When to Consider Company Liquidation
There are several reasons why a company may need to be wound up other than company liquidation due to insolvency. A business that has ceased trading but is not insolvent may be wound up so that it no longer attracts administrative costs. Business owners may lose interest in their registered business, where the prospect of the business remaining profitable is poor. They often then wish to wind up the entity.
The owners of many businesses that were adversely affected by COVID-19 may have become disillusioned and no longer wish to revive the business. Sometimes a business owner’s passion has changed, or they simply wish to retire. Where a company is solvent, all that the business owner or owners need to do is:
- Pay all their outstanding creditors.
- Collect all their outstanding debtors, if any.
- Cancel any active contracts.
- Inform all employees and customers of the intention to close the business.
- Sell off any business assets and liquidate the business.
- Distribute any cash or assets that remain in the business.
- Deregister the company at the Companies and Intellectual Property Commission (CIPC).
- Deregister the company with SARS.
The situation is different for a company that is insolvent and in severe financial distress. Where there is no possibility of business restructuring or business rescue and no prospect of additional investment in the company, company liquidation becomes the only option.
In terms of the provisions of the Companies Act No. 61 of 1973, a company may not keep on trading if it is insolvent. The company is legally required to cease trading and enter business rescue or apply for liquidation.
Voluntary or Compulsory Company Liquidation
Voluntary liquidation occurs when the shareholders of a company pass a resolution to place the company into liquidation and wind it up. A company may be liquidated irrespective of whether it is solvent or insolvent. South African insolvency law is regulated by the Insolvency Act No. 24 of 1936, the Constitution of South Africa Act No. 108 of 1996 and the Companies Act No. 71 of 2008. Where no legislation exists, common law is applied.
Voluntary liquidation can occur by means of an administrative request to the CIPC or by application to a competent court. An insolvent company or a company whose liabilities exceed its assets may, with the requisite special resolution of the shareholders, initiate liquidation proceedings.
A company may also be forced into company liquidation by one of its creditors, employees, or shareholders bringing an application for the liquidation of the indebted company. When a party other than the company itself applies for company liquidation, it is termed compulsory liquidation.
The Process of Liquidation
Certain requirements must be met before a liquidation application will succeed. There are two options, namely by special resolution and by application to the court. Discuss which of these options will be best for your circumstances with a specialist insolvency attorney. Get professional help before making any decisions which may prejudice the company, the employees, or the creditors. Insolvency attorneys specialising in company liquidation will know the best course of action for your company.
Once the court grants an application to liquidate, a provisional liquidation order is issued, and the company’s creditors are notified of the date at which the provisional liquidation will be made final. Creditors are allowed to object to the liquidation order. Where no objections are received, the provisional liquidation order may be made a final order of the court and a liquidator may be appointed.
Connect with Expert Insolvency and Litigation Attorneys
To achieve the best possible outcome, it is crucial to connect with attorneys that have experience and expertise in debt, insolvency, business rescue, corporate restructuring, and liquidations. Francois Uys Incorporated Attorneys holds over 33 years’ experience and more than 8000 successful cases conducted to date. Our expert attorneys in the field of Insolvency Law and Insolvency Litigation are waiting to assist with your unique company liquidation needs.
Contact us online and one of our attorneys will call you free of charge to discuss your concerns. We can assist you in navigating all the complexities of company liquidation, including drafting applications and managing court proceedings.
Disclaimer: This article is for information purposes only. It does not constitute legal advice and should not be used to make any financial or legal decisions. For advice on the topics of insolvency and company liquidation contact Francois Uys Inc. The information is relevant as of the date of publishing.
