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Business rescue procedure contributes to huge decrease in liquidations

25th June 2013

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Indicative of the value of the business rescue procedure as a mechanism to assist the survival of struggling but viable companies is that the number of liquidations in May this year dropped by a huge 51.7% compared to the same period last year, according to figures released by Stats SA yesterday.

Adam Harris, Director of pan-African corporate law firm, Bowman Gilfillan, noted that: “The implementation of business rescue is without doubt a factor which has contributed to this decrease.

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“Although by no means a new concept, business rescue is now firmly entrenched on our legal landscape. But, it still meets with a mixed reception. Some financial institutions and lenders view it with suspicion, while it is enthusiastically embraced by debtors seeking time to re-arrange their affairs.”

In terms of the “new” Companies Act of 2008, business rescue was introduced to maximise the likelihood of a company or close corporation (CC) continuing in existence on a solvent basis, or if this is not possible, to result in a better return for the company’s creditors.

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“The traditional model of liquidation, in part replaced by business rescue, has been accused of causing value destruction and job losses. This is no longer appropriate in a modern companies regime - all the more so in South Africa given our high level of unemployment and the multiplier effect of job losses,” said Mr Harris.

He added, however, that not every company or CC that is in financial trouble is a suitable candidate for business rescue. As the Courts have held, “business rescue proceedings are not for the terminally ill. Nor are they for the chronically ill. They are for ailing corporations, which, given time, will be rescued and become solvent.”

According to Mr Harris, the business rescue mechanism has been subject to some abuse, which is reflected by the number of High Court judgments dismissing applications for rescue, instead often granting a liquidation order.

“Of the 40 or so judgments which have dealt with contested applications for business rescue, in only four cases was business rescue actually granted. The courts have set the requirements for a rescue to be granted, and there has been some criticism that the bar has been set too high. Instead, it should be up to the business rescue practitioner to determine how best to rescue the company. The courts, it has been argued, are over-emphasising their role as ‘gate-keepers’”, he added.

Under the right circumstances, it is possible to give effect to what was intended by the law-maker, that is, saving the business, or giving a better dividend to creditors. There have been some recent high-profile cases where business rescue has been implemented, and time will tell how many are successful.

Said Mr Harris; “Looking at the time periods prescribed, business rescue is intended to take place over a short period of time. This depends on the complexities of the matter, but experience so far shows that the law-maker appears to have been overly optimistic with what is realistically achievable.

“However, business rescue offers a flexible mechanism. It can be adapted to deal with virtually any type of business. If the underlying fundamentals are in place, or can be fixed by the business rescue practitioner, it is a powerful alternative to the traditional liquidation.”

In practical terms, the business rescue practitioner is appointed to run the business. A “moratorium” is put in place, protecting the company from claims by its creditors, while the practitioner investigates how best to restructure and, ultimately, rescue the company.

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