If a creditor wants to bring an application for liquidation of your company, the creditor must be able to prove that it would be fair and just to liquidate your company. The creditor must prove that your company is insolvent and thus unable to pay its debts.

If you want to bring a voluntary application for liquidation of your company, a creditor can oppose it if they can prove that your company is not insolvent and that is would not be fair and just to liquidate it. With voluntary sequestration of an individual, the applicant’s estate must have sufficient assets to ensure the sale thereof on auction can realise the minimum benefit to the creditors as required by law and for payment of the sequestration process, but with a company it is different. According to the Companies Act, a business entity must stop trading if it is insolvent. It is considered insolvent if its liabilities exceed its assets and the business is unable to service its debts. As such, no assets are needed if you want to voluntarily liquidate your company.

If you have signed surety on any of the debts of the company, you will become liable for those debts and may also need to sequestrate. We thus recommend that you seek legal guidance before liquidating your company to ensure that you do not lose all your personal assets in the process. The overseas debts of the company must be included in the liquidation process. It is imperative to list all creditors that can have claims against the business estate, as there are legal consequences for leaving out any creditors. All creditors must be notified of the liquidation application. However, unlike with a voluntary sequestration where the creditors must be notified before the application is brought to court, the creditors of the company need only be notified once the provisional application has been brought to court. The only exception is SARS.

Once the provisional application is made, the final liquidation order is enforced. This means creditors cannot take any further legal action against the company. The company must cease all payments to the creditors after the last day of trading. This is to prevent one creditor from being benefitted above the others. Interest on debt is frozen and the creditors are handled as a collective. The last day of trading is the date that the directors of the company or members of the close corporation have agreed upon and they must sign a resolution to the effect. A business can trade, but any income from that date forward goes straight into the insolvent estate of the business. This means the directors and the business may not use any of the income.

The best way to ensure that employees do not all lose their jobs is to register another business entity before making the decision to apply for liquidation. The business operations can be transferred to the new entity and the employees can be employed by the new business entity. In this way the effect of the liquidation on the employees can be kept to a minimum. Note that when your company liquidates, the employees become preferred creditors. This means that, along with SARS, they stand first in line for claims against the company. Once the last trading day has passed, the employees are creditors and you will thus also not be able to pay them, as you cannot benefit them above other creditors. To avoid such a situation, it is thus best to ensure that they already have employment elsewhere.

Speak to our attorneys about the liquidation process, its impact, and how to address various issues such as employee salaries, notification of creditors, and more.

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.