Company liquidations in South Africa are more common than most people realise. The two main types of liquidations are:
- CIPC liquidation
- Court application for liquidation
WHAT IS THE DIFFERENCE?
The deregistration of a company at CIPC is also referred to as liquidation. In this regard, a solvent entity is brought to a close, and the easiest way to end it is to deregister it at CIPC. The assets and liabilities must be disposed of before the deregistration can take place. This normally takes anything from 90 to 150 days.
With the court application for liquidation, the board of directors or shareholders sign an agreement to consent to the winding up of the company. The application is made to the Master of the Court, and security is provided for the company’s debts.
WHAT IF THE COMPANY IS NOT SOLVENT?
With a court application, a liquidator is appointed to oversee the winding-up process of the company. This entails listing the assets, inventory, debtors, and creditors. The necessary financial statements are prepared, and the assets disposed in order to pay the minimum benefit to the creditors. As the company is a legal entity, the directors are not held responsible for its debts, except for where they have signed surety. In such instances, they must also sequestrate unless they can pay the debts of the company.
When it comes to a forced company liquidation, it is a creditor, shareholder, or employee that applies to court to have the company liquidated.
WHAT IS THE LAST DAY OF TRADING?
Where the board members have signed a resolution to liquidate the firm, they must decide on a last day of trading. This marks the last day in which income generated by the business is for the benefit of the directors, business, employees, and shareholders. Any income thereafter is directly for the benefit of the creditors of the liquidation account.
WHAT HAPPENS IN TERMS OF BUSINESS RESCUE?
The board of directors, an employee, or shareholder can apply for business rescue of the company in trouble. To qualify, the company must be in financial distress. It must be in the public interest to save the firm. And there must be a real chance for saving it. The board of directors can approach a legal firm where there is a business practitioner and appoint the practitioner to oversee the rescue process. It is also possible to apply to court for business rescue instead of the board of directors’ resolution.
The process is specifically aimed to bring a firm in financial distress back to a solvent state. There is usually a time limit that applies to the process. If the business practitioner realises that the entity cannot be saved, the practitioner must notify the court and creditors. Though the long-term success of companies saved through business rescue operations is often limited, when many employees are involved, it is worth the effort to save as many as possible jobs.
WHY ARE THE COMPANY ASSETS FROZEN DURING LIQUIDATION?
The company cannot trade and benefit one creditor over another. In the same way, the company cannot sell its assets or transfer such. This is all in place to protect the interests of creditors, including SARS. The other side is also true. Creditors cannot initiate further legal steps against the insolvent company and must wait for the liquidator to finish with the winding-up process to receive their benefits. All debts and the interest on the debts are frozen.
WHAT IS CORPORATE DEBT COLLECTION THROUGH LIQUIDATION?
Instead of your company ending up with severe cash-flow problems related to a client company’s non-payment for services and goods delivered, you can opt for corporate debt collection through the liquidation process. To ensure the success of your application, you must have a paper or electronic trail of the agreement by the client company to pay for goods and services rendered within a stipulated period. Every piece of paper or email signed by the client company representative to show satisfaction with the products or services rendered must be kept.
Keep in mind that the client company must have equity, otherwise your firm ends up paying the liquidator administrator fees. You must be able to prove that the claim against the client company is valid and can thus not to be disputed. This is done by means of the written communication and evidence of products or services delivered, acceptance thereof, and the non-payment of the amounts due. You need to notify the debtor company of your intention to liquidate the firm.
If the debtor company fails to respond to the demand for payment and does not respond to your notice of the intention to apply for the liquidation of the company, then be cautious. In this instance, the debtor company may have no equity. It will thus not be in your interest to liquidate the company as you will end up paying for the cost of the liquidator as well. If the company does respond, it is most probably because the firm is solvent and able to pay the debt. In this regard, the company most probably will attempt to come to an agreement and pay for the products and services rendered rather than risk being liquidated by a creditor.
WHY IS IT BETTER TO ATTEMPT DEBT COLLECTION THAN TO LIQUIDATE A DEBTOR COMPANY IN SOUTH AFRICA?
If the company does not have equity, it is not to your benefit to liquidate it. With liquidation, you risk only getting 20 cents out of the rand for the debt owed. Debt collection should be first in line. Here too, caution must be applied as it can cause a permanent rift between your firm and the debtor firm. Consider the amount owed. Is it enough to cause your firm to become insolvent because of the outstanding amount? If so, it is sufficient reason to enter debt collection proceedings.
If the debtor company files opposing documents to the liquidation application, you need to consider whether your firm wants to proceed with the court application. It can become a costly exercise. If you are sure that it will financially benefit your firm, you can proceed. To this end, make sure you have enough evidence to prove that the company has agreed to pay for the products or services and failed to do so or could only do so partially.
FACTORS TO KEEP IN MIND BEFORE APPLYING FOR THE LIQUIDATION OF YOUR OWN FIRM
Consider whether you have signed surety for debts since you as a director will then have to pay the debts or sequestrate. If you sequestrate, you may no longer be a director of a company until your estate has been rehabilitated. Keep in mind that only if you follow deregistration procedures at CIPC can you later apply for reinstituting the company to its legal status and only if the company is solvent. If the firm has been liquidated by means of the court application, it is no longer a legal entity and thus does not exist.
It is imperative to take responsible steps in saving a business entity as employees are involved and depend on the company for their income. If, however, it is not possible to restructure operations to bring it back to a solvent state, it is your responsibility to minimise the risk for creditors. To this end, apply for the liquidation of your company.
Get in touch with our legal team to help you decide how to address the solvency issues of your firm or that of a debtor client company.
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.