Business Rescue vs. Liquidation’s affected parties:
Updated: Apr 22
Business Rescue vs Liquidation’s affected parties:
Any business, big or small, can run into trouble where they will either not be able to pay off debts or become insolvent. Whether this happens through mismanagement or situations out of the business’s control, it leaves the company between a rock and a hard place: do they go into business rescue or do they liquidate? The affected parties in both cases are generally the same. However, the focus and priorities in the two situations are quite different.
Business Rescue (Companies act 71 of 2008):
Parties affected after the start of the business rescue proceedings (i.e. parties to be paid from post-commencement finance) will receive priority over any pre-existing debt that needs to be settled. As it can be more challenging to get post-commencement loans and investments in business rescue circumstances, any debt incurred at that time enjoys priority over debts predating the commencement of the business rescue proceedings. Pre-commencement creditors might find that they need to be more patient and wait longer before their debt is repaid. This should not be cause for concern, however, as the whole idea of commencing with business rescue proceedings is to ensure that all creditors receive the best possible return while also getting the business back to running on a solvent basis.
Once the Master has appointed a liquidator over the judicial management of a company’s affairs, It is the objective of the liquidator to maximize the proceeds available in the business, for disbursement to all creditors. Trade is usually surrendered, and the company is winded-up.
Business Rescue, however, aims to provide a business in distress with some breathing space and an opportunity to restructure its affairs, that will enable profitable trade. Reasonable prospect is the key to business rescue. Business Rescue places a moratorium over all claims of a business. It provides the opportunity to restructure all aspects of the company.
The Business Rescue Practitioner: The Business Rescue Practitioner is one of the first parties to be paid during the business rescue process. This includes all the fees and expenses incurred by a said individual as well as any other claims arising out of the costs of business rescue. Payments are to be made from working capital or post-commencement finance. The exact amount to be paid will be invoiced by the practitioner, usually calculated according to an hourly rate, and is heavily influenced by the level of the practitioner – Junior, Experienced, Senior.
Employees: The employees’ remunerations are next on the list of individuals to be paid. Concerning the business rescue, this refers to all employee remunerations that become due and payable after the start of the business rescue process. Remuneration due prior to Business Rescue forms part of a claim as an unsecured preferent affected party. It receives an opportunity to vote on the acceptance of the proposed Business Rescue plan.
Secured parties: Secured lenders/creditors (i.e. lenders with collateral attached to the loan/supply) are to be paid next in the order in which the loan/supply was incurred. The order of payment of Secured Post-Commencement Finance vs Secured Pre-Commencement finance does differ in Business Rescue proceedings.
Unsecured parties: Unsecured lenders/creditors (i.e. no collateral attached to the loan/supply) are the last group to be paid. Any debt incurred before the commencement of the business rescue is to be paid after all of the above has been settled.
Liquidation (Insolvency act 24 of 1936)
The objective of Business Rescue is to save a financially distressed business. If a reasonable prospect cannot be restored or identified, a company should be placed in liquidation. Once a business is placed in liquidation, their assets are taken control of in such a manner as to pay creditors according to their ranking and then spread the residual funds amongst the shareholders. The same concern for the future existence of the business and best possible return for creditors and shareholders is not given in liquidation as it is in business rescue. Before any creditor can be paid, they need to prove their claim at the official creditor’s meeting. The classification of affected parties is determined by the statutory provisions of the act as set out by each act.
Master, liquidator, realization cost: Once a business is placed in liquidation, there is a fair bit of administration that is involved, and the parties responsible for these activities are paid first. This includes the liquidator acting on behalf of the company, the Master of the High Court, and all other costs incurred in realizing the liquidation. This includes any and all VAT added to these services.
Secured creditor & Mortgages/Leases: After the incurred administrative fees have been paid, the liquidation of assets is used to pay all creditors with a proven secured claim, i.e. a claim secured by an asset or assets. These creditors will receive the entire proceeds of the asset(s) after administrative deductions.
Interest on secured claims: Any interest due on the secured claims, dating back a maximum of two years, is part of the secured claim that needs to be paid.
Employees & PAYE: Once all the administration fees and secured creditors have been paid the remaining funds (free residue) are used to pay the list of remaining preferent creditors, first of which are the employees. Any outstanding remuneration is to be paid to the employees for a maximum three month period. This includes the payment of leave/holidays due and any severance or retrenchment pay due. The payment of remuneration includes PAYE taxes owed to SARS.
SARS outstanding TAX: Next on the list of preferent creditors is SARS and all of the business’s unpaid taxes of any kind.
Unsecured Preferent & General bond: Any proved unsecured claims (i.e. a claim not secured by an asset) and claims secured by a general mortgage bond are then payable. This payment includes any interest owed on the claim.
Unsecured Non-preferent: Any balance remaining from the free residue will lastly be used to pay entities with proven unsecured non-preferent claims.