Entri AdminEntrihub chats to Robyn Hey, Founder of Robyn Hey Attorneys. Robyn talks about the processes and roles struggling businesses can take on.
Question 1: What does the liquidation process entail?
Robyn: Liquidation can be started in two ways. The first is an application to court and the second is by means of a special resolution that the shareholders of the company pass. We always recommend an application to court especially if there are monies owed to SARS because the minute you owe money to SARS you need a formal application right from the beginning. Once your business is in liquidation, a liquidator is appointed and that liquidator comes in, he assesses the value of all the assets of the business he sells those assets and he pays the creditors in accordance with their ranking. Ranking means where they stand in the hierarchy of creditors. Your secured creditors like your banks they stand right at the top, then you have your preference creditors such as your employees and SARS they come next and then lastly you have your concurrent creditors and those are creditors with no special ranking. Your secured creditors are paid out of a sale of assets so for example if you've got a bond over a property, then your secured creditor will be paid out of the proceeds of the sale of that property, whereas your preference and concurrent creditors are paid out of what's called the free residue which is when your assets are sold and those assets are not encumbered by any security. Being a concurrent creditor is a very bad place to be. You are unlikely to see most of your money and you really are in a position of vulnerability so we as far as possible encourage our plans to take security of any monies owed to them.
Question 2: What does the business rescue process entail?
Robyn: Business rescue much like liquidation can also be brought either by means of a resolution or by a court application. In the case of a court application in addition to explaining to a court why the business is in distress. You also have to explain to the court how you think the business is going to be saved and to do that you need to have a business rescue plan. Once a business is placed in business rescue the business rescue practitioner has to call a meeting of creditors and present his or her plan to those creditors who then vote on that plan. Obviously, I'm simplifying it hugely but once that process has been undertaken the plan is then implemented and creditors are paid in accordance with that plan.
Question 3: How does a turnaround work?
Robyn: Turnaround is the most exciting of the three options, because they're the most creative it's also the most high-risk. Normally with a turnaround you get a turnaround professional either a business coach or a business consultant who comes in to see where a business is struggling and gives advice to the business owner on how to improve matters. It's very important to understand that turnaround can only happen where the business is still trading and is relatively profitable. If there is some cash available and also it's important to note that the minute a business has a situation where it is insolvent so its assets are exceeded by its liabilities. Then your turnaround to your business risk your options really are no longer on the table and liquidation becomes pretty much your only option.
Question 4: What are your rights and obligations as the business owner during liquidation?
Robyn: Once a business has been placed in liquidation a director of a company or a member of CC has an obligation to assist the liquidator in his or her duties. This means that the director has to provide whatever documentation the liquidator needs, information with regards to the creditors and any other assistance at the liquidator and may require to perform his or her duties. What you're going to be on the hook for is any debt that you signed surety for. It's very important if you're running a business that you're very careful where and when you sign surety, because that way the liability that is limited within your company spills out to you personally. The other thing to bear in mind is if you have been trading recklessly or under insolvent circumstances. It could well be that you're exposed to legal liability which is another reason why we always advise clients if things start going wrong to act as quickly as possible.
Question 5: What are your rights and obligations as a business owner during a turnaround?
Robyn: Although turnaround is the most high-risk of your three options it is the option that leaves you in control of your business. That said, in my experience businesses seldom fail for any reason other than poor management. If you've made a mistake and you're not able to get your business out of trouble you may need a third party to come in and help you.