When Is It Time for a Business to Enter the Debt Rescue Process?

Many businesses hit a roadblock or some type of hindrance, and because of it, face cash-flow problems. These businesses practically become financially distressed, unable to pay creditors and salaries. If they continue on the path, these companies are likely to become insolvent within six months. In such instances, the directors or any affected persons can apply to court to initiate the business debt rescue process.

The business debt rescue process enables a distressed enterprise to get help. Any creditor claims against the company undergoing the business debt rescue process are stayed. This means the business gets a bit of operating space and time to get its cash-flow in order.

Should a financially distressed firm be liquidated, then job losses are inevitable. Since a company does not need any assets to liquidate, the creditors stand to lose money. Rather than having a firm liquidate without benefit to the creditors, one of the creditors may see it as a better option to apply for implementation of the debt rescue process. In this way, the company can get back on track and the creditors have an improved chance of being paid what is owed.

The debt rescue process cannot be initiated if liquidation proceedings of the company have already started. As such, it is in the best interest of affected parties to have the business go through the debt rescue process. Where the appointed business rescue practitioner, after thorough review of the company’s situation, finds that there is no reasonable likelihood of the company getting back on track and staying solvent, then the practitioner reports such and liquidation of the company can commence. It is thus a better option to first initiate the debt rescue process before applying for liquidation of the company.

 

What is Business Debt Rescue?

It is the process whereby the rehabilitation of a financially distressed company is initiated. The business rescue practitioner is appointed to temporarily supervise and manage the company’s financial affairs and property. All creditor claims are temporary stayed. The business debt rescue plan is developed, and if approved by the affected persons, such as the creditors, the restructuring of the company’s debt, properties, equities, and liabilities takes place.

This is done in a manner that increases the potential of the business staying solvent. If it is impossible to keep the firm solvent through the process, then a plan is set in motion to ensure improved return for the shareholders and creditors as opposed to the minimum, or even no benefit to the shareholders and creditors when the company is liquidated.

The aim is thus to ensure the restructuring of the financial affairs of the distressed firm. To determine whether a firm is financially distressed and thus likely to benefit from the debt rescue process, the firm must be reasonably unable to pay debts as the debts become due within the next six months. A firm that is likely to become insolvent within the next six months thus qualifies for entering the debt rescue process.

 

Importance of Appointing a Competent Business Debt Rescue Practitioner

Since the business in distress is already at risk of failing, it is essential to appoint a practitioner that is competent, committed, and ethical. The practitioner must be able to identify instances of fraud and illegal activities, and must report such to the relevant authorities immediately. Such a practitioner must be ethical and assertive in dealing with such situations to ensure the rescue of the business. If it should become apparent that the business could not be rescued through the process, then the practitioner needs to notify affected persons immediately to ensure the necessary steps can be taken to minimise losses for the creditors.

To this end, it is imperative to appoint a practitioner from an experienced insolvency law firm or a respectable accountancy firm to help ensure the success of the business debt rescue process.

Get in touch with our team of insolvency lawyers if you want to apply to court for business debt rescue or need assistance in appointing a business rescue practitioner, as it is important to appoint a practitioner that has the best interest of the affected parties and the solvency of the business at heart.

 


Disclaimer: This article is for informational purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.

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