Simply put, a liquidation and business rescue can be compared to a shut down versus rehabilitation.
Liquidation (also known as “winding up”) is when a debtor company which owes money to a creditor is wound up. The creditor would typically apply to court to after having demanded payment from the debtor company to no avail, to have the debtor company placed into liquidation. (“compulsory liquidation”).
Members and directors of companies may also apply for winding up where the company’s liabilities clearly exceed its asset and there appears to be no prospect of the company paying its debts as they become due. (“voluntary liquidation”).
The purpose of liquidation proceedings is to shut the company down and have a liquidator appointed to dispose of the assets of the company and pay whatever proceeds might become available, to the creditors of the company by means of a legal order of preference.
During liquidation the company cannot continue to trade through its insolvency.
Liquidation of the company results in the establishment of a concursus creditorum (coming together of creditors) and the company’s assets are frozen. Civil proceedings are stayed and the attachment or execution of judgments after commencement of proceedings are void.
Business Rescue (also known as “rescue proceedings”) are proceedings brought about to facilitate the rehabilitation of a company that is financially distressed. These proceedings place the company, its management and affairs under temporary supervision whilst the business rescue practitioner develops and implements a plan to rescue the company by restructuring its affairs business property debts and other liabilities and equity in a manner that maximizes the likelihood of the company continuing in existence on a solvent basis.
The proceedings may be initiated by court application or on Resolution by the Board of directors, the latter being filed with the Companies Intellectual Property Commission to change its status.
The process is driven by the Company’s creditors who vote on the business plan to rehabilitate the business.