Page 29 - Q&A.indd

Liquidation or business rescue - what is the
difference?

July 2017

“My family company has been operating successfully for nearly
20 years. Over time I’ve also managed to get a few investors
into the business. The last year however has been tough and
we are struggling to make ends meet. I feel its decision time
about the future of the business, but was wondering whether Commercial
liquidation is the best route or must I rather look at business
rescue? What is the difference between these two options?”

In difficult economic times, many companies are having to come
to terms with making tough financial decisions. Filing for liquidation,
has in the past been a route considered by many companies. The
Companies Act 71 of 2008 (“Companies Act”), introduced another
intervention mechanism, namely business rescue, as an option to be
considered by a company that is in financial distress.

In terms of the Companies Act, a company will be considered to be in
financial distress, if the company is not in a position to reasonably pay
all of its debts as they become due and payable within the immediately
ensuing six months or it appears reasonably likely that the company
will become insolvent in the immediately ensuing six months. Once it
has been established that a company is in financial distress, it must
then be considered whether to file for liquidation or undergo business
rescue.

To make this decision, the objective of each option must be considered
as well as the process to be followed by a company.
With liquidation the objective is to dispose of the assets of the company
and apply the proceeds thereof to pay the creditors of the company
in terms of a legal order of preference. The purpose of business rescue
on the other hand is to rehabilitate the financially distressed company
and to rescue it by means of a plan that will help the company to turn
its financial distressed position around and trade on a solvent basis
again. Liquidation and business rescue proceedings can be launched
either voluntarily or by way of an application to court by creditors and
affected parties.

To initiate the voluntary liquidation process a company must decide on
a date for the institution of liquidation proceedings. As from this date the
company will not be allowed to incur any further debt but can continue

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