LAW: Business Rescue: a Year Later
Recent Gauteng Business News
The main purpose of Business Rescue is to offer an alternative to liquidation by allowing relief for financially distressed companies, assisting with operational continuation. This in turn aims to limit the number of business failures, ultimately aiding the preservation of jobs.
The amount of Business Rescue cases being handled by Coface South Africa in the first half of 2012 has seen a significant increase in numbers and value since its promulgation in 2011.
Once a Business Rescue order has been granted by the court, collections activity ceases, allowing the debtor a window period of relief from payments due. But creditors become reliant on the will of the majority creditors.
To date, there are instances where Business Rescue has already been effective. These are cases where the buyer has sufficient assets but lacks the cash flow to meet their creditor commitments.
In such instances liquidation would defeat the purpose. This is because, although the buyers liabilities exceed their assets, the buyer would within a reasonable period be in a position to settle each creditor in full without compromise.
Where the buyer does not have sufficient assets to ensure solvency, keeping in mind that insolvent trading is considered an offence, applying for Business Rescue could be deemed to be an act to delay the inevitable.
It is also important to note that a formal application must be made to the Court, and creditors are to be afforded the opportunity to consider and agree to the Business Rescue plan. Creditors are at all times involved in the process and the rescue practitioner is obliged to meet with the creditors and make recommendations as to how the debt is to be settled.
This process is still new and largely untested. This has in some cases led to unproductive and inconclusive discussions between the debtor and their creditors, resulting in applications ending up in court. This further increases costs, creating an additional financial burden for an already cash-strapped debtor.
The granting of the court order will directly impact on how the collection will be handled because creditors will be bound by the approved Business Rescue plan. It forces them to accept the decision of the largest creditors and could result in extended settlement periods.
As Business Rescue does not hamper the buyers ability to trade, the process may be open to abuse to avoid litigation for non-payment.
Business News Sector Tags: Business|