GET HELP WITH VOLUNTARY LIQUIDATION AND AVOID COSTLY MISTAKES
If your company’s liabilities exceed its assets, and your company is not able to pay its debts when due or there is a high likelihood that it will not be able to do so within the next six months, it must stop trading. You have the options of business rescue, compromise, or voluntary liquidation. For the purpose of this article, let us consider how to get help with voluntary liquidation, what the process entails, and factors to consider.
HOW TO GET HELP WITH VOLUNTARY LIQUIDATION
The Internet is a superb vehicle for finding information on just about any topic. However, information alone is not enough when it comes to insolvencies. Since the voluntary liquidation of an insolvent company entails a court application, you need to get legal help with the process. The first step is to get in touch with insolvency practitioners who can help you determine the best course of action for your firm’s particular situation. We provide an online liquidation assessment form to this effect.
You do not have to complete the form in one session as the session information is saved. You can thus get the required information or documents where needed and return to complete the assessment form for help in determining the best course of action.
THE DURATION OF THE VOLUNTARY LIQUIDATION PROCESS
Once the court has awarded voluntary liquidation, an appropriate liquidator must be appointed. The winding up process follows and the proceeds are distributed to the various creditors. The complexity of the securities, number of creditors, and cooperation given by the directors affect the speed of the process. It can take between 6 and 60 months for the process to conclude.
EFFECT OF THE VOLUNTARY LIQUIDATION ON THE EMPLOYEE CONTRACTS
Once the board of directors has decided on the last day of trading, it is important to inform employees of the potential job losses. It is possible to create a new company beforehand and start business operations to ensure trade can continue without significant job losses. That said, there is a fine line between what is legal and what can land the board of directors in trouble. To this end, it is best to get legal help with voluntary liquidation to ensure all decisions and steps taken are above board.
Keep in mind that all employment contracts are suspended once the liquidation process has started. The liquidator decides if and when to cancel employment contracts. Where possible, the liquidator attempts to minimise the need for retrenchments. It is imperative to be honest with employees about their job security to ensure they can take appropriate steps in finding suitable employment. Even contracts not yet cancelled or suspended at the start of the liquidation process will automatically be suspended within 45 days after the liquidator has accepted the appointment.
Once the voluntary liquidation process has started, the employees do not have to perform any job duties, as they are under no obligation and the company does not have to pay them either. The employees have preferent claims against the company, but these claims are limited. They also have limited claims for all monies due to them by the company for pension contributions, UIF contributions, leave days, and more. To avoid misunderstandings in this regard, get legal help on what is due to the employees.
EFFECT OF THE VOLUNTARY LIQUIDATION ON OTHER CONTRACTS – GET PROFESSIONAL HELP
A common misconception is that all contracts come to an immediate end. The truth is that the contracts remain valid and the liquidator can, at their discretion, decide which agreements to continue and which ones to cancel. Decisions regarding the contracts must be made within a reasonable period. Get legal help regarding the validity of agreements and on what is seen as a reasonable period.
HOW THE PROCEEDINGS AFFECT THE SHAREHOLDERS
Once the firm has been liquidated, it seizes to exist. Since there is no company, the shareholders have no rights. Only once the debts have been settled according the requirements of the law, and only if residue is left, can dividends be paid to the shareholders.
RANKING OF THE CREDITORS
The cost of the winding up process is first paid and then the creditors receive their benefits according to their status. Two types of creditors are distinguished. The first is the preferent and the second is the concurrent. The preferent creditors, as the name suggests, are the creditors, such as employees. SARS is also a preferent creditor. These creditors receive their benefits proportionate to their claims from the residue and the concurrent ones stand last in line.
Secured creditors are the ones to whom the company owes money and for which the company has given security for the debt. The proceeds of sale of the particular security that the secured creditor has against the debt are used to pay the particular creditor’s claim. Secured creditors can also be concurrent creditors if their claims are not paid in full.
The concurrent creditors thus consist out of unsecured creditors and secured creditors. These creditors are paid from the proceeds of sale once the winding up process has been paid and preferent creditors have received their benefits.
WHAT HAPPENS TO THE CLAIMS AND PENDING LITIGATION AGAINST THE FIRM?
Once the voluntary liquidation has been registered, any civil proceedings against the financial estate of the company are suspended until the liquidator has been appointed. Where a creditor proceeds to attach assets or put execution in force after the voluntary liquidation process has started, the attachment or execution in force will be void.
Where a creditor wishes to continue with their claim, attachment, or execution of force against the insolvent company, they must within 28 days of the liquidator’s appointment, notify the liquidator in writing and give the liquidator at minimum 21 days’ notice of their intention to go on with the proceedings against the insolvent estate of the company. Where the creditor fails to give the appropriate notice, the proceedings cannot commence unless a court awards otherwise.
RECKLESS MANAGEMENT OF A COMPANY – GET LEGAL HELP
The directors can be personally held responsible for the debts of the company if they recklessly manage the company. It is a criminal offence to commit fraud. This is punishable with imprisonment. Where the directors, knowing the financial insolvency of the company, continue to let the business trade and thereby add more debt to the company’s name, they can be considered as reckless. Rather than risking being held responsible for the company debts, it is best to get help with voluntary liquidation if it becomes apparent that the company can no longer pay its debts.
DIFFERENCE BETWEEN VOLUNTARY LIQUIDATION AND SEQUESTRATION
Sequestration is the legal process followed to apply for the surrendering of the insolvent estate of an individual. If voluntary, then the creditors must be notified of the intention to sequestrate. Because a company is prohibited from trading in an insolvent state, there is no need to inform the creditors beforehand of the intended liquidation application.
With liquidation, the directors are not personally responsible for the debt unless they have recklessly dealt with the company’s management or if they have signed surety for one or more debts of the company. In the latter instance, the directors must also apply for the voluntary sequestration of their individual estates.
WHAT HAPPENS TO THE INCOME GENERATED AFTER THE OFFICIAL LAST DATE OF TRADE?
All income generated after the last date of trade goes towards the estate of the company. Any profits thus made are to the benefits of the winding up process and the creditors.
WHEN IS LIQUIDATION BETTER THAN BUSINESS RESCUE?
Only if it is possible to bring the company back to a state of solvency is business rescue a better solution. If the rescue practitioner’s assessment shows that the company cannot be saved, then liquidation must follow.
WHERE TO GET HELP WITH VOLUNTARY LIQUIDATION IN SOUTH AFRICA
Get in touch with our insolvency practitioners for professional help. Start by completing the online voluntary liquidation assessment to determine the financial state of your firm.
Disclaimer: This article is for information 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.