If your business is operating under financial stress then, depending of the severity of that stress, you probably have 1 of 3 options
1. Informal turnaround
2. Business Rescue
3. Liquidation.
1. Informal Turnaround
Of the above, informal turnaround, is probably by far the preferred course of action; however, this option will only be available to business owners who are proactive and take remedial action when problems begin to manifest.
The principles of the turnaround process are similar to a business rescue, but the process occurs in different environment as it the business owner/s who is in control.
2. Business Rescue
If it is reasonable unlikely that a company will be able to pay all of its debts as they fall due in the next 6 months or it appears reasonable likely that the company will become insolvent within the next 6 months then they are compelled to apply for business rescue. The process may be initiated by the directors of the company or a creditor.
The provisions regarding business rescue are provided in Chapter 6 of the Companies Act and afford companies in business rescue certain protections against its creditors. During the business rescue process the company is under the control of a business rescue practitioner who is obliged to follow a well-defined process.
A successful outcome of the business rescue process will see control revert to the directors and the business continuing to trade on a solvent basis. An unsuccessful business rescue will result in the liquidation of the company.
3. Liquidation
When the liabilities of a company exceed its assets, the company is insolvent and liquidation procedures are required to be followed.
In a nutshell, the purpose of a liquidation is to realise the assets of the company at their best advantage so that the return to the creditors is maximised. As the company’s assets are disposed the operations are terminated.
The liquidation process is under the control of a liquidator.
The COVID pandemic has created a completely unknown operating environment not only in South Africa but globally as well. Unfortunately, the only certainty there seems to be is that the economy will experience a recession which few people alive today have had to endure.
While stories of doom and gloom abound business owners will need all of the assistance they are able to get to navigate this period. Many companies will undoubtedly not survive the next 12 months and an industry clean out/consolidation is often advantageous in the longer term – especially to the companies that do survive! Any business strategy at the moment needs to be premised on ensuring that your business is still standing a year/18 months from now.
