WHAT IS VOLUNTARY LIQUIDATION? HOW DOES IT AFFECT A SOLVENT COMPANY?
According to the information from Stats SA, a significant increase in compulsory and voluntary liquidations have been reported for the last six months of 2020. The lockdown regulations have made it difficult for businesses to pay creditors. In light of the recent ban on alcohol sales and beach closures, more businesses can be expected to apply for voluntary liquidation as ongoing restrictions severely affect their ability to trade. To this end, we answer the question “what is voluntary liquidation?” as it applies to solvent companies to help you understand the processes involved.
WHAT IS VOLUNTARY LIQUIDATION?
The process entails that the business stops all trading, except for those needed to complete the winding up process. The company or close corporation’s assets are sold and the income from the sale is distributed among the creditors. If a business is unable to pay debts when due while its liabilities exceed its assets, then by law it must stop trading. The directors, close corporation members, and/or shareholders can agree to wind up the business activities and for the voluntary liquidation of its assets. This can also be done when a business is solvent.
WHAT IS VOLUNTARY LIQUIDATION THROUGH A SPECIAL RESOLUTION AS RELEVANT TO A SOLVENT BUSINESS?
If the business entity’s liabilities do not exceed its assets and it is still able to pay its creditors, then it is still solvent. However, to close the books and bring an end to the entity, the shareholders, directors, or members adopt a special resolution to voluntarily liquidate the entity. They must file the resolution with CIPC, perform the necessary notice, and make the required payment on the prescribed fee. Once this process has been completed, the company or close corporation enters the winding-up phase.
Following this route for voluntary liquidation, it is essential to provide proof of security at the Master for the debts of the entity within the prescribed period. Note that it is possible to request approval for setting aside the security requirement.
CIPC submits a copy of the resolution to voluntarily liquidate to the Master and the liquidator appointment follows. The liquidator is tasked with the assessment of the company’s assets to determine the value. They also set up the relevant creditor meetings, arrange for the sale of the assets, and oversee the distribution of the proceeds of sale in the prescribed manner.
WHAT IS VOLUNTARY LIQUIDATION OF A SOLVENT BUSINESS THROUGH A COURT ORDER?
Instead of the directors, members, or shareholders submitting the special resolution for the winding up and voluntary liquidation through CIPC, they make a special resolution for applying to court for the voluntary liquidation of the business entity. In this instance, the court awards the voluntary liquidation. The court approves a provisional voluntary liquidation, and the creditors are notified. They have an opportunity to object before the proceedings commence on the hearing date as stipulated by the court.
If no objections are made through the period, then the provisional order becomes the final order for voluntary liquidation. The liquidator is appointed to assess the value of the entity’s assets, the sale thereafter, and the distribution of the proceeds in the prescribed manner. Note that the creditors can also adopt the special resolution for the voluntary winding up and liquidation of a solvent company.
WHAT IS THE OUTCOME?
Once the solvent company has been voluntarily liquidated, the company is removed from the CIPC register. This is only done once the Master has filed a certificate of the voluntary liquidation with CIPC. Only then is the company removed from the register, and at that stage, it is officially no longer in existence. The business entity is then dissolved, but former directors and shareholders can still be held liable for omissions and acts prior to the official dissolving of the business entity. This means that a creditor or the liquidator can, after the date, apply for the dissolution to be voided. If granted by the court, proceedings against the business entity or its directors initiated prior to the dissolution can go on as if the business is still a juristic personality.
The two acts to consider in the winding up and voluntary liquidation of a solvent company or close corporation are that of the old Companies Act (61 of 1973) and the new one (71 of 2008). If an insolvent company is liquidated, then it is done according to the old Companies Act.
WHEN DOES WINDING UP OR VOLUNTARY LIQUIDATION OF A SOLVENT COMPANY BY MEANS OF A COURT ORDER APPLY?
It makes sense to adopt a special resolution for the liquidation and dissolution of a solvent company through the submission of the prescribed forms, notices, and payments with CIPC. It is certainly more cost-effective than having to get a court order to do so, but there are instances for when a court order may be needed, as briefly discussed below.
BUSINESS RESCUE PRACTITIONER APPROACHES THE COURT
If a business is likely to become insolvent (cash and capital insolvent) within the next six months and is placed under business rescue to bring it back to a state of solvency, but the business practitioner comes to the conclusion that it cannot be saved, then they must notify creditors and the court of this. In this instance, an application is brought to court for the winding up and liquidation of the company.
CREDITORS APPLYING TO COURT
Even if a company is solvent, one or more of its creditors can still apply to court for its liquidation.
DIRECTOR OR COMPANY APPLYING BECAUSE OF A DISAGREEMENT
If the shareholders or directors cannot come to an agreement on an important issue, one of them can apply for the voluntary liquidation of the business entity. It is also possible for a director or the company to apply for the winding up of the business entity based on the improper conduct of one or more stakeholders in the business.
It is best to discuss the mentioned instances with experienced insolvency attorneys, as it is essential to understand what is seen as improper conduct, a disagreement on an important issue, and related matters.
UNDERSTAND THE PROCESS FOR THE WINDING UP APPLICATION
The insolvency attorney drafts the necessary affidavit for the voluntary liquidation application. The application is submitted to the Master of the High Court. The Master states the security needed. Relevant parties receive a notice of the application. Such parties include employees, SARS, shareholders, directors, trade unions where relevant, and the company. The application is placed on the court role. After the hearing, a liquidator is appointed and the winding up is done. The company is dissolved once CIPC has removed it from the company register.
PAYMENT OF THE VOLUNTARY LIQUIDATION COSTS
The proceeds from the sale of assets are used for the payment of the winding up and liquidation. The creditors also receive their benefits, whereafter any money left is distributed among the directors and members according to their rights in the company or close corporation.
NEED HELP?
If you want to liquidate your solvent or insolvent company, it is best to do so with help from experienced insolvency attorneys in South Africa. Get in touch with our insolvency practitioners for more information or a consultation on voluntary liquidation of a solvent company.
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.