In today’s uncertain economic climate, many businesses face financial instability such as cashflow problems, or, at worst, trading in insolvent circumstances (where its liabilities exceed its assets) resulting in an inability to pay creditors. In such cases, businesses have various mechanisms available to them:
Liquidation (also known as “winding up”) is completed by way of an Application to the High Court and can be voluntary (when applied for by the Company’s Directors or members of a Close Corporation) or involuntary (when applied for by the Company’s creditors). When liquidation proceedings are launched, the business ceases to operate (if they are still operating) and following liquidation, the business will cease to exist. Creditors may often only receive a portion of the debt owing to them, if anything at all. It is important to consult a liquidation specialist when considering liquidation as there are certain implications such as the Directors becoming liable for the business’ debts upon liquidation. Liquidation is governed by legislation.
Business Rescue refers to proceedings available to a Company that is financially distressed, to facilitate the rehabilitation of that Company (which must show that it has a reasonable prospect of trading out of its distressed circumstances). The Business Rescue process is initiated on Resolution by the Board and a Notice is filed with CIPC. Business Rescue places a temporary moratorium on the rights of creditors against the Company. Unlike Liquidation, the business continues to trade throughout the Business Rescue process. The Company is placed under supervision of a Business Rescue Practitioner who steps into the shoes of the Directors (managing) the Company’s affairs, business and property. The process is driven by the Company’s creditors who vote on a business plan to rehabilitate the business. Again Creditors may only receive a portion of the debt owing. It is important to appoint an experienced and honest Business Rescue Practitioner. This process too is governed by legislation.
Turnaround refers to the steady and positive financial recovery of a Company that has been performing poorly for a prolonged period of time. For successful turnaround, the Company needs to identify problem areas, consider changes in management and develop a problem-solving strategy to be implemented. The turnaround process is often facilitated by a “Change Consultant” or “Business Development Consultant” who can be employed from outside the Company, if circumstances allow. Turnaround is an internal process not governed by legislation.