Liquidation Fundamentals: Why Businesses May Choose to Liquidate

Financially distressed companies in South Africa have three formal processes available to them, namely liquidation, business rescue, and compromises, under the Companies Act 71 of 2008. Why, then, do companies opt to liquidate?

Liquidation, also known as winding-up, involves the realisation of a company’s assets to pay for winding up expenses and costs with any remaining funds after the company’s creditors have been paid.

The winding-up of solvent and insolvent companies is regulated by separate legislation. The Companies Act governs the winding-up of solvent companies, whereas the Insolvency Act 24 of 1936 and the Companies Act 61 of 1973 (Old Companies Act) govern the winding-up of insolvent companies.

The two processes are distinct as the procedures and requirements of each are different. Solvent companies are those that can pay their debts as they become due, whereas insolvent companies are those that cannot. Winding up a solvent company is a voluntary process initiated by the company while winding up an insolvent company can be initiated by the company or through legal action by creditors or other interested parties.

Companies should seek professional legal advice to ensure that they follow the correct procedures and comply with the relevant legislation when winding up.


Why Choose the Liquidation Option?

Businesses may choose liquidation for various reasons. One of the main reasons is insurmountable debt. Where a company is unable to pay its debts as they become due, liquidation becomes an option. In such a situation, being liquidated can be used to address the company’s financial difficulties and settle its affairs. In some instances, it may be a legal requirement. The Companies Act 71 of 2008 states that a company that cannot pay its creditors within six months is obliged to liquidate.

Closing the business is another reason why a company may choose to liquidate, particularly if it has decided to wind up its affairs. Reorganisation can also lead to liquidation as part of a broader strategy when the

company may opt for restructuring or consolidation. Sometimes changes in market or economic conditions may make it difficult for a company to adapt and remain profitable, making liquidation the best option to minimise further losses.


The Importance of Getting Liquidation Advice from Legal Professionals

In South Africa, trading while insolvent is considered a civil offence rather than a criminal one. This occurs when wrongful trading takes place and the company’s director is aware that the company will become insolvent but continues to operate regardless. However, a director that engages in unethical practices to try and recover from insolvency may be accused of engaging in fraudulent trading which is a criminal offence in terms of the Companies Act.

If you are a member of a close corporation or a director of a company, be aware of your legal obligations if you are unable to pay your creditors. You have a legal obligation to liquidate your company in such circumstances, and failure to do so can result in criminal charges.

Francois Uys Inc Attorneys understand the complexities and challenges involved in the liquidation process and are committed to providing expert assistance to our clients. Our team of seasoned professionals can assist with the efficient liquidation of your company, allowing you to move on effortlessly. We specialise in working with South African businesses that are facing financial distress. Our team will work closely with you to find the best solution to your problems and provide you with the optimal outcome.

Contact us today to learn more about how we can assist you in navigating the liquidation process and ensuring that you comply with all relevant legal requirements.


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.