When companies fall into financial trouble

Reuben Mukavhi

You will definitely have heard about companies being put into liquidation, or being put under judicial management.

More recently, you might have heard about corporate rescue. I will give you a heads up on these processes in this installment.

When a company’s debts are greater than its assets at any given point in time, that company is said to be insolvent. If all the assets of the company were to be sold at that point in time, the money raised from the sale will not be enough to pay all the debts of the company.

Some creditors will fail to be paid. Such a scenario puts the going concern of the company in doubt. If some creditors become aware that the company is insolvent, they might quickly secure judgments against the company and attach assets in execution.

The run on the company will benefit the agile creditor at the expense of the lethargic.

Not only that; the run on the company will most definitely lead to the collapse of the company, even if the company could have been saved if a more orderly approach had been adopted.

This is where the law of insolvency comes in, to afford creditors equitable distribution of the assets of the insolvent company and/or to prevent the collapse of otherwise viable companies.

Not all insolvent companies are doomed. In fact, even the most profitable companies can be insolvent at some point.

The law of insolvency differentiates between those companies that are insolvent beyond redemption, and those that can be saved.

Those that are beyond redemption will be liquidated, while those whose insolvency can be reversed are put under judicial care.

In a liquidation, once the company is put into liquidation, whether by court order or by resolution of the company, no creditor can individually execute against the assets of the company.

The liquidator is the only one allowed to sale the assets of the company and use the money to pay the creditors.

The process is that the all the creditors prove their claims with the liquidator through the Master of the High Court. The liquidator then sales all the assets of the company.

He then compares the value of the claims with the money raised from the sale of the assets. Each creditor will be paid a proportion of their claim, so that all creditors get something.

For example, if the claims are $100-00, and the money available is $70-00, then each creditor will be paid 70% of what they are owed, in final settlement of their claim.

If a company is in financial distress but still has a reasonable prospect of being saved, that company is placed under judicial care known as corporate rescue proceedings. In the old days, this process was called judicial management.

The aim of corporate rescue proceedings is to facilitate the rehabilitation of a financially distressed company so that it can pay its debts and be a going concern again.

Once a company is put under corporate rescue, there is a stop to all debt recovery proceedings against the company. The creditors prove their claims with the corporate rescue practitioner through the Master of the High Court.

The corporate rescue practitioner will prepare a rescue plan for the company, which when implemented will result in the creditors being paid in full or in part, and the company continuing in existence as a going concern.

The people allowed by the law to liquidate or rescue companies are called Insolvency Practitioners, and Yours Truly is one of them.

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