Before the Companies Act of 2008 (“the Act”), creditors seeking to enforce their claims against a company could either issue summons or initiate liquidation proceedings to recover their debt. With the introduction of business rescue proceedings under the Act, creditors now have an additional option. Not only can the board of directors initiate business rescue, but any affected person, such as creditors, shareholders, or employees, can also obtain a court order to place the company in business rescue.
When pursuing the summons route, a creditor must first secure a judgment against the company. Only after judgment is granted can the creditor proceed with a warrant of execution to sell the company’s assets to recover the debt. This process can be time-consuming, and the company might defend the claim to delay or avoid judgment. Throughout this process, the creditor has no insight into the company’s finances or assets.
If a creditor opts for liquidation, the company ceases to trade, and an appointed liquidator winds down the company, settling its debts with the available funds. Again, the creditor has no insight into the company’s finances or assets and has minimal involvement in the liquidation process.
Business rescue proceedings offer creditors a further option. If a company is in financial distress, and it can be proven to a court that the company can be rescued with a proper business rescue plan, an affected person may apply for an order to place the company under supervision and commence business rescue proceedings. This process allows creditors more insight into the company’s affairs and the opportunity to nominate the business rescue practitioner.
Creditors should carefully consider the advantages and disadvantages of each option to decide the best course of action.
Disclaimer: The contents and information provided above are generalized and must not be acted upon as legal advice.