Voluntary liquidation, also known as voluntary winding-up, is a process by which a company chooses to cease its operations and sell its assets to pay off its debts and distribute any remaining funds to its shareholders. Companies in South Africa might choose voluntary liquidation for several reasons, but, in most cases, they are in financial distress to the point of being insolvent. An indication of insolvency is the inability to pay debts when they become due. However, the formal test is to determine whether the company’s debts exceed its assets. Insolvency and liquidation are regulated by the provisions of the Companies Act 61 of 1973 and the Companies Act 71 of 2008 (the ‘old’ and ‘new’ Companies Acts).
Two Options for Voluntary Liquidation of Solvent Companies
A solvent business can be wound up voluntarily if the shareholders or members have adopted a special resolution to do so. The resolution is filed with the Companies and Intellectual Properties Commission (CIPC). Once filed, the winding-up of the company takes place. A liquidator is appointed who assesses the value of the business’ assets, arranges meetings with creditors, sells the assets, and distributes the proceeds to the creditors and shareholders.
A solvent business can also be wound up when the company makes an application to a competent court in terms of which the owners have made a special resolution for the court to wind up the company. If the application is accepted by the court, a provisional liquidation order will be granted, and the company’s creditors can then be notified of the liquidation application and the court date. If no objections to the liquidation are received, the provisional liquidation order can be made a final order of court. A liquidator is then appointed to liquidate the company.
Why Would a Company Choose to Liquidate?
Here are some reasons that may lead to a company choosing to liquidate:
- Persistent financial distress which includes significant losses, cash flow issues, or overwhelming debt. Another motivation for voluntary liquidation may be a consistent failure to generate sustainable profits. The owners may decide to shut the company down and employ their resources in a more profitable endeavour.
- Rapid shifts in market dynamics, the emergence of disruptive technologies, or changes in consumer preferences may make a business model outdated or impractical, in which case the shareholders may elect to undergo voluntary liquidation.
- The company’s owners may opt for voluntary liquidation when they reach retirement age or wish to pursue other ventures. In some instances, the business is so intertwined with the owner’s identity that selling it isn’t feasible.
- Disputes or irreconcilable differences among partners or shareholders can lead to the decision to dissolve the company by undergoing voluntary liquidation.
- The inability to comply with legal or regulatory requirements, such as tax obligations or industry-specific regulations, may force a company to shut down.
- A business might dissolve because of significant strategic shifts, like mergers, restructuring, or divestment from certain business segments.
- Sometimes, the closure of a company is part of a planned succession strategy, where the business is either wound down or transferred to new owners or family members.
Even Voluntary Liquidation is a Complex Legal Process
Voluntary liquidation is a complex legal process that must be carried out in accordance with the relevant laws and regulations. Companies considering voluntary liquidation should seek professional advice from legal experts to ensure that the process is conducted properly and in the best interests of all the stakeholders involved.
At Francois Uys Incorporated Attorneys, we specialise in insolvency law and liquidations. We are dedicated to securing the best possible legal and financial outcome for your business. Our highly skilled team strives to achieve optimal results with minimum stress. With over 33 years of experience in insolvency and liquidations, we are eminently equipped to guide you through the required legal formalities. The quality of legal advice and guidance received at each stage of the process significantly affects the outcome for all the parties involved. Before making uninformed decisions, contact Francois Uys Inc. Attorneys for professional guidance.
Disclaimer: This article is for information purposes only. It does not constitute legal advice and cannot be used to make any decisions. For advice on the topic of company liquidation, contact Francois Uys Inc. The information is relevant as of the date of publishing.