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  • Business Rescue Administration and Liquidation: What Is The Difference?

Business Rescue Administration and Liquidation: What Is The Difference?

14 April 2022

BUSINESS RESCUE (also known as “rescue proceedings”) Before the enactment of The Corporate Insolvency Act No. 9 of 2017 (hereinafter referred to as “the Act”) financially distressed companies traditionally only had the option to liquidate. The Act has created another option in the form of business rescue proceedings.

Companies which are in financial distress can be placed under business rescue where after a business rescue practitioner will be appointed. The main objective of business rescue proceedings is to reorganise and restructure the business to make it a more profitable and stable entity. This is achieved by placing the company and the management of its affairs, business, and property under temporary supervision. Furthermore, it provides for the development and implementation of a business rescue plan.

The proceedings may be initiated by court application or on Resolution by the Board of directors, the latter being filed with the Patent and Companies Registration Agency (PACRA) to change its status. A company must be in financial distress before it can file for business rescue. A company will be deemed to be financially distressed for purposes of this Act if:

  1. it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months; or
  2. it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

The ultimate objective of business rescue proceedings is to save companies. This should, if possible, be the preferred course of action for a financially distressed company since it has the potential to preserve jobs and to reinstitute a stable and solvent company which can contribute to the country’s economy.

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LIQUIDATION (also known as “winding up”) is when a debtor company which owes money to a creditor is wound up.  The creditor would typically apply to court to after having demanded payment from the debtor company to no avail, to have the debtor company placed into liquidation. (“compulsory liquidation”).

Members and directors of companies may also apply for winding up where the company’s liabilities clearly exceed its asset and there appears to be no prospect of the company paying its debts as they become due. (“voluntary liquidation”).

The purpose of liquidation proceedings is to shut the company down and have a liquidator appointed to dispose of the assets of the company and pay whatever proceeds might become available, to the creditors of the company by means of a legal order of preference. During liquidation the company cannot continue to trade through its insolvency.

Liquidation of the company results in the establishment of a concursus creditorum (coming together of creditors) and the company’s assets are frozen. Civil proceedings are stayed and the attachment or execution of judgements after commencement of proceedings are void.

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