If your company is in financial difficulty, whether due to load-shedding woes, mis-managed funds, outstanding debts or otherwise, there are really only two choices you have when it comes to legal options; that being business rescue or liquidation. To put it plainly, a successful business rescue aims to restore the business to trading successfully, whilst liquidation results in the managed demise of the business.
Business owners must, at the earliest stage possible after realising their business is in financial difficulty, consider whether to engage in business rescue proceedings or whether to embark on liquidation proceedings.
The first question you should be asking yourself, advises senior associate and commercial law and litigation specialist at Gillan & Veldhuizen Inc. Katherine Timoney is, “Is my company commercially insolvent?”
This means you must look closely at the company’s financial position and consider whether the company is able to pay its existing debts that are on the horizon, and whether it can continue its business of trading. “If the answer is no, then your company is commercially insolvent and you will need to take steps to resolve the situation quickly, as there may well be a risk of personal liability for directors that continue to trade in insolvent circumstances. This should be distinguished from factual insolvency where the company’s assets, fairly valued, do not exceed its liabilities,” she says. If either a state of factual or commercial insolvency exists, decisions need to be made.
Rescue can be either voluntary – where a company files a board resolution putting itself into business rescue – or compulsory – where a court will order that it is put into business rescue on the application of an interested creditor. If your company is financially distressed, business rescue will provide you and the company with breathing room by pausing the enforcement of creditors’ claims against the company (including liquidation applications) brought after entering business rescue.
“Business Rescue provides for a business rescue practitioner (BRP) to take temporary control over the company’s affairs, business, property and general management from the board,” Timoney explains. The goal here is for the BRP to develop and implement (if approved by the company’s creditors) a plan to rescue the company by restructuring its business, assets and liabilities, to try and get the company back to trading on a solvent basis or, if that is not possible, to wind the company down in a way that provides a better return to creditors than immediate liquidation.
Often, a BRP will work to obtain post-commencement financing to fund the business going forward and will have to streamline the company and its business to minimise further financial losses and maximise the chances of saving the company.
If there is no reasonable prospect that a company can trade out of its financial difficulty, the second option is liquidation which is a statutory process for a company to be wound up in the hands of the Master of the High Court.
Liquidators (or joint Liquidators) are appointed by the Master to investigate the company’s financial position, collect debts owing to the company, sell its assets and to pay its creditors in the prescribed order and process set out in the Insolvency Act. Like business rescue, liquidation can be entered into voluntarily – through the filing of resolution at the Companies and Intellectual Property Commission (CIPC) – or by court order.
Under the Master’s supervision, the Liquidator takes over the practical, day-to-day and administrative running of the company. He (or she) can oversee the continued running of certain parts of the business during the liquidation, sell the company’s assets, reach agreements with creditors, collect debts owed to the company, bring legal proceedings in the company’s name and otherwise act to protect and administer the affairs and property of the company.
Ultimately, the Liquidator will draw up a liquidation and distribution account, which will set out clearly to the Master what funds the company has been able to recover, through the recovery of debts owed to it or the sale of assets, and how much the creditors will be paid. Once all the creditors are paid their share of what the Liquidator/s can recover, the company ceases to exist.
Which option is best will ultimately depend on the company and business involved says Timoney. Some businesses simply need time and funding in order to bounce back, and in this case, when there is a reasonable prospect that the company can be rescued, then business rescue could be the way to go. Others are simply too far gone and would never be able to trade out of their situation, in which case liquidation is the only real option.
Whatever your company’s situation, it is important to make careful and considered decisions and get timeous, professional advice on the best option for the company to try and limit the potential for directors to be held personally liable. This will allow you to find the best strategy for your business and avoid unnecessary delays or escalating costs.
Timoney advises that directors should bear in mind that the Companies Act requires the corporate controllers of a company in financial distress to either enter business rescue proceedings, liquidate or advise inter alia the company’s creditors the reason why it is not taking either route. The failure to comply with this may lead to the personal liability for the debts of the company and the concurrent allegation of reckless trading.
In short, if in doubt ask for professional advice sooner rather than later.