A way out for distressed businesses
VITAL: EVERY OWNER NEEDS TO UNDERSTAND TERMS AND FUNCTIONS OF EACH PROCESS
Pleading ignorance can have a detrimental impact on the business.
Most of us woke to the news that South African Airways (SAA) had been put under business rescue this week. This got me thinking about the legal proceedings that deal with distressed businesses which many business owners may not know off. This can have a detrimental impact on the business.
Let us take SAA’s turn of events as an opportunity to investigate certain legal business functions that you, as a business owner, could one day be faced with.
The most common terms that are associated with distressed businesses are business rescue, liquidation, restructuring, winding down and shut down.
Business rescue
According to the Companies Act, business rescue is the process where a financially distressed company can voluntarily or involuntary by court order, be given time to rehabilitate itself to achieve solvency. Essentially, the company is given six months to restructure its debt to a manageable state.
During this period a temporary order against claimants is awarded to the company that prevents creditors from taking any legal action against the company.
Additionally, a licensed business practitioner is appointed and has full authority over the business to do whatever he/she deems necessary to save the business.
Business restructuring
According to Wikipedia, restructuring is the act of reorganising the legal, ownership, operational, or other structures of a company to make it more profitable, or better organised for its present needs. Amalgamating its debt or swapping debt for equity are two common restructuring mechanisms.
Business liquidation
It implies that a business will cease to operate mostly due to its inability to settle its debt or meet its financial obligations. Liquidation may be brought about as a result of a legal court process, or by a request by its creditors, or the company may voluntary decide to be liquidated.
Winding down or deregistration
It occurs when a solvent business stops operating. It is a rarity because most business owners would rather sell instead of closing a profitable business.
Business shut down
It refers to a business that chooses to shut down operations temporarily. Companies do this when they determine that it is cheaper to temporarily stop production than to continue during an off-season. A good example could be companies that sell Christmas trees, I would imagine that most if not all, shut down during the year to only commence around November time.
These terms and functions are important. A great place to get full understanding is the Companies Act, which you can download for free on the DTI website.
Munya Duvera is CEO at Duvera Elgroup