The above question needs to be answered in the clearest of terms to avoid any confusion. While the circumstances that invite any of the above procedures are the same, the actual situation usually determines which option is suitable to be implemented.
To drive this point home, we will examine each to see what considerations result in that option being the suitable in each circumstance. In other words, what is it that determines on which option to use?
Liquidation is regulated under the Insolvency Act 24 of 1936, the Companies Act 61 of 1973 as well as the Companies Act of 2008. While the former two acts regulate the liquidation of insolvent companies, the latter governs the winding up of solvent companies.
Liquidation is a process whereby a company’s assets are realised by private treaty or public auction, to pay for the costs of such process and then settle the claims of creditors according to the order of preference, rights, and interests.
The underlying factor used to determine on whether the company must commence with liquidation is when the company is not able to pay its debts as and when they become due. In other instances, its assets may be exceeded by its liabilities (factual insolvency) and sometimes not, but that it still is not able to settle its debt obligations as they become due (commercial insolvency).
Liquidation should be the option where it is reasonably seen that there are no prospects of bringing the company back to operate in solvency.
Business Rescue is a process introduced by chapter 6 of the new Companies Act of 2008 to cater for financially distressed companies. This procedure involves the appointment of a Business Rescue Practitioner (BRP) who must take over the temporary management of the affairs of the company to maximize its chances of returning back from financial distress.
This is done through the development of a Business Rescue Plan, which must be adopted first and then implemented accordingly.
Business Rescue is preferred whereby reasonable chances are that it will offer better returns to the interests and claims of creditors than what liquidation would have done, and that there are better chances of saving the business from collapse such that liquidation would be too drastic a step under the circumstances.
Compromise on the other hand is a less regulated process provided for under the Companies Act of 2008. Compromise is a process whereby provisions are made for the restructuring of the company’s affairs without the appointment of a Practitioner, whether it is financially distressed or not.
This contrasts with Business Rescue which is implemented when the company is financially distressed. A detailed Proposal must be developed and provided to the creditors or a class of creditors, with a notice of the meeting where a vote on the Proposal will be conducted.
A threshold of 75% affirmative vote representing the value of creditor claims present is required for the Proposal to be accepted, which is then sanctioned by Court to be binding on all creditors.
Therefore, it is not a case of heads or tails to determine which option to proceed with, careful analysis of the situation and whether there are reasonable chances of saving the business needs to be done first and then chosen which option to go with.
Our Company Law department assists distressed companies with Liquidations, Business Rescue and Compromise procedures to cater for the interest of the company, its shareholders, employees as well as creditors. Contact us for comprehensive assistance.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter. One should not act or refrain from acting on the basis of any content included in this site without seeking legal or other professional advice. The contents of this site contain general information and may not reflect current legal developments or address one’s peculiar situation. We disclaim all liability for actions one may take or fail to take based on any content on this site.
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