Business Rescue & Liquidation – Is the Difference the Same?
The Covid-19 pandemic has caused ravage never experienced before the world over since the great depression of 1929 and the 1918 Spanish flue before that. Governments have battled for ideas on how to forge ahead in containing and averting a total economic collapse, which has been an imminent threat since the pandemic started. Measures in place have had to seek a balance between business continuity while keeping citizens safe from the scourge. We applaud these efforts, including interventions such as the vaccination drives that are in full swing.
Business was hit the hardest, with thousands of companies closing and millions the world over thrown out of jobs. These were the repercussions of businesses being caught between a rock and hard place, they simply had no choice. However, in our own context in South Africa, the law still expected lawful means and processes to terminate employment. Having terminated employment through lawful means, then the company may well weigh its survival options on its own terms.
Business Rescue and Liquidation are mechanisms provided for in the Companies Act 71 of 2008 as well as Companies Act 61 of1973, with regards to companies facing financial challenges. The most striking difference between these two is that, Business Rescue is for those companies where there are prospects to save the business whilst liquidation is meant for those where chances are next to zero. Therefore, the difference is not the same, there are material differences between the two mechanisms.
With regards to business rescue, on commencement of the proceedings a Business Rescue Practitioner (BRP) is appointed but not before a Resolution is passed to commence the process and a Notice being sent to all affected parties. After filing of the Notice of Appointment and notice to affected parties, the process commences whereby the BRP will investigate the company records and affairs, and thereafter call for the first meeting with creditors and employee representatives. A Business Rescue Plan will be prepared and published, where after a meeting will be called to vote for its adoption. If adopted, it will be implemented accordingly until the company returns to solvent trading. This is basically the process of business rescue.
Liquidation on the other hand, is for businesses whereby there are no prospects of returning to solvency, such that it will actually give more returns if the business is wound up. A distinction between factual and commercial insolvency is necessary.
Factual insolvency refers to where the liabilities of a business exceed its assets, whereby commercial insolvency is whereby a business will not be able to pay its obligations as and when they become due within the foreseeable six months.
There are instances where liquidation proceedings may even be launched where a company is still solvent (as set out in Section 81 of the Companies Act of 2008) which includes (amongst other things) the following circumstances:
i. The functionaries in a company e.g directors, prescribed officers or other persons in control of the company, reacting in a manner that is fraudulent or illegal (Section 81(1)(f));
ii. The company's assets are being misapplied or wasted (Section 81(1)(e)).
In fact in the case of Pinfold vEdge to Edge Global Investments Ltd [2013] ZA KZD HC 52 a winding up order was granted after the applicants proved fraud through misrepresentation.
Liquidation may be voluntary (initiated by Resolution of the Board) or involuntary (initiated by Court application of an interested party e.g creditor). Liquidation of insolvent companies is regulated by the Companies Act of 1973 while that of solvent companies is regulated under some sections of the Companies Act of 1973 and the Companies Act of 2008.
Below is a non-exhaustive list setting out the consequences of a company being placed into liquidation:-
· Suspension of civil proceedings against the company and execution of judgments;
· The assets of the company will be under the custody of the Master until the liquidator is appointed;
· The liquidator acts as a party to the contracts concluded before the liquidation procedure;
· The suspension of employment contracts;
· The liquidator must decide on terminating or proceeding with lease agreements within 3 months of appointment;
Although Business Rescue and Liquidation share the common denominator of companies experiencing financial doldrums, these two procedures are not the same.
We assist businesses, employees, creditors and interested parties during the procedures of business rescue and liquidation.
