When are Liquidation Costs Incurred?
There are three legal processes available to financially distressed companies in South Africa, namely liquidation, business rescue and compromises in terms of the Companies Act 71 of 2008 (Companies Act). Only the liquidation process incurs liquidation costs.
The Liquidation Process
The test for placing a company into liquidation is whether or not the company can pay its debts as they are due. If not, the board of directors may pass a resolution to that effect, or an application can be made to court either by the company itself or by a creditor or shareholder of the company.
The liquidation, or winding-up, is a relatively simple process that involves the realisation of a company’s assets, to pay the liquidation costs and expenses incurred in the winding-up process. Any remaining, after liquidation costs and expenses are paid, is distributed to creditors in a prescribed order of priority.
Liquidation applies to corporate entities, also referred to as juristic persons, such as Companies or Close Corporations. The Companies Act 61 of 1973 regulates the liquidation process in conjunction with the Insolvency Act.
The objective of liquidation is to help ensure that creditors receive some repayment of their outstanding debts and that the entity does not continue trading and incur fresh debt.
Business Rescue Proceedings
In business rescue proceedings the business rescue practitioner bills the company for their payment and costs as per the rates specified in the Companies Act. They charge on an hourly basis, and the rate varies based on their level of experience, Additionally, the practitioner can enter into a separate agreement with the company for additional payment under specific conditions. The agreement for additional payment is only valid if approved by the company’s creditors.
Compromises in Terms of the Companies Act
This process allows companies to attempt to negotiate a compromise on their debt repayment with their creditors directly. For a compromise to be accepted, it needs approval from a majority of creditors, constituting at least 75% in value of the company’s creditors present at a specially convened meeting.
A receiver is appointed, as per the approved compromise proposal, and typically oversees the implementation of the compromise. The receiver is compensated according to the terms outlined in the proposal.
Calculating Liquidation Costs
Calculating liquidation costs in South Africa involves accounting for various expenses related to the liquidation process which include:
- Legal and professional fees are paid to lawyers, liquidators, and other professionals involved in the liquidation process.
- Asset valuation and realisation fees which include the cost of valuing and selling the company’s assets.
- Payment of any outstanding taxes and duties, including VAT and payroll taxes.
- Miscellaneous administrative expenses incurred during the liquidation process, such as communication and postage.
- Expenses related to advertising the liquidation and notifying creditors.
It’s important to note that these costs can vary widely depending on the complexity of the liquidation, the size of the company, and the cooperation of stakeholders involved. It is advisable to consult with a qualified legal expert to get a precise estimate of the liquidation costs, depending on the specific circumstances of each liquidation.
Manage Your Liquidation Costs
Francois Uys Incorporated Attorneys has a seasoned team of insolvency professionals who can liquidate your company quickly and efficiently. We are experts at working with South African companies that can no longer meet their debt repayment obligations. With years of experience in the field, our highly talented team will work closely with you to find the best solution to your company’s debt and provide you with the best possible outcome.
For comprehensive information on the topic of liquidation and liquidation costs visit the Francois Uys Attorneys Inc. website or contact us today for expert 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 and liquidation costs contact Francois Uys Inc. The information is relevant as of the date of publishing.