Business rescue or liquidation - When is it time to make the call?
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A Big corporation or small enterprise - no business is immune to the current financial disaster 2020 has chauffeured in.
We’ve seen the business rescue troubles of SAA unravel before our locked-down eyes, Edcon and Comair sending up an SOS flare and reports of indeterminable businesses (small and large) staring down the barrel of the Covid-19 gun. Company directors, management and owners remain in lockdown paralysis, hands tied, many unable to trade, raising the question: how much longer must we endure?
The fact of the matter, according to PJ Veldhuizen of Cape-based law firm Gillan and Veldhuizen Incorporated, is that directors of a company remain obligated by their legal and fiduciary duties. The CIPC has made it quite clear that the enforcement of section 22 of the Companies Act, although not invoked until 60 days after the lifting of the national state of disaster, remains. A company may not carry on its trading recklessly, with gross negligence or in insolvent circumstances. To add to this, the moratorium granted by the CIPC does not prohibit any third party from instituting a claim, leaving any business under stress wide open.
Veldhuizen says that it’s time for business to honestly asses their position, apply the financial distress test and consider their options. Companies should perform the test to ascertain whether they are in “financial distress”, he says. “If the majority of the board decide that a company is in financial distress they have a few options to consider:
(a) resolve as a board to go into business rescue
(b) if it is too far gone and there is no reasonable prospect of trading out, file for liquidation or
(c) advise affected parties why they have elected not to resolve to enter business rescue.
There are two main considerations in determining feasibility of business rescue, namely whether the company is financially distressed and whether there are any reasonable prospects of the business once again being profitable. For a company or close corporation to be regarded as being ‘financially distressed’, there must be no reasonable prospects that the company will be in a position to pay its debts as they become due and payable, within the immediately ensuing six months or else it must be reasonably likely that the company will become insolvent, within the immediate six months. The South African lockdown regulations are certainly going to test the strength of many a business, especially those who fall within level 3,2 and 1 of the lockdown ease.
Although business rescue has taken a bad rap thanks to several failed rescues, it stands as a viable option for a business to negotiate its way through and possibly out of this stressful financial period.
“This is not the time for analysis paralysis,” concludes Veldhuizen. Directors and business owners have a duty to their company, staff members and stakeholders which should not be ignored. You may be required to take steps which could include business rescue an offer of compromise to your creditors or liquidation. “The failure to take these steps can render the board and those managing the trade and affairs of the company personally liable for its debts,” he warns.