The Process and Benefits of Voluntary Liquidation
Voluntary liquidation occurs when the Directors of a company resolve to wind up the company and liquidate it. A company may be liquidated whether it is solvent or insolvent. South Africa’s insolvency law is regulated by the Insolvency Act No. 24 of 1936, the Constitution of South Africa Act No. 108 of 1996 and the Companies Act No. 71 of 2008. Where this legislation is silent, common law is invoked.
When Company Liquidations Take Place
If the company is solvent, it may be liquidated for reasons other than that of experiencing financial difficulty. For example, where the company was created for a specific purpose which has been served, or the relationship between the directors has deteriorated to a point where they can no longer work together, the company may file for voluntary liquidation and be wound up. A company that is not technically insolvent but is experiencing liquidity issues and is not able to pay its creditors as they fall due, may be submitted for voluntary liquidation if such a decision is taken by its shareholders and board of directors. Voluntary liquidation, whether the entity concerned is solvent or insolvent, can be achieved through an administrative request to the CIPC (Companies and Intellectual Property Commission) or by application to a competent court.
Where a company is insolvent, in other words, its liabilities exceed its assets, the company itself, with the required special resolution of the Directors, can initiate liquidation proceedings. Companies often opt for this route to mitigate the harm shareholders and creditors may otherwise suffer.
Alternatively, a company may be forced to liquidate when one of its creditors brings an application for liquidation or when a shareholder or Director initiates liquidation proceedings. This is known as compulsory liquidation.
What the Process Involves
Whatever the underlying reasons may be, the requirements for voluntary liquidation to proceed will remain the same and certain requirements must be met before such an application will succeed.
A solvent business can be wound up voluntarily if the shareholders, directors, or members have adopted a special resolution to do so. The CIPC provides the Master of the High Court with a copy of the filed resolution and notice, after which a liquidator is appointed. The liquidator assesses the value of the assets of the business, arranges meetings with the company’s creditors, sells off the company’s assets, and then distributes the proceeds to the creditors.
Voluntary liquidation can also occur when a company makes an application to the court, stating that the owners of the company have made a special resolution asking the court to voluntarily liquidate the company. If the court grants the application, a provisional liquidation order is issued, the company’s creditors are notified of the liquidation application and the court date at which the provisional liquidation will be made final is determined. Creditors are then allowed to object before the provisional liquidation order is made final. Where no objections are received, the provisional liquidation order can be made a final order of the court and a liquidator can be appointed.
The Benefits of Voluntary Liquidation
The main benefits of these proceedings include:
- They are relatively inexpensive.
- They are expeditious.
- Limited court processes are required.
- Outstanding company debts are written off.
- Any legal action against the company is halted.
- Some staff may qualify to claim redundancy pay.
- Certain lease agreements may be cancelled.
Exercising the Voluntary Liquidation Option
It is important for the directors, shareholders, or members of a company to carefully consider the legal options available to them. Essential to obtaining the best possible outcome is to brief attorneys with specialist experience in insolvency, liquidations, and sequestration, like the qualified team at Francois Uys Incorporated Attorneys. We can assist you in navigating the complexities of the possible liquidation of your company, including drafting the required applications and managing any court proceedings. If you are considering voluntary liquidation, contact us today.
Disclaimer: This article is for information purposes only. It does not constitute legal advice and should not be used to make any financial or legal decisions. For advice on the topic liquidation, contact Francois Uys Inc. The information is relevant as of the date of publishing.
