HOW VOLUNTARY LIQUIDATION OF A BUSINESS WORKS IN SOUTH AFRICA
It is no secret that start-up businesses have tremendous capital layouts, and often land in deep water within a year. Getting out of debt is difficult as is, but add problems, such as VAT payments, SARS returns, and upfront expenses related to large contracts, and it is a recipe for disaster.
When there is a slow-down in the economy, more businesses fail. Indeed, it is estimated that five out of seven start-up businesses in South Africa do not make it through their first financial year. Reasons for such failure range from poor business planning to highly competitive business environments, escalation in product and overhead prices, and capital layouts for large projects. Unlike larger firms, small businesses do not have sufficient spare capital to absorb non-paying or late-paying clients.
Entrepreneurs often put in everything to make their businesses work, including taking out additional loans or overdrafts in order to fund large deals with the potential of handsome returns. However, in many cases, the commissioning client companies stall with payments, causing the smaller start-ups to fold even before getting out of the starting gate. One way to deal with the excessive debt problem is to apply for voluntary liquidation of the business.
LIQUIDATION AS A DEBT SOLUTION
The Companies Act of South Africa stipulates that a business must seize trading and liquidate if its liabilities exceed its assets, and the business is unable to pay its debt. Voluntary liquidation is a legal process whereby the business estate is surrendered, and the assets are sold on auction to pay for the cost of liquidation, management of the liquidated estate, legal fees, and the minimum benefits to the creditors.
Liquidation can be voluntary, which is when the shareholders decide to liquidate the business and apply for such to a court with the assistance of attorneys specialising in liquidations. It can also be compulsory. In this instance, the creditors or a single creditor apply to court to have the insolvent company liquidated. Liquidation is normally the last resort, as it means the company closes its doors and people are retrenched.
MORE ABOUT VOLUNTARY LIQUIDATION
Voluntary liquidation is a straightforward legal process whereby an application is made to the High Court to have the business affairs placed under control of a court-appointed liquidator who sees to the sale of assets and distribution of proceeds to the creditors. The liquidator investigates the financial affairs of the business to determine the reasons for failure. The liquidation is then advertised, and the company’s doors are closed. The creditors are notified and the assets are sold. Proceeds are distributed to the creditors.
Once the liquidator is appointed, the company is no longer under the control of its shareholders or directors. A creditor meeting is called where the creditors must prove their claims. Unless the directors are guilty of fraud or mismanagement of the company’s finances, they are not liable for any of the company’s debts. However, where directors have signed surety for the company, they too become liable for the debt and must then either be able to pay the debt or face sequestration.
Note that should the directors conduct business while the company is insolvent, they can become liable for any debt incurred. It is thus essential that the company seize trade once the decision has been made to liquidate, and on the date agreed upon. Voluntary business liquidation can take two weeks or several months, depending on the particular situation.
The company’s debt problem is solved. The director risks are managed, and they can create and implement new business plans. It is possible to apply for business rescue, even after the liquidation application has been made.
WHAT IS BUSINESS RESCUE?
It is also a legal process in which the company applies for legal protection, giving it an opportunity to propose a new business plan and arrangements with the creditors. The downside is that business rescue is expensive. As part of the process, a business practitioner and supporting team are appointed to oversee the rescue process. It is a suitable solution for medium to large corporations, but is too expensive for smaller companies. Voluntary liquidation is thus the best debt solution for a struggling and insolvent smaller company.
WHERE TO GET HELP
Get in touch with our team of insolvency attorneys to assist your company in dealing with debt through voluntary liquidation. Our team provides you with legal guidance, and handles the entire application process on your behalf.
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.