Many creditor financial institutions believe business rescue applications are being abused, according to a commercial lawyer on Monday.
This comes as the number of applications for business rescue by companies that are financially distressed has increased since the implementation of the New Companies Act in May.
The companies committing the alleged abuse are said to be trying to prevent foreclosure of overdraft facilities or loans.
Eric Levenstein, director at Werksmans Attorneys, says that many business rescue practitioners have been appointed in companies where the resolution passed for business rescue was nothing more than an attempt to delay the ultimate demise of the company, when clearly it could not pay its debts to creditors.
"Many South African financial institutions are met with resolutions for business rescue when proceeding against debtors. Once business rescue proceedings begin there is no opportunity for creditors to legally pursue claims against debtors."
While the new business rescue procedure provides companies in financial distress with alternatives to liquidation, not every company is suitable for the procedure. As such Levenstein warns directors to be careful before embarking on this road.
According to statistics published by the Companies and Intellectual Properties Commission (CIPC), there have been 175 filings for business rescue since May 1, 2011. Only two companies have terminated their business rescue proceedings, one because liquidation proceedings intervened and the other due to refinancing. - I-Net Bridge
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