Legal wise

New law rescues liquidations

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The sharp decline in company liquidations, which recorded a 20.2% year-on-year decrease in August, seems to suggest that more companies are considering the new business rescue laws that came into effect in South Africa in May last year under the Companies Act of 2008.

According to Adam Harris, director of the litigation department at corporate law firm Bowman Gilfillan, business rescue aims at avoiding liquidations and job losses by providing businesses with protection against creditors who may want to file for liquidation. It is an opportunity to reorganise and restructure distressed but viable companies in order to avoid liquidation.

Figures released by Statistics SA this afternoon indicated that the number of liquidations decreased by 13.5% in the first eight months of 2012 compared with the first eight months of 2011. A year-on-year decrease of 20.2% was recorded in August 2012. 

“The decrease in the number of liquidations in August 2012 was due to voluntary liquidations declining by 110. In contrast, compulsory liquidations increased by 49 over the period. Lower voluntary liquidations suggest that the business rescue procedure is taking hold in the economy and that there has been an increase in the number of companies seeking assistance,” said Harris.

A compulsory liquidation takes place when the affairs of a company or close corporation are wound up by an order of the court when liabilities exceed assets. A voluntary liquidation happens when a company resolves of its own accord to wind up its affairs.

According to Statistics SA, the largest year-on-year decreases in total liquidations in August 2012 related to businesses in financing, insurance, real estate and business services. 

Applying for business rescue can provide companies with the opportunity to access interim liquidity to fund their operations while a rescue package is being formulated. It is important for a rescue package to be implemented as soon as possible.

Harris commented that, "Business rescue offers an alternative to liquidation for financially distressed companies, allowing them to be stabilised and restructured. However, business rescue always depends on there being a source of funding, which means companies will also need buy-in from their banks and creditors for an application to be successful."

1time Holdings subsidiary 1time Airline recently applied for business rescue, while one of the first companies to undergo business rescue was Pinnacle Point Group. The latter failed, however, after Pinnacle Point’s bankers declined to provide the necessary financial support.

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