Informing the Vote: The Business Rescue vs Liquidation Decision

Abstract

Background: Non-unitary insolvency systems require an initial choice between liquidation and rehabilitation. For those systems, the decision to further support rehabilitation is often reinforced by the estimate of a lesser return in liquidation. The creditors’ decision to either accept or reject the business rescue plan depends substantially on comparing the proposed liquidation value with the business rescue value that is mandated in the business rescue plan. Purpose: The purpose of this study is to compare the proposed liquidation value with the actual liquidation value of firms that had commenced business rescue proceedings but were subsequently liquidated. This study is exploratory; therefore, our aim is to use the findings of this study to derive future research opportunities for scholars to explore. Methodology: This research adopted a content analysis research approach by collecting documents such as business rescue plans and liquidation accounts, which are qualitative in nature, and describing these documents through quantitative data analysis. Findings: The study revealed that for the secured creditors’ sample, there was a significant difference between the proposed liquidation value and the actual liquidation value. For the unsecured creditors’ sample, this study found no significant difference between the proposed liquidation value and actual liquidation value. Limitations: The major limitation of this study was access to data; therefore, the huge decline in the actual sample size in comparison to the expected sample size. Value: To the researchers’ knowledge, this is the first study comparing the proposed liquidation value to the actual liquidation value in order to determine whether differences exist. As a result, this study tackles a novel perspective on one of the influences that can affect the vote. This may be of particular importance to creditors, who may find the results of this study to be useful. Lastly, the findings of this study derived future research opportunities for scholars to explore.

Enhancing creditor decision-making in South African business rescue proceedings: a comprehensive analysis of information requirements in business rescue plans

“…Thus, where BR plans lack sufficient information for decision-making, creditors would rather abstain from exercising their voting rights, which is not in the spirit of Chapter 6. Therefore, BRPs need to develop BR plans suitable for the creditors with a voting interest, which, although optimistic regarding the prospects for the turnaround for the company, should also disclose the risks of adopting the plan (Rosslyn-Smith and De Abreu, 2022).…”

“…The findings further reveal that the BRV does not consider the associated risks of business rescue, which is an essential consideration for stakeholder decision-making (Conradie and Lamprecht, 2021a;Rosslyn-Smith and De Abreu, 2022). Additionally, the liquidation dividend is used to enforce accountability by the BRP to deliver a better outcome for creditors than in a liquidation scenario (Lusinga and Fairhurst, 2020).…”

“…While the larger, more sophisticated financial creditors are likely to have material information about the distressed company, the trade creditors are unlikely to have such access (Wan and Watters, 2021). These trade creditors are usually unsecured and have minimal voting rights in spite of having a legitimate interest in the business rescue proceeding (Rosslyn-Smith and De Abreu, 2022). Trade creditors' participation in rescue proceedings is limited because they are often unable to assess the company's value or process complex financial documentation (Eu, 2022).…”

“…The BR plan seeks to convince, by appealing to reason, the notion that, through its approval, the affected stakeholders will remain better off than in liquidation (Madaus, 2014). The BR plan should contain comprehensive details and strategies in which the BRP predicts that the company will be resuscitated, including circumstantial information such as the financial statements, security for assets, all creditors outstanding in order or statutory preference and details of the BRP’s remuneration (Rosslyn-Smith and De Abreu, 2022).…”

“…However, many discrepancies exist in their knowledge, competencies and exposure to BR plans and the rescue process (Le Roux and Duncan, 2013). In some cases, sub-standard BR plans with glaring absences of crucial information are presented to voting creditors, mainly concerned with the probable dividend they will receive, whether in rescue or liquidation (Rosslyn-Smith and De Abreu, 2022).…”