which in return has caused a loss in revenue and cashflow. James and Belinda are unsure of what they should do and have approached Voss Wiese Haggard Attorneys for advice and guidance during these difficult times.
After taking the time to consult with our clients and evaluating the facts, it became clear that James and Belinda had two options. They could either liquidate their business in terms of the Companies Act 71 of 2008 read together with the Companies Act of 1973, or alternatively apply for business rescue in terms of the Companies Act 71 of 2008.
After conducting the required due-diligence, it became clear that Business rescue would be the better option, as the owners (board) had reasonable grounds to believe that the company was financially distressed with reasonable prospects of rescuing the company.
Although the aforesaid problem might seem as a last straw scenario, we assure you that it is not. For purposes of this article we’ll be focusing on The Knight in Shining Armour aka “Business Rescue”.
The Companies Act 2008 in Section 128(1)(b) defines business rescue proceedings as proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for –
i) the temporary supervision of the company, and of the management of its affairs, business and property;
ii) a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
iii) the development and implementation , if approved, of a plan to rescue the company by restructuring its affairs, business, property, debts and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.
According to Section 128(1)(f), a company will be financially distressed if it appears to be reasonably unlikely to pay all of its debt as they become due and payable within the immediate ensuing six (6) months (commercial insolvency), or if it appears to be reasonably likely to become insolvent within the immediate ensuing six (6) months, (actual or factual insolvency), where its debts are likely to become more than its assets.
LEGAL CONSEQUENCES OF BUSINESS RESCUE PROCEEDINGS:
The Business Rescue process has profound consequences for a company and its stakeholders such as:
– Most civil legal proceedings are stayed until the end of the business rescue process
– The disposal of company property is restricted
– Employee contracts are protected
– Re-financing agreements can be negotiated, and other contracts may be suspended or cancelled in certain circumstances.
A good example of the process would be the rights of the employees of a company in business rescue versus liquidation. Assume Company X with 200 employees is liquidated by the High Court due to its inability to pay its debts. If the final liquidation order is granted, all contracts of employment will be suspended subject to the provisions of the insolvency Act.
During the suspension, the employees will not be required to work, but will also not be paid. The only time that these contracts will not be suspended would be if the company is sold out of the insolvent estate as a going concern.
The employees, however, can intervene as an affected party in the liquidation process by applying for a business rescue order to be granted. If such an order is granted, the business rescue provisions in the Companies Act 2008 provide for the maintenance of all employment contracts on the same terms and conditions as existed prior to the granting of the business rescue order.
It is clear that Business rescue proceedings in certain circumstances are far more beneficial than liquidation and one should rather opt for sound advice before proceeding with any legal steps. The legal landscape is difficult to navigate so rather intrust your situation with us your trusted legal partner.
For more information about Business Rescue, contact our offices on 021 300 3952 or email firstname.lastname@example.org