Winding Down: Considerations for Business Liquidation
Winding down a business through liquidation is a significant step that involves the orderly distribution of assets to creditors and the closure of the company. It is important to fully understand the motivations for deciding to liquidate a company, the circumstances in which it is relevant, and the procedural intricacies involved.
It is necessary to know why, in many, but not all, cases it may be in the best interests of shareholders and directors to liquidate promptly upon the company becoming insolvent. Liquidating entails realising a company’s assets through auctions or other means to settle outstanding debts owed to creditors.
Is Liquidation the Only Option?
Financially distressed companies in South Africa have access to three formal processes: liquidation, business rescue, and compromises, as outlined in the Companies Act 71 of 2008.
The most drastic of these is opting to liquidate as it results in the closure of the company. Determining whether to liquidate a company involves a straightforward test. If the company is unable to meet its debts on time, or it is anticipated that it won’t be able to do so in the next six months, the company is insolvent, and the board of directors can pass a resolution to initiate liquidation. Alternatively, an application can be submitted to the court, either by the company, a creditor, or a shareholder.
Starting Proceedings
A party seeking to liquidate an insolvent company can do so by filing an application with a competent court. In South Africa, the High Court has jurisdiction to grant liquidation orders. The legal process starts with an application for a provisional liquidation order, after which a return date is assigned allowing opposing parties an opportunity to contest the liquidation. If, on the return date, the court confirms compliance with relevant regulations and deems the company genuinely insolvent, it finalises the provisional order, initiating the company’s winding-up. Typically, the High Court with jurisdiction is the one located in the area where the company is registered.
Timely Action May Be in Shareholders’ and Directors’ Interests
Although the prospect of liquidating a company may seem daunting, it often aligns with the best interests of shareholders and directors. Unless personal surety has been signed by any of the directors or shareholders, they benefit from the protection of limited liability. As a separate legal entity, the company’s outstanding debts are typically written off during liquidation, sparing shareholders, and directors from personal liability.
Limited Liability Does Not Cover ‘Reckless Trading’
The prevailing economic conditions have undoubtedly prompted numerous shareholder or director meetings, where individuals find themselves at a pivotal juncture needing to decide whether the company should persist in its current state, undergo downsizing, opt for business rescue, or consider liquidating. It is crucial to fully grasp the associated consequences. Strictly speaking, an insolvent company is not permitted to continue trading. In cases where it is evident that a company should have declared insolvency and applied for liquidation but continued to trade and incur debt, a court might rule that the directors or shareholders will bear personal liability for the debts of the company. It is at this juncture that legal advice from an experienced and objective insolvency and liquidation attorney is invaluable.
Comply with the Liquidation Regulations
The best outcomes are tied to ensuring strict compliance with the legal requirements and regulations governing liquidating companies. It’s crucial that the process be carefully planned, and all the legal requirements complied with. Engaging with experienced attorneys will help you navigate the complexities of liquidating and ensure that the process is conducted in accordance with applicable laws and regulations.
Choose Experience and a History of Success
For comprehensive guidance on insolvency and related matters, consult our expert team at Francois Uys Incorporated Attorneys. We provide tailored assistance for your specific needs with an experienced team of insolvency professionals who specialise in liquidating companies quickly and efficiently. With over three decades of experience, our talented team will find the best possible outcome for your company’s specific circumstances. Contact us today to tap into true expertise.
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. The information is relevant as of the date of publishing.
