When to Liquidate and When To Go Under Business Rescue
A company is obliged to go under liquidation when its liabilities exceed its assets or when the debt cannot be paid. A company can choose to go under business rescue voluntarily and it is not obligatory. Let’s take a look at when to liquidate and when to go under business rescue.
When to Liquidate
There are scenarios where business rescue simply is not a realistic option and liquidation is the immediate solution:
- Irreparable Financial Damage: If a company’s financial situation is beyond repair, liquidation is the responsible choice. Business Rescue will not magically fix it.
- Lack of Turnaround Potential: Some businesses may not have a viable path to profitability, making liquidation the more pragmatic option.
- Creditor Unwillingness: If key creditors are unwilling to support a business rescue plan, liquidation may be the only remaining option.
- Continue to Trade: the company can restructure itself and then continue to trade before or after liquidation, there is no legal requirement that you may never run a similar business again.
When to go under Business Rescue
Business rescue can be appropriate when there is a temporary problem. Business rescue is not for long term problems as business rescue simply cannot solve long term problems. For example, if company A imports products and their container is stuck at the harbour for some reason which causes them to run in a cash flow problem, business rescue is a better option than liquidation. If it means that the container will be released some time and then the goods can be sold and the company The reason for this is Liquidation offers a clear, fast, more cost-effective, and legally protective path for companies facing insurmountable financial difficulties. By choosing liquidation, business owners and creditors can often achieve a swifter and more satisfactory resolution to financial distress.
Advantages of Liquidation
One of the primary advantages of liquidation is its finality. Unlike business rescue, which can be a lengthy and uncertain process, liquidation provides a clear endpoint. This finality can be beneficial for several reasons:
- Debt Relief: Liquidation offers a complete discharge of debts, allowing business owners to move on without the burden of outstanding obligations. With business rescue ALL the debt plus interest plus costs must still be paid on top of business rescue practitioners’ costs.
- Psychological Closure: For business owners, the definitive nature of liquidation can provide emotional closure, enabling them to focus on future opportunities. With business rescue the business owner is putting out fires for another 6 months so the focus cannot be on restructuring the business and starting over.
- Asset Distribution: Liquidation ensures a fair and orderly distribution of remaining assets among creditors, following a clear legal framework. (Note that this only applies to companies who own assets. A company does not need to own assets to be able to liquidate).
Cost of Liquidation versus cost of Business Rescue
- For liquidation there are the legal fees and the liquidator’s cost and that is it. Business rescue usually is an expensive process requiring ongoing fees for business rescue practitioners ON TOP of normal running cost AND paying debt. If a company already experiences financial difficulties it cannot afford extra burdens (the business rescue practitioner’s cost) AND continue to pay for the debt.
- Shorter Time Frame: Liquidation takes a week. Business rescue is a long term project that usually runs for 6 months at least. And if the business rescue isn’t successful, the company is liquidated in any case.
- Simpler Process: The liquidation process is more straightforward and fast. With business rescue you need a business rescue practitioner (must be paid), a High Court application (expensive) and the ongoing efforts and costs for at least 6 months.
- Immediate Cost Cutting: Liquidation allows for the immediate cessation of operations, stopping the bleeding of funds that probably will occur during a prolonged business rescue attempt.
Why Liquidation is better than Business Rescue
With liquidation the solution is swift: it takes 3 – 5 days to liquidate a company at the CIPC. The company can be restructured so that you can continue to trade without the company debt. The cost is much less and relief can start the same day that you decide to liquidate. With business rescue you first have to find a business rescue practioner; hand over the reigns (you don’t run your own company in a business rescue, you have someone else in charge); you have to pay the practioner AND the debt; and if after 6 months it didn’t work, you have to liquidate in any case.
