In South Africa, the process of winding up insolvent companies is governed by the Insolvency Act 24 of 1936 and the Companies Act 61 of 1973. Liquidating a company involves a process of realising the company’s assets, either through private treaty or by public auction. The assets are realised to cover winding-up costs and the remainder is distributed among the company’s creditors in a specified order of preference and according to their rights in the company. According to the Companies Act, insolvent companies are prohibited from trading. Even if they lack sufficient assets to pay all creditors, they must cease trading and either enter business rescue or liquidation. Continuing to trade while insolvent can have serious consequences for the company and its directors.
The primary consequence of placing a company into liquidation is that it ceases trading unless it is deemed that continued operations are necessary and in the best interests of all creditors. This is typically where the liquidators want to sell the business as a going concern or because certain contracts need to be continued to generate funds for creditors. This must be sanctioned by either the court or the creditors and shareholders.
Liquidation Follows Insolvency
When a company finds itself insolvent, two forms of liquidation may apply. The process can be initiated by the distressed company’s Board of Directors, known as voluntary liquidation, or at the request of the company’s creditors or other concerned parties.
Alternatively, the company’s creditors have the option to petition a competent court for the company’s liquidation. Typically, this involves a court application initiated by a creditor or other interested party based on the company’s inability to meet its financial obligations as they arise. Such applications are filed as sworn affidavits in the High Court with jurisdiction over the area where the company is registered. These applications are usually frustrated creditors’ last resort to get paid, either by forcing the directors to act or by gaining access to the company’s assets. Liquidating is not the only option. Speak to your attorney about the most suitable option for your company.
A common practice in courts is to initially grant a provisional order and schedule a return date, usually around six weeks later, for the final winding-up order. This process is known as a rule nisi application. Where liquidation starts through a board resolution, the process officially begins upon the registration of the resolution with the Companies and Intellectual Property Commission (CIPC), in accordance with the Companies Act.
The Master of the High Court appoints provisional liquidators to oversee the proceedings. Following the final winding-up order, the Master calls for a creditors’ meeting to, among other things, register claims and nominate final liquidators. Typically, this first meeting occurs within six to eight weeks after the final order, with notice published in the Government Gazette. Creditors have a subsequent opportunity to submit claims at a second meeting, which must be convened within three months of the final appointment of liquidators (usually shortly after the first meeting).
Claims must be supported by sworn affidavits and include all relevant documentation. Only creditors who file claims are eligible for fund distribution.
There’s Only One Opportunity to Do It Right
Get the best possible advice before making any decisions. Liquidation is an important legal process which includes strict formal requirements, many of which are time-bound. Some of the legal options that need to be exercised can dramatically affect the outcome for a company and its directors. The liquidation of large companies requires an experienced legal team.
Francois Uys Incorporated Attorneys are experts in the field of insolvency law and liquidation. Let us secure the best possible legal and financial outcome in your company’s specific circumstances. With over 33 years of experience with corporate insolvency, our specialist team can guide you through the legal formalities. Getting the best outcome depends very much on the legal advice you are given at each step of the process.
Make an appointment with Francois Uys Inc. Attorneys and enjoy the peace of mind that comes with knowing that you are in expert legal hands.
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 insolvency and liquidation, contact Francois Uys Inc Attorneys. The information is relevant as of the date of publishing.
