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Liquidation, or ‘winding up’, refers to the process that follows after a company is no longer able to pay its debts when they fall due and has to shut down its operations. The purpose of liquidation is to wind up the organisation’s affairs and pay the outstanding debts owed to creditors. This is achieved by selling the company’s assets through either a public auction or private treaty. If there are funds remaining after payment to the creditors and after paying the costs of winding up, these will be distributed among the shareholders in accordance with their shareholding in the company.
When a company’s liabilities surpass its assets this is referred to as factual insolvency, whereas commercial insolvency refers to a company’s inability to pay its debts when they are due. An organisation that is commercially insolvent will normally find it difficult to continue trading and can then opt to place itself in voluntary liquidation or face a creditor applying for its liquidation to the Court.
Different legislation guides the liquidation process for insolvent businesses in South Africa. This article will focus on the liquidation of insolvent companies which is governed by the Companies Act No. 71 of 2008 and the Insolvency Act No. 24 of 1936.
The liquidation process entails selling a company’s assets, either privately or by public auction, to cover the costs and expenses resulting from the liquidation proceedings. The remaining funds are paid to creditors. A company that is unable to afford debt repayments may need to initiate liquidation proceedings. The liquidation process may be voluntary or involuntary.
In respect of an involuntary liquidation, a creditor normally makes an application, on an affidavit under oath, to the court with jurisdiction, claiming that the organisation cannot pay its debt when they become due. It may be the case that an application for a provisional order of liquidation is made prior to a final order of liquidation. A copy of the liquidation application must be delivered to the company employees, any registered trade unions representing the employees, as well as SARS.
The applicant must furnish the court with proof that a copy of the application was delivered to each of the aforementioned parties prior to or on the day of the application being heard. If the court grants a provisional winding-up order, the sheriff of the court will normally deliver to the aforementioned parties, as well as creditors, a copy of the provisional order.
A provisional liquidator is then appointed by the Master of the High Court, pending the approval of creditors. Upon the granting of the final liquidation order, the Master of the High Court will call a meeting of the creditors to allow creditors to submit their claims and to finalise the appointment of the liquidator. Liquidators are responsible for the administration and winding up of the organisation’s affairs. The liquidators will sell the company’s assets and distribute the proceeds in order of preference of the creditors.
The first meeting, which is announced in the Government Gazette, generally occurs within 8 (eight) weeks after the final liquidation. Creditors will have another chance to substantiate their claims at a second meeting, which must be convened within 3 (three) months after the liquidators’ final appointment. To benefit from a distribution of funds, creditors are required to submit claims that are backed up by affidavits under oath containing all essential supporting documentation. The process, on average, is concluded within 6 (six) months to 2 (two) years.
To ensure successful, prompt and efficient resolution of your matter, it is important to consult with an experienced lawyer when commencing with liquidation proceedings. Legal procedures are often complex and necessitate a legal background with extensive knowledge of legislative and procedural requirements to reach a successful resolution.
This article is intended as an educational summary of the liquidation process of insolvent companies in South Africa and does not constitute legal advice of any sort. It is best to consult an experienced lawyer to assist you with liquidation proceedings to ensure that it is in line with legislative requirements. For exemplary legal assistance contact Alan Levy Attorneys.