What is Liquidation?
When a business is unable to pay it's debts, the owner of the company can apply to liquidate the business. Liquidation encompasses the process of a Liquidator taking charge of the estate and selling the assets by way of public auction. If auctioning off the client’s assets does not generate enough revenue to pay off debt, Credit Providers will turn to personal sureties to pay the difference. If the directors or members cannot settle the outstanding debts, then they have the option to include these debts under debt review, or apply for Sequestration in their personal capacity.
Each case is different and unique. Please contact our offices on the numbers provided on our website to discuss your specific needs.
1. Liquidation documents are lodged
Liquidations Documents & Requisitions from Credit Providers are lodged at the Master of the High Court.
2. First Meeting with Credit Providers
A meeting is arranged with all the Credit Providers to determine the outstanding debt owing.
3. A Liquidator is Appointed
A Liquidator is appointed to manage the claims and all the Credit Providers are required to submit claims if they want to participate in the Liqudation.
4. Second meeting with Credit Providers
The Liquidator must convene a Second Meeting of the Credit Providers. At this meeting the Liquidator must Lodge a Report in Terms of Sec 81 of the Insolvency Act 24 of 1936. This report is a detailed report of the Current Affairs (Assets & Liabilities) of the Liquidated Company or Closed Corporation.
5. The Master of the High Court
The Master of the High Court and the Credit Providers will Accept and Adopt the Resolutions of the Report. Credit Providers can also lodge and prove Claims against the Insolvent Company or Closed Corporation.
6. Lodge Liquidation and Distribution Account
Once all the Assets of the Company or Close Corporation have been sold by way of Private or Public Auction, the Liquidator must draft and Lodge a Liquidation and Distribution Account at the Master of the High Court.
The Master of the High Court will examine the Liquidation & Distribution Account, the Master of the High Court will approve the account in concept and if satisfied give permission to the Liquidator to advertise the Account.
This process can take anything from one month to six months and if satisfied, gives consent to the Liquidators to advertise the Account to lie for inspection for a period of 14 days.
7. Confirmation of the Liquidation
If no objections are lodged, the Master of the High Court will confirm the Liquidation and Distribution Account in terms of which the Liquidator is entitled to pay dividends to Credit Providers
Benefits of Liquidation
1. Outstanding debts are written off
As a director you have no legal liability to repay monies owed by the business, unless personal surety was given for company debts. This opportunity exists to avoid any investments from being swallowed up by existing debts.
2. Legal action is halted
Any legal action against the Company is stopped on Liquidation. As long as you have not signed personal surety for a company debt, creditors will be unable to take action against you.
3. Leases can be cancelled
Terms on lease and hire purchase agreements are generally terminated at the date of Liquidation, meaning that no further payments need to be made. If any arrears exist the leasing agency can put in a claim along with the other credit providers.
4. Relatively low costs involved
The legal costs involved in liquidating a Company are significantly lower than the outstanding debt owed to the Credit Providers.
5. Avoid court processes
By voluntarily choosing to Liquidate the Company you demonstrate to the public that Liquidation was a company choice rather than a Credit Provider forcing legal action against you.
Disadvantages of Liquidation
1. Personal liability for company debts
Becoming personally liable for company debts can happen if a Director signed personal surety against the debts of the business. A Credit Provider can enforce the debt if they are unable to reach an agreement for repayment. In this event it may also become necessary to Sequestrate the Director that signed personal surety for the debt.
2. All business assets will be sold
There will be no remaining assets with which to start a new business. All existing assets will be sold off in order to provide a dividend to Credit Providers where possible, and for the insolvency practitioner to collect their fee.
3. All staff will be made redundant
When staff notice the events unfolding they look for new employment, abandoning their jobs and making it difficult for the Company to continue the business under a new company name. Intellectual capital is lost and new staff will have to be employed and trained.
Liquidation - Frequently Asked Questions
1. Should my Company / Close Corporation keep on paying it's Credit Providers after instruction is given to the Attorneys to Liquidate?
No. Should your company keep on paying certain Credit Providers, it prefers them above other Credit Providers which under South African Law is not allowed.
2. Can Credit Providers oppose the Liquidation application?
Yes. If they can prove that the company is not insolvent and that it is not fair and just that the company be Liquidated.
3. Should I attend court when the application for Liquidation is presented?
No. Liquidation is dealt with by way of “motion” procedure. This means that everything that you want to present to court must be on paper.
4. How long does the winding up of my Company / Closed Corporation estate take?
The process normally takes between six months to eighteen months and in involved estates, where for example the Liquidator must take legal action against debtors etc, it could take many years. The winding-up process does not really involve you personally.
5. How does the Liquidator get paid?
There is a schedule that forms part of the Insolvency Act which prescribes that the Liquidator gets paid from the sale of the assets. When a Company is Liquidated and it has no assets it creates a problem as it costs the Liquidator a substantial amount to wind up the estate even when there are no assets. In these circumstances clients are advised to pay the Liquidator's fee and expenses as the Liquidator should not have to incur losses for the winding up of your Company.
6. What is the position regarding assets or debt that I have in countries other than South Africa?
The General Assembly of the United Nations has adopted a resolution, on 15th December 1997, after which the South African Parliament adopted the cross border Insolvency Act No 42 of 2000. If your Company has debt overseas your Company has to notify those Credit Providers of the application to Liquidate. These Credit Providers then have the same rights to claim from your Company’s estate as the South African Credit Providers. Assets that are held in another country form part of your Company’s insolvent estate and the Liquidator may apply in that country to extend the Liquidation order to that country.