A DEBT SOLUTION THAT COMPANIES IN SOUTH AFRICA NEED TO CONSIDER
Liquidation may not be a debt solution that companies in South Africa consider at first, but with the risks involved in carrying on with business even when in financial trouble, more companies should consider it.
BUSINESS RESCUE AS A DEBT SOLUTION FOR COMPANIES
Some companies can still be saved, thus brought back to a state of solvency, whereas others have reached the stage in which it is best to stop trading and apply for immediate liquidation. Business rescue is the process whereby an appointed business rescue practitioner takes charge of a company that is in trouble. This is a temporary situation in which the practitioner is appointed to assess the current financial situation and take the necessary steps to restructure the business operations to bring the business back to a place of solvency. The company is protected against further legal steps by creditor companies during the business rescue period.
However, business rescue should not be used as a means to stay liquidation proceedings by creditors. If the company is in deep financial trouble because of a client that has not paid for a large contract or perhaps because of having too many overheads, it may be saved through restructuring. During the business rescue process, the practitioner can replace the board of directors or can work with the board to save the company.
If it should become apparent during this process that the business cannot be brought back to a solvent state, the practitioner informs the shareholders and relevant parties of such. In this instance, immediate steps must be taken to liquidate the company before its creditors force the company into liquidation.
WHAT HAPPENS WITH VOLUNTARY LIQUIDATION AS A DEBT SOLUTION?
Voluntary liquidation as a debt solution is especially helpful for smaller start-up companies. In many instances, the owner runs out of working capital within the first year. The business overheads, initial marketing costs, inability to compete with larger companies for a share of the target market, and more can be reasons for the financial troubles. If the owner or directors ignore the signs and let the company trade despite its insolvency, then they can become responsible for the debts of the firm.
The Companies Act states that if the liabilities of a company exceed its assets and the company is unable to pay the debts when such become due, then the company is insolvent and must stop trading. So, even if the business does not have assets, it must liquidate. The directors thus have an obligation to their employees and shareholders to take the necessary steps to initiate the winding up of the company.
Liquidation as a solution, enables companies to stop trading in order to not build up more debt and thus cause more financial losses for their creditors. Liquidation entails the dissolving of the company as a legal entity. The assets are realised, and the proceeds of sale thereof are used to pay the debts. Any surplus can be distributed to the shareholders.
The first step is to choose a date as the last day of trading. Any income generated after the last day of trading is for the benefit of the creditors. Such income is thus used to pay debts. It is, therefore, recommended not to keep trading. An application must be submitted to the High Court of the country.
The court provides a case number for the provisional application court date. Once granted, it provides relief against any further legal action for the debt by the creditors. As such, it is an immediate solution to stay further legal action and interest.
Because the application is made on a semi-urgent basis, the provisional order is immediate. The creditors do not receive notification before the application. SARS does get an immediate notification. The court postpones the liquidation matter for 30 days, giving creditors time to inspect and object against the application. If no creditor objects during the period, the court grants the final liquidation order on the return date and the liquidation process commences.
Creditors that object must do so by submitting their affidavits with reasons and details for such. A trial may follow if the reasons are valid.
Get in touch with our attorneys for more information on liquidation as a debt solution for companies in South Africa.
Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.