Coexistence of Liquidation and Business Rescue: An Analysis of the Suspension of Proceedings

Jun 14, 2023 | , , , , , | News

The interaction between liquidation and business rescue proceedings has always been a complex and contentious issue in corporate law. One key point of debate revolves around the question of whether the initiation of a business rescue application should suspend ongoing liquidation proceedings. This discussion piece aims to delve into the statement that “Once a liquidation order has been granted, the bringing of an application for business rescue will not be suspended; liquidation proceedings will continue until such time as the court grants an order as contemplated in section 132(1)(c).”

Business Rescue

Understanding Liquidation and Business Rescue:

Before diving into the statement, it is crucial to establish a clear understanding of liquidation and business rescue. Liquidation, also known as winding up, occurs when a company is unable to pay its debts and its assets are sold to repay creditors. On the other hand, business rescue is a mechanism designed to rehabilitate financially distressed companies by providing a temporary breathing space to restructure and reorganize their affairs.

 

The Suspension Debate:

The crux of the debate lies in determining whether liquidation proceedings should be suspended upon the initiation of a business rescue application. Proponents argue that allowing business rescue to take precedence facilitates the possibility of rescuing the company, preserving jobs, and maximizing creditor returns. They argue that suspending liquidation proceedings allows for a more comprehensive evaluation of the company’s viability and the exploration of alternative rescue plans. 

However, opponents of the suspension argue that liquidation provides a clear and conclusive process for winding up a company’s affairs. They contend that suspending liquidation in favor of business rescue can prolong uncertainty for creditors and other stakeholders, potentially leading to further financial losses. Furthermore, they claim that business rescue processes often fail, making it more practical to pursue the more established liquidation route.

 

Court’s Perspective and Section 132(1)(c):

The statement under discussion asserts that the court will not suspend liquidation proceedings when a business rescue application is brought after a liquidation order has been granted. It suggests that liquidation proceedings will continue until the court grants an order as contemplated in section 132(1)(c). Section 132(1)(c) refers to the court granting a business rescue plan and providing for the rescue of the company.

This position aligns with the rationale that liquidation is considered a definitive and conclusive process, while business rescue is seen as a discretionary option that may or may not succeed. The court, when faced with both liquidation and business rescue applications, must balance the interests of the creditors, the company, and other stakeholders to determine the most appropriate course of action.

 

The debate surrounding the suspension of liquidation proceedings upon the initiation of a business rescue application is a complex issue in corporate law. The statement that liquidation proceedings will continue until the court grants an order as contemplated in section 132(1)(c) reflects the prevailing view that liquidation is the default route and that business rescue is an exceptional measure. While proponents argue for the suspension of liquidation to explore rescue possibilities, opponents emphasize the certainty and finality of liquidation. Ultimately, it falls to the court to evaluate the specific circumstances and make a decision that balances the interests of all stakeholders involved.

The content does not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. Kindly contact us on info@cklaw.co.za or 021 556 9864 to speak to one of our attorneys.

Author:

Reynhard Carelse

Reynhard Carelse

Reynhard is a founding member of CK, and established the firm during 2005.

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