Understanding Liquidation Costs: An Overview
When starting a business, you rarely anticipate the possibility of having to liquidate it sometime in the future. However, the reality is that a large percentage of businesses in South Africa fail. An estimated 75% of new businesses cannot achieve profitability and are closed making the failure rate in South Africa one of the highest in the world. Directors of companies in financial distress may strive desperately to keep the doors open due to misconceptions about liquidation costs. Surprisingly, the actual cost of winding up a company is often significantly less than the debts it owes.
In South Africa, liquidation costs are incurred when a company becomes insolvent and goes through the formal liquidation process. Liquidation involves appointing a liquidator, who is responsible for selling the company’s assets and distributing the proceeds to its creditors according to an established legal order of preference. The costs associated with this process, including the fees for the services of the liquidator and other professionals involved, are carried by the proceeds resulting from the liquidation of the company’s assets. The cost of the liquidation is prioritised and paid from the proceeds before the remaining funds, if any, are distributed among the creditors.
Establishing Liquidation Costs
The cost of the liquidation is typically compiled by the liquidator appointed to handle the winding up of the company in question. This is a licensed professional responsible for managing a company’s liquidation process. They assess the business’s assets, handle the sale of the assets, pay off creditors in a specified legal order, and manage all the administrative tasks related to the liquidation. The liquidator calculates and compiles the liquidation costs based on various factors.
Costs are typically made up of fees paid to attorneys, liquidators, and other professionals involved in the process. Asset valuation and realisation fees include the cost of valuing and selling the company’s assets. In addition, administrative expenses are incurred during the liquidation process and there are expenses related to advertising the liquidation and notifying creditors.
Costs charged by the liquidator are generally subject to oversight and scrutiny. The Master of the High Court, a government official responsible for the administration of deceased and insolvent estates, oversees the process. The Master’s office reviews the fees charged by the liquidator to ensure they are reasonable and in line with industry standards.
Creditors and interested parties have the right to challenge the cost of the liquidation if they believe it to be excessive or unjustified. If there are disputes or concerns about the fees charged by the liquidator, stakeholders can raise these with the Master of the High Court, who has the authority to investigate and resolve disputes related to the liquidation costs.
Liquidation Costs are Case-specific
It’s important to note that the specific total cost of liquidation will vary from case to case based on the complexity of the case, the size of the company, and the nature of its assets and liabilities. It is strongly advised that companies considering liquidation seek professional advice from legal experts to properly understand the potential costs involved in their specific situation.
Reckless Trading Should Be Avoided
Many people are unaware that the directors of a company are legally obligated to liquidate their business when the company becomes insolvent. Directors who act willfully or negligently and continue to trade when they are actually insolvent may be trading recklessly, particularly when it worsens the company’s financial situation and puts creditors at risk.
The consequences of reckless trading in South Africa are significant and can have severe legal and financial implications for the individuals involved. If there is any chance your company is trading recklessly, then it is advised that you consult with experienced insolvency attorneys.
Controlling Your Liquidation Costs
Francois Uys Incorporated Attorneys has an experienced team of insolvency professionals who specialise in liquidating companies quickly and efficiently. We are experts at assisting insolvent companies and businesses in financial distress. With over three decades of experience, our highly talented team will find the best possible outcome for your specific circumstances. Contact us today for expert assistance.
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 liquidation and liquidation costs, contact Francois Uys Inc. The information is relevant as of the date of publishing.
