Does Business Rescue Work and How Can a Debt Practitioner Help You to Rescue Your Business?

The most prominent question that company directors ask when having to decide between liquidation and business rescue is whether business rescue really works. To understand why companies opt for the latter, we have to consider the benefits of the process as opposed to liquidation.

For a business rescue to be successful, the process must ensure that the entity returns to a state of solvency. This means it must be able to pay its debts, and the liabilities must no longer exceed the assets. With liquidation, the assets are sold and proceeds distributed among the creditors according to the requirements of the Insolvency Act. However, the company does not always have physical assets that can be sold. To this end, the creditors are placed at a disadvantage, as they may end up with nothing even though the company owes them large amounts.

 

Benefit to The Affected Persons

business rescueEmployees are also creditors of a company in distress. They may realise that once the company is liquidated, they will be out of jobs, but with no prospects for receiving any compensation. Business rescue provides the potential benefit of a better return for the creditors. The process thus ensures a higher return for the affected parties. With liquidation, the creditors can hope for 20% out of the rand, but with the restructuring of the company’s debt and organising its assets, as well as streamlining its operations, it is possible that the company is only able to pay part of its debts back.

If the company can be saved, the creditors do not necessarily lose a client. It may be a short-term cash-flow situation that can be solved.

 

Return to Solvency

Indeed, if the main causes for the company’s financial distress are adequately addressed, it is possible to bring the firm back to a state of solvency. It may even be possible to make it profitable again. The creditors may need to write some of the debt off to help the company achieve solvency status. When the company is placed under liquidation or applies for such, all the debt is frozen. The creditors must wait for the winding-up process to be completed before they can hope to receive the minimum benefits. The company comes to an end, and the creditors lose a customer.

With business rescue, the company can still trade. With a limit on the time it must take to bring the business back to solvency, the practitioner usually works hard and fast in restructuring debts and management aspects. Creditors thus have reason to support the business rescue process.

 

Economic Contribution

A liquidated company seizes to exist, whereas if the business rescue process is successful, the entity can return to an economic active state. This means tax contributions and economic contribution to the country.

 

Asset and Employee Protection

With the unemployment rate already high, it is essential to prevent job losses. Liquidation does not help to ensure employment for the employees. Indeed, they have no other choice than to seek new employment. The disruption to their lives and income can be devastating. With the business rescue process, some of the employees may lose their jobs, but the larger part of the workforce may have a future at the rehabilitated company.

With several advantages associated with business rescue, one has to ask whether it really works. The unfortunate truth is that there is no guarantee of success since the business model and industry in which it operates play roles. An entity that operates within the retail industry is more likely to return to a positive cash-flow situation within three months than a property investment firm. The latter’s assets are not as easy to sell. It takes longer than selling products to get the cash-flow in a positive state.

Not all businesses can be rescued. The directors may have traded recklessly, causing excessive debts. The creditors may oppose the rescue plan, and delays in the process can cause the business rescue to fail. The product that the company sells may be redundant or the company’s image may be so poor due to defective products that it can be difficult to change the public perspective.

With liquidation, it is possible to get rid of up to 80% of the debt. However, the company must close doors. With business rescue, the company doors stay open. Employees must still be paid. This means the company still has the expenses, and only with excessive streamlining is it possible to bring it back to a state of solvency. The business must have a fair chance of getting back to the solvent state before it can qualify for business rescue.

 

Role of The Business Practitioner

The business practitioner is appointed to oversee the company’s journey back to solvency. The practitioner investigates the financial records of the entity, its processes, and management. Once done, a rescue plan is drafted. The practitioner thus takes the time to understand the business operations. Consultation with all the affected persons is essential. As such, the practitioner has meetings with the creditors to determine which debts can be written off and whether the creditors are willing to reduce interest rates.

The management structure may require changes. The practitioner has to perform all the above in three months. If it is not possible to complete the business rescue proceedings within the three months, the practitioner must apply for an extension of the period and provide progress reports at the end of each month. If the practitioner finds that the business cannot be rescued, then the court and all affected persons must be informed.

Though the success rate is low, there are instances where the process works well in helping companies recover from cash-flow problems. Some of the assets may be sold during the process and operations are streamlined. This helps to increase the probability of long-term success.

 

When To Consider Liquidation As Opposed To Business Rescue

If the debts are excessive, it may be a better option to voluntary wind up the business entity. In this instance, the directors may also have to apply for sequestration where they have signed surety for the business debts.

Where it is in the best interest of creditors and the South African economy to ensure the solvency of a company, such as SAA, business rescue is the preferred method for dealing with the solvency problems of the business entity. In the case of SAA, it is the national flight carrier and thus plays an important role in terms of transporting people and goods internationally. It is also a large employer. Liquidation of the company means large-scale job losses. With the proper restructuring of the company, the assets, and management, such an entity can be saved to the benefit of all affected persons.

Of all the companies that have been placed under business rescue in 2011, a third is still functioning. As such, there is a chance of helping a business to get back on its feet. During the business rescue process, the company has legal protection against creditor actions. In many instances, the period of protection can make a difference in helping to restore cash-flow and thus rehabilitate the company.

 

Where to Get Help

Consult our experienced insolvency attorneys regarding the process of business rescue to determine whether your company can be rehabilitated from its financial distress.

 


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

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