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Too insolvent for business rescue

May 24, 2017

Lowvelder Article 24 February 2017

Is it possible for a company to be too insolvent for Business Recue? The answer is Yes.

Business rescue is defined as proceedings to rescue and rehabilitate a “financially distressed” company. It is, therefore, important to understand the meaning of “financially distressed”.

In the matter of Gormley v West City the court ruled that the test for a business rescue application to be successful was for the company to be financially distressed and not insolvent at the time of the application.

To be financially distressed, it must appear to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months, or it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

In Gormley v West City the company was insolvent and could not pay its debts unless the court suspended the company’s obligations to pay a creditor, for a period of three to five years. The judge said business rescue is meant to be a “short-term approach”. He further stated there must be a measure of certainty in the commercial world. Creditors cannot be left in a state of flux for an indefinite period.

In short, a company is insolvent the moment its liabilities exceed its assets.

The company’s financial situation did not fall within the definition of financially distressed and the court ruled that the company was too insolvent and not just financially distressed. The business rescue proceedings were canceled and the company liquidated.

Therefore if a company’s financial situation is so dire, it will not be able to commence with business rescue proceedings and the only outcome will be liquidation.

In order to give a financially distressed company the best possible chance of re-establishing, itself it is necessary to consider business rescue the moment it appears unlikely that the company will be able to settle all its debts.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances