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 Business rescue or liquidation

What is the difference between the two legal processes?

In the current tough economic trading conditions; there are many businesses that are under severe financial pressure.

Yesterday we received the following query and will again try to answer the question put to us here in this blog.

 “My family business is a company and has been operating successfully for nearly 20 years. Over time I’ve also managed to get a few investors to invest money in the business. 2018, however, has been really tough and we are struggling to make ends meet. I feel that we have arrived at a point where its decision time about the future of the business and how to manage it. I was wondering whether you can advise me as to whether or not liquidation is the best route to follow and perhaps you might advise me to rather consider the option of business rescue. Could you please also explain the difference between these two options?”


There are no easy answers to this question.

In these difficult economic times, many companies and businesses 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 No 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 period of six months or if 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, its directors and management must then consider whether to file for liquidation or undergo business rescue. 

To make this decision, the objective of each of these two options must be considered as well as the process that has to be followed in proceeding with the formal application to a court for either option.


Liquidation:

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 and objective 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 a formal application to a court by creditors and other 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 debts; but can continue trading. Any income then derived will go into the insolvent estate, and may not be used by the company. Once the date has been selected the shareholders of the company must resolve, by special resolution, to place the company under liquidation and an accompanying court application has to be drawn up and submitted to the High Court.

The court will first issue a provisional liquidation order before issuing the final order at a later date and proper notice must be given to all creditors before the final liquidation order is granted. Once the provisional liquidation order is granted no creditor may institute any legal action or proceed against the company and any legal action or proceeding so instituted will be suspended.

The Master of the High Court will appoint a liquidator for the insolvent company who will determine what the assets and liabilities of the company are, make decisions for the company, hold meetings with the company’s creditors, collect outstanding debt from its debtors, sell assets, and finally pay creditors and finalise the insolvent estate, after which the matter will be closed.

Business Rescue:

On the other hand; to initiate business rescue proceedings voluntarily the board of the company may resolve to place the company under business rescue if the company is financially distressed and there appears to be a reasonable prospect of rescuing the company. The resolution may not be adopted by the board if liquidation proceedings have been initiated by or against the company and will have no force or effect until it has been filed with the Companies and Intellectual Property Commission (“CIPC”). The company must notify all its creditors and appoint a business rescue practitioner (“BRP”) within five days after the resolution has been adopted and filed with CIPC.

During business rescue proceedings no legal action, including enforcement action, may be instituted against the company, except with written consent thereto by the BRP or with leave of a court. The BRP is responsible for assessing the affairs of the company, holding meetings with creditors, other affected persons and management of the company and compiling a business rescue plan which needs to be voted on and accepted by all affected persons.

The business rescue plan must indicate amongst others the probable dividends creditors would have received if the company was placed under liquidation and must prove that under business rescue the company is able to generate a better monetary return for its creditors than in the event of liquidation. The plan must further set out the advantages of business rescue over liquidation.

Once the business rescue plan is adopted it binds the company, creditors and holders of any securities against the company.

Business rescue, when compared to a liquidation effectively, provides for the company’s debt to be managed and contracts restructured and reorganized in order for the company to continue to trade on a solvent basis rather than selling off all of the company’s assets and the company being shut down as in the case of liquidation.

If it does happen that business rescue is unsuccessful, the BRP may apply to a court to have the company liquidated.

The business rescue process is, therefore, the last lifeline to try to save a company and also the jobs of the employees of that company and turn a company around before it has to close its doors when liquidated.


In the above case of the inquiry, the clients' views on the potential to rescue the company and the degree of financial distress the company is in, will finally determine which of these two proceedings are the most appropriate route (if any) to be followed.

Once again we stress that it always advantages to seek the assistance of a legal practitioner to advise you properly of the facts of each particular case; as they will always be different.

 Please visit our website at www.legaladviceoffice.co.za or send us an email to This email address is being protected from spambots. You need JavaScript enabled to view it. and we will respond to your legal queries within 48 hours.

About our author:

Hugh Pollard (Legal Consultant), has a BA LLB and 42 years’ experience in the legal field. 22 years as a practicing attorney and conveyancer; and 20 years as a Legal Consultant.

082-0932304 (Hugh’s Cell Number)

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