Can you apply for business rescue after a final liquidation order? A recent Supreme Court of Appeal (SCA) case dealt with this question. In this case a close corporation (CC) was placed into final liquidation by a High Court. The CC argued to the High Court that it should rather be placed under business rescue. 5 months later, the CC applied for business rescue again. The High Court concluded, however, that once a final liquidation order is granted against a company (or CC), it is too late to apply for business rescue. The appeal went to the SCA. The SCA held the opposite of what the High Court held. It held that a company can in fact apply for business rescue after a final liquidation order is granted against it.
Why you can apply for business rescue after a final liquidation order
The SCA recognised the possibility of a liquidated company’s circumstances improving significantly, even after liquidation. Its circumstances could improve to the extent that it could become profitable if allowed to trade. The SCA then gave examples of how this could be so: A company could be awarded a contract for which it had earlier tendered; it could secure funding for future projects; or one of its major creditors could offer to subordinate its claim.
The court held that if business rescue will yield better returns for shareholders and creditors and help retain jobs, then there is no reason to deny business rescue. This is so even if the company is in final liquidation.
The potential problem if you can apply for business rescue after a final liquidation order
With a ruling like this, there are obviously concerns about how this affects the jobs of liquidators. On liquidation, liquidators take control of a company from the directors. Liquidators then make decisions regarding ongoing and new contracts and continued trading etc. They would be left uncertain in carrying out their duties, knowing that they could be removed from office at any time. The directors would then be handed back control of the company. It is quite clear how this could be very disruptive to a company.
The SCA addressed these concerns. It held that the Court can dismiss any business rescue application that is not genuine and made in good faith. It held that the Court can also dismiss an application that does not establish that the business rescue process will be successful.
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