Business Rescue and liquidation - not an interchangeable process

The number of liquidations for South African businesses decreased by 1.1% to 177 in May compared with May 2015, according to Statistics SA data. While this could be a result of business rescue becoming available to more companies in financial distress, it is important for business owners to understand that business rescue and liquidation are seldom interchangeable processes.

This is according to Justine Hoppé, Senior Legal Counsel, Business Rescue for Mazars – an internationally represented organisation specialising in audit, accounting, tax and advisory services -  who points out that the vast majority of companies facing insolvency are not viable candidates for business rescue. “The business rescue process in South Africa is still in its infancy and as a result it is sometimes abused by directors looking for a quick mechanism to stave off liquidation and keep creditors at bay.”

The concept of business rescue, as set out in the Companies Act 71 2008, is slowly becoming better known in the country and consequently, creditors are becoming considerably more sophisticated with regards to what they expect from the process and the business rescue practitioner, says Hoppé. “This, together with the growing bank of case law and guidance, will result in less leeway for the business rescue process to be abused.”

She explains that by the time that companies are forced into liquidation, rescue proceedings would not be viable in many cases. “However, if the directors of a company address financial pressures and concerns quickly and pro-actively, there is often scope to avoid liquidation and rather place the company in business rescue. From there one can either work towards returning the company to run as a viable business, or to realise a better dividend for the company’s creditors than they would expect in a liquidation.”

In the event that a company is a good candidate for business rescue proceedings, Hoppé notes that some of the many advantages include the moratorium on all legal proceedings and enforcement actions against the company, giving the company often much needed breathing room to assess its position.

“A business rescue practitioner will investigate the affairs of the company and engage with the company’s creditors, employees and other stakeholders. He / she also has the power to amend or suspend any agreements or any other obligation (except employment contracts).”

Lastly, business rescue proceedings, used in the appropriate circumstances and for the proper motives, are certainly good for all stakeholders in the company and often offer considerable security and protection to employees, she states.

“This is not a cure-all remedy. Even if a business initially qualifies, business rescue proceedings may terminate in a number of instances, including where there are no longer reasonable prospects of successfully rescuing the company.  Yet in the majority of cases where it is successful, the process remains considerably quicker and, if correctly managed, less expensive than liquidation and can have a positive effect on the economy” concludes Hoppé. 

Justine  Hoppé

Senior Legal Counsel, Business Rescue