Date: 20 April, 2020
Author: Karl Gribnitz and Robert Appelbaum
Let us assume that the COVID 19 lockdown is the “last straw that broke the camel’s back” and you realise that your company or closed corporation cannot continue to trade any further. You may even have been advised to place your business in liquidation.
The problem with liquidation is that the process can take years to complete and destroys a tremendous amount value.
Some liquidators also seek as many appointments as possible, which may result in an administrative overload. This overload of administration could lead to delays, which may take years to complete. The lack of administration of these cases is further exacerbated by insufficient oversight by the Master of the High Court, who simply does not have enough competent staff to verify the accounts submitted by liquidators.
The average cost for selling fixed property is 28,8% and movable property is 38,0% of the value realised on auction. The realisation of investments and debtors’ cost is 11,5%. Over and above these expenses, there are other expenses such as security fees for the Master, disbursements, and administration expenses. Sometimes, these costs are manipulated to be as high as possible as the Master does not seem to have the manpower to manage the review of the loss and distribution accounts submitted by the liquidators correctly.
The alternative to liquidation is to place your company or CC in business rescue. It is cheap and quick, but you must ensure that you find a competent practitioner. The process starts with the filing of documents with the CIPC and does not require the court or costly lawyers.
Section 128(1)(b) of the Companies Act states that a business rescue is appropriate where the outcome will result in a better return for the creditors and shareholders than the return that would result with the immediate liquidation of the Company. An approved business rescue plan can therefore provide for the practitioner to sell the assets and distribute the proceeds as set out therein.
Speed is everything – a business rescue plan should be published within three weeks, approximately half the working days required by the Act. This allows the creditors to meet quickly, to amend the plan if required and then approve the plan, whereupon the practitioner can commence with the implementation of the plan. The entire process should usually take between 90 to 120 days to shut the operations down, retrench staff, sell the assets, and pay creditors.
In other words, creditors make the decisions leading to the outcome of the business rescue; this does not require a costly court process to place the business in rescue, or require the interference of a Master of the High Court who does not have the capacity to perform the oversight function. In the liquidation, the creditor is merely a passenger who hopes and prays that the process will be finalised and that they will receive some dividend at some stage as they wait for the finalisation of an external process.
The cost in business rescue is substantially less than that in liquidation, as the costs are prescribed in the regulation and there are no extra costs such a legal fees and Master fees. Even if the creditors agree to a success fee for realising the assets, this will still be far less than the fees charged in liquidation. The manner in which the assets can be sold is set out in the business rescue plan, which means that the practitioner can seek or receive offers and present these offers to the creditors for approval. By way of contrast, liquidations are managed under legislation promulgated in 1934 – this is an antiquated and slow process, where every action in the estate needs approval from the Master of the Court.
Business rescue places the “final say” in the hands of creditors. A business rescue managed by a competent practitioner with a team can complete the business rescue proceedings effectively with transparency, efficiency, and substantially cheaper.
So, what is the incentive for you, as a business owner, to ensure that creditors receive the maximum dividend as quickly as possible? Simply put, if you have signed sureties, every cent that the competent practitioner saves during the structured wind-down is a cent less that you have to pay to those parties who hold your personal surety. Even if there are no personal sureties, it would be better to wind up the business faster, cheaper, and more efficiently through business rescue. Therefore, the smart thing to do is to find a competent practitioner to help you.