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Business Rescue vs Liquidation 

If your business is financially distressed, you may consider liquidation or business rescue to assist. Both are serious steps which must be carefully considered.

The purpose of Business Rescue is to restructure your business, to make it solvent and stable. It takes the business out of your hands for some time and entails the temporary supervision and management of your business, its affairs, property, and business activities by a Business Rescue Practitioner (BRP). There is also a temporary stay on claims against your business and its property during the Business Rescue proceedings.

The purpose of liquidation is not to rescue a business but rather to end it when it is insolvent. This entails an application to court and various procedural requirements. Further, the company cannot trade. A liquidator, appointed by the Master of the High Court, will take over the estate of the business and will facilitate its liquidation for the benefit of the business’ creditors.

Business rescue can also become liquidation proceedings. The BRP will prepare a Business Rescue plan setting out how to save your business. The BRP will determine if there is a reasonable probability of rescuing the business. If not, liquidation of your business will be considered.

Only consider Business Rescue proceedings if you are willing to accept the potential conversion of Business Rescue to liquidation proceedings. Liquidation should be considered only when your business is not eligible for Business Rescue- in other words, there is no business to rescue or there are no reasonable prospects that your business can be rescued.

The Process of Liquidation 

Liquidation relates to companies governed by the Companies Act and close corporations. A company cannot continue trading if it is insolvent.

An application for liquidation of your company may be made to a High Court with jurisdiction. The application can be made by your company, one of its creditors, one of your company’s members, jointly by any or all of the aforementioned entities, or the Master of the High Court.

Your application to the Court must be accompanied by a certificate by the Master, “issued not more than ten days before the date of the application” confirming that security was given as required.

A copy of your application and all supporting affidavits must be lodged with the Master. A copy of your application must also be provided to:
  1. every registered trade union that, as far as you can reasonably ascertain, represents any of the employees of your company and to the employees of your company;
  2. the South African Revenue Service; and
  3. to your company, unless your company made the application.

In addition, you must, before or during the hearing, file an affidavit by the person who furnished a copy of the application which sets out the manner that the application was sent to the above parties.

If your company elected to be voluntarily liquidated, there must be a resolution to this effect. The directors and officers of your company must also prepare a Statement of Affairs setting out your company’s affairs which must be presented before the meeting at which the resolution will be made. The Statement of Affairs must be lodged, in duplicate and certified, with the Master within 14 days from the date of the liquidation order.

The liquidation will commence on the registration of a special resolution of your company authorising the liquidation of your company. Certified copies of these resolutions must be lodged with the Master of the High Court within 28 days of their registration. Your company must further give notice of the voluntary liquidation in the Government Gazette within 28 days of the registration of the resolution authorising the liquidation of the company.

When your company is liquidated, all property of your company vests in the Master, or, where a liquidator has been appointed, the liquidator. The Court may order directors, officers, and others to deliver property to the liquidator to pay into the estate. When your business is liquidated, all contracts concluded you’re your business remain in effect. The liquidator then decides whether to abide by each contract or terminate it, depending on what is most beneficial to your creditors. The liquidator will also have the power to decide whether to terminate or continue employment contracts of your company. The decision must be in line with the LRA and the BCEA. Employment contracts are suspended upon the liquidation of your company.

Your company will cease to operate after liquidation as all assets will be sold, liabilities settled, and the residue will be paid to shareholders, if any.

Consult with an attorney specialising in liquidation before you take any steps. The process can be quite onerous and may have dire consequences which must be considered and weighed against the consequences of not liquidating your business.

The Process of Sequestration 

Sequestration relates to the insolvency of a natural person or trust. It is similar to liquidation, but this relates to the insolvency of companies or close corporations.

Sequestration consists of the surrender of the insolvent’s estate and the declaration of the insolvent as bankrupt. The estate is managed by a trustee or curator for the benefit of the estate’s creditors.

Sequestration can be voluntary or compulsory. Compulsory sequestration is where creditors apply to a Court to have a debtor’s estate sequestrated. Voluntary sequestration is where the debtor applies to a Court to sequestrate their own estate.
The Insolvency Act, 1936 (the Insolvency Act) applies to the sequestration of an estate. A debtor who has insufficient assets in their estate to discharge their liabilities may have their estate sequestrated a Court.

The purpose of sequestration is to ensure an equitable and organized distribution of the debtor’s assets to their creditors. Certain creditors will be determined to be preferential creditors, meaning that they will be paid first.

To voluntarily sequestrate your estate, you must be able to prove that you are insolvent, and that sequestration would benefit your creditors. If you are able to do this, you can apply to Court in accordance with the following process:

Step 1: Not more than 30 days but no later than 14 days before the hearing date for your application, publish a notice in the Government Gazette and a newspaper that your creditors will likely have sight of, announcing your sequestration. The notice must include your full details, the date of the hearing, and where the stamen of affairs will be kept for inspection by creditors. You will need to prove publication of this notice through an affidavit with copies of the published notice attached.

Step 2: Within 7 days of publishing the notice, you must supply your creditors with copies of the notice, insofar as you are aware of the creditors’ addresses. The notice must also be sent to SARS. It is best practice to use registered mail. You will be required to prove compliance with this step by affidavit which explains the process used to deliver the notice.

Step 3: Prepare a Statement of Affairs detailing your income, expenditure, assets, debtors, creditors. It must also include details of your financial situation and an affidavit confirming accuracy of the Statement of Affairs. The Statement of Affairs must be submitted to the Master’s office, in duplicate.

Step 4:
Submit an application for surrender and hearing to Court. This will consist of a notice of motion, affidavit and supporting documents. Your application will show the Court that you have met the above requirements and that you are insolvent. Your application will be placed on the court roll, and you will receive a hearing date. On the hearing date, the court will accept your application to surrender your estate or reject it.

The benefit of sequestration is that some of your debt will be written off, legal action against you is stayed, and, once you are rehabilitated, full control of your debt-free estate will be returned to you. Once rehabilitated, your credit status will change from sequestrated to rehabilitated, to be automatically removed from your credit record after 5 years. This process is fairly complicated. It is recommended that you make use of legal assistance when you consider voluntary sequestration or when your estate is subject to compulsory sequestration.