LIQUIDATION AS ONE OF THE DEBT SOLUTIONS THAT WORK FOR A COMPANY
If your business is in trouble, it is essential to take proactive steps in seeking debt solutions that work. Business rescue is one such a debt solution that can work very well. However, if it is not a viable way to save the business, it is time to apply for voluntary liquidation.
Perhaps you have not considered liquidation as one of the debt solutions that can work for a company in financial trouble, because you fear losing your own assets. Here is the good news: Unless you have signed surety for the business at any stage, as director, you are separate from the business entity. You will thus not have to apply for sequestration as well. In addition, unless you have managed the finances of the business irresponsibly, you will not be held liable in your personal capacity. However, there are instances where you can be held responsible for the debts of the company, but these are best discussed with our attorneys.
Liquidation is one of the debt solutions that work for a company in deep financial trouble, as the Companies Act states that if the liabilities of a business exceed its assets, the business is insolvent and must stop trading. If your business is thus unable to pay its employees and service its debts, the responsible step to take would be considering liquidation as one of the debt solutions that will work in such a situation. Failure to address the debt situation or to take the necessary steps in applying for voluntary liquidation of the company can be indicative of irresponsible management of the finances. If you plan well. it is possible to save the jobs of your employees by registering another business entity before you apply for liquidation of your business. The business trading is then done in the new business’s name and the employees are transferred to the new business. You can thus still trade and generate income while the insolvent business is liquidated.
Once you have decided on liquidation as one of the debt solutions that is likely to work in your situation, you must decide on the last trading day of your business. A resolution must be signed by all the members of the close corporation or directors of the company to the effect. No more share transfers can take place after the last trading day and any income generated from there on will form part of the insolvent estate. It is thus imperative to have another business entity in place to ensure trading can continue. All payments to creditors must cease, since it is illegal to favour one creditor over another.
The attorneys bring the provisional application for liquidation to court on a semi-urgent basis. Only SARS is notified beforehand. The court grants the application and sets a date for hearing on the final liquidation order. The creditors are notified and have time to object. If no objections are received, the final order is given, and the estate is placed under the control of the Master of the High Court. The Master transfers control to appointed liquidators. The directors of your company must meet with the liquidator and creditors to help the liquidator with the necessary information regarding debts owed and claims from creditors. The winding-up process can take a few months or even years, but since you have taken the proactive step in registering another business entity, you can go on with business while the current company is liquidated.
Note that you must disclose all information to the liquidator as requested and must ensure that you disclose any debts owed to overseas creditors as well. These creditors must also be notified about the liquidation application. The liquidator will be paid from the sale of business’s assets. If your business does not have any assets or finances, it will mean that the liquidator will have to be paid by the directors. There are costs involved in the winding-up process and these have to be covered.
Though voluntary liquidation is one of the debt solutions that can work very well for insolvent companies, the process can be complex and there are many pitfalls to avoid. We thus recommend you seek our legal guidance before you take any steps towards liquidation.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing – October 2018.