Liquidation vs Business rescue

The state of the economy has no doubt caused many shareholders and directors to have to consider whether their company should stay as is, downsize, go into business rescue or, if all else fails, liquidate.

Before considering whether to liquidate or go into business rescue, directors and shareholders should be aware of the facts and effects of both processes.

Liquidation and business rescue can be compared to a shutting down versus rehabilitating.

Liquidation (also known as “winding up”)

The purpose of liquidation proceedings is to close a company down. Any assets in the business would be sold in order to pay the creditors of the company.

Directors must carefully consider the ability of their company to pay its debts as they become due or risk falling foul of their fiduciary duties under the Companies Act, which prohibits reckless trading.

Liquidation can happen in one of two ways:

Voluntarily liquidation  if after consideration by the company’s directors it appears that by continuing to trade in the company’s current state, there is no prospect of the company being able to pay its debts as they become due, voluntary liquidation may be the solution.

Voluntary liquidation is typically done by way of special resolution being filed with the Companies Intellectual Property Commission. However with a voluntary liquidation by way of resolution, the directors would need  to confirm that there are no existing creditors that can’t be paid by the proceeds of the winding down. If this is not possible the directors will need to apply for liquidation by way of application to court and court order.

Forced/compulsory liquidation if a company owes money to a creditor or creditors and the company is unable to pay these debts, the creditor or creditors may apply to court to have the company placed into compulsory liquidation. Application by the creditors will typically be done after demand for payment has been made and the company has failed to make payment in terms of the demand.

Creditors can make application to court to hold the directors personally liable for the debts of the company, if they believe that the directors traded recklessly to the detriment of the creditors.

Regardless of whether the company is being wound up voluntarily or forcibly, business operations may not continue after the commencement of the liquidation process, except to the extent that it is necessary for the beneficial winding up of the company. This decision must be made having regard to the interests of all creditors of the company (as opposed to the interests of shareholders).

Liquidation of a company results in the company’s assets being frozen and civil proceedings being stayed, any attachment or execution of judgments after commencement of the liquidation proceedings will be void.

Business Rescue

Where a company is in financial distress but there appears to be a way to trade out of this distress should the company be granted some leeway with debts and legal proceedings, business rescue may be the solution.

This process is conducted in accordance with the provisions of the Companies Act and may be initiated by court application or on resolution by the directors filed at the Companies Intellectual Property Commission. In this process a business rescue practitioner is appointed to manage the affairs of the company either in place of the directors or by supervising the directors. A moratorium is granted which stays creditors’ claims and legal proceedings for the duration of the business rescue process.

The business rescue practitioner will develop and implement a plan to rescue the company with the aim maximising the company’s chances of trading into solvency.

Business operations continue after the commencement of business rescue but the debt is managed and contracts restructured and reorganized to assist the continuing business operation until solvency is reached or a decision to move to liquidation is made.

The company’s creditors are involved in the business rescue process and are regularly updated on the progress towards solvency by the business rescue practitioner.

As can be seen for the above liquidation proceedings are not aimed at rescuing a financially struggling company, but rather to permanently end the company. The potential for rescue and the degree of financial distress will ultimately be the decider between liquidation or business rescue.