t is no secret that most small- to medium-size businesses fail within the first two years of operation, with many also failing in the third and four years. The business world is highly competitive and even having just one large client not paying their accounts can mean serious cash-flow problems. South Africa’s Insolvency Act states that if the liabilities of a business exceed its assets and the business is unable to pay its debts, accounts, and employees, it must cease trading. There are rescue plans available, but sometimes even such plans are not enough to keep the business afloat. This is when it is time to get help from insolvency lawyers.

It is certainly better to apply for voluntary liquidation than having to wait for a creditor to bring a compulsory liquidation request to court. In the latter instance, you won’t have time to register another business entity to ensure that you can continue trading and save the employees’ jobs. In addition, a hostile curator is not ideal, because you want to minimise the effects of the liquidation on the business, directors, and employees. As such, take the responsible step to consult with insolvency lawyers regarding options and the best route to take.

If you and your fellow directors or members decide to liquidate the business, you must decide on which date the business will stop trading. Once the date arrives, you must cease all business operations, stop any further payments to creditors, and stop generating income. Any such income will go directly to the bankrupt business estate and you may not use any of it.

Our attorneys will handle the court application for urgent relief and thus a provisional liquidation order. Once awarded, the creditors cannot take any further legal steps against your business. The court will appoint a liquidator, whose appointment will be confirmed upon the final court order. The creditors receive notification regarding the court date and can in the meantime oppose the liquidation request. If no objections are received, the court awards final liquidation and the liquidator assesses the business assets, including the business bank accounts and debts owed to it. The assets are sold and the benefits fairly distributed amongst the creditors. The liquidation is completed.

Note that all the contracts into which the business has entered remain valid and the liquidator makes the decision whether to honour a contract or to have it terminated, the decision always being to the benefit of the creditors. Where the liquidator terminates a contract, the creditor can then claim against the estate as a creditor without security.

It is important to understand that the members, trustees, directors, and shareholders can be held accountable for debt for which they have signed surety. To avoid such pitfalls during liquidation, get help from insolvency lawyers before taking the decision to stop trading. If the court finds that the director/s have committed fraud or have irresponsibly managed the business’ financial affairs, the court can rule that they should be held responsible in person for the debts.

Employment contracts also stay in place and the liquidator decides on them. During the liquidation process, the employee contracts, though valid, will be suspended and the employees are under no obligation to keep working for the employer. They are, however, not entitled to benefits or payment. For these reasons, it is essential to take proactive steps in helping your employees find suitable alternative employment before liquidation, or to register another business entity to keep trading, where the employees can then work.

Employees who lose their jobs as the result of the business liquidation can claim for the loss suffered, including the severance pay due. However, the creditors with security rank first, then employees and SARS, and then the creditors without security. Get professional guidance and help from our insolvency lawyers to minimise the effects of liquidation.