There’s a lot to consider when starting a business in South Africa, including what could happen if the business doesn’t go according to plan. This is why it’s important to understand business rescue and how it works.
Business rescue is a process that businesses under financial distress go through. It could help to save a business going through a rough patch, although it’s not a process that you ever want to end up going through.
Follow this guide for everything you need to know about business rescue and how it works.
What is a Business Rescue?
Business rescue is a legal route for financially distressed businesses to take as an alternative to liquidation. The aim of business rescue is to save businesses that are struggling financially and prevent them from closing down.
Business rescue forms part of the Companies Act 2008, which states the clear process of how business rescue needs to be done.
Business rescue could be voluntary or ordered through the court.
What Happens When a Company is in Business Rescue?
Whether a company should be placed under business rescue or not depends on whether the company is financially distressed and unable to meet its obligations. Business rescue is also only implemented if there is a reasonable prospect of being able to rescue the company.
As stated in the Companies Act 2008, when an enterprise is in business rescue, the company and the management of its affairs need to be temporarily supervised by a business rescue practitioner.
If approved, a business rescue plan is implemented by the company. This plan includes processes to restructure the business, property, debt, affairs, other liabilities, and equity in an attempt to rescue the company.
There are three ways that business rescue may be commenced. These are:
- A voluntary business rescue process decided by the company, also known as a company resolution
- Business rescue may be required in terms of a court order. The court order would be brought about by an affected person, like a shareholder or creditor
- Business rescue may be court-ordered during liquidation proceedings
Once the business rescue proceedings have commenced without any objections, the company needs to appoint a business rescue practitioner who meets the specific requirements set out in the act.
If the business rescue proceedings are compulsory, then the court may also appoint an interim business rescue practitioner. The company’s directors need to cooperate with the business rescue practitioner and cannot prevent their duties.
If the company has the right business insurance this can help to protect its property and income, and safeguard the business against liability claims.
What is the Difference Between Business Rescue and Liquidation?
When a company is in financial distress, they have two options: liquidation or business rescue.
Liquidation is the most common proceeding for companies that aren’t able to meet their financial obligations. Liquidation proceedings are when the company stops trading, and all of the business’s assets are sold and distributed to any creditors.
So, liquidation is all about closing the business in the most equitable way, whereas business rescue is focused on rehabilitating and saving the business to let it keep trading.
Liquidation happens when there is no hope for the business to continue operating, and closing it down seems like the only solution. Business rescue, on the other hand, is implemented when there is a reasonable prospect of being able to save the company and get it back on track.
How Does Business Rescue Affect Employees?
When a company goes into business rescue, employees of the company remain employed. Employees of the company are still entitled to protection against unfair dismissal, unfair labour practice, and any other rights that the Labour Relations Act guarantees.
If the business owes employees any money before it went into business rescue, then the employee becomes a preferred unsecured creditor. This means employees will be paid before other creditors.
The business rescue plan needs to clearly outline what will happen to affected employees.
When putting together a plan for your small business funding and development, it’s always important to consider what could possibly go wrong and what path would be available if this is the case. Business rescue is one such path.
When done properly, it can end up saving businesses that would have otherwise had to close down. It’s important to have a strong business plan in place to help keep businesses on the right track and anticipate or prevent possible financial disasters.