Understanding the Liquidation Process in South Africa
There are three formal processes available to distressed companies in South Africa, including liquidation,
business rescue and compromises in terms of the Companies Act 71 of 2008. What follows is an introduction to the first of these processes, namely liquidation. For comprehensive knowledge on the topic, consult the qualified attorneys at Francois Uys Incorporated.
The test for placing a company into liquidation is simple. If the company cannot pay its debts as they are due, or it is foreseen that the company will not be able to pay its debts in the ensuing six months, the board of directors may pass a resolution to that effect, or an application can be made to the court either by the company itself or by a creditor or shareholder of the company.
What Occurs Once a Company is Liquidated?
Briefly stated, the company stops operating and is deregistered and the entity ceases to exist. Directors will no longer have any role in the firm and employees will be retrenched. Company assets are sold to pay the costs of the winding-up process and to pay back various claimants, such as creditors, employees, and shareholders, among others.
Once a company is placed in liquidation, it must cease to trade unless continued trading is necessary for the best interests of all creditors. Trading may only continue if sanctioned either by the court or by the creditors and shareholders. The last day of trading is decided upon, from which date onwards the entity does not trade anymore.
The assets of the company are frozen, and no disposal of the assets is permitted. Hiding assets is a criminal offence and any person who assists in hiding assets from the liquidator can be sentenced to a maximum of three years in jail. They also lose the right to claim against the insolvent estate should they be a creditor. Any pending civil proceedings against the company are stayed, and any judgment execution orders made after the start of the liquidation proceedings are voided. The creditors are notified and winding up commences.
Once the entity has been wound up and the liquidation and distribution account was lodged by the liquidators and confirmed by the Master of the High Court, the liquidator will distribute any funds that may be available for distribution. If a contribution is required by a creditor because the assets were insufficient to cover the basic costs of the liquidation, it becomes payable.
When the affairs of the company have been completely wound up, the Master transmits a certificate to this effect to the Companies and Intellectual Property Commission (CIPC) and a copy to the liquidator. The CIPC records the dissolution of the company, the entity is deregistered with the CIPC and ceases to exist.
Order Of Creditor Payment on Liquidation
Secured creditors are creditors holding security for their claims in one of several recognised forms. They receive their payments first. Then comes payment to the preferent creditors who do not hold specific security for their claims but rank above concurrent creditors. Employee remuneration is an example of this class of creditor. Concurrent creditors are paid from any proceeds of unencumbered assets that remain after preferent creditors have been paid in full. Shareholders are concurrent creditors and are third in line for payment from proceeds if there are any left.
Reduce the Stress and Risk of Financial Distress
Francois Uys Incorporated Attorneys has a seasoned team of insolvency, business rescue and restructuring lawyers who will competently advise all parties, including directors, shareholders, employees, and creditors, during all the stages of this process. This includes providing advice to creditors on the best strategic decisions. With 33 years of experience, our highly talented team will work closely with you to provide you with the best possible outcome while reducing uncertainty and minimising the stress of the experience.
As a member of a close corporation or a director of a company, you have a legal obligation to liquidate your company if you foresee not being able to pay its creditors as they fall due in the ensuing six months. Failure to do so is a criminal offence. Contact us today for expert advice and 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, contact Francois Uys Inc. The information is relevant as of the date of publishing.
