Understanding company liquidation is important, as is knowing what happens to your business throughout the process and thereafter. Also, you will want to know whether it is better to apply for business rescue or to start over.
Read on as we take a closer look at what happens to your company with liquidation, what your choices are in terms of trading, and whether or not to apply for business rescue.
WHAT HAPPENS WITH COMPANY LIQUIDATION?

It is the process whereby a company is winded up. The assets are sold and the creditors get paid from the sale. All accounts are closed. If a business is insolvent, it must liquidate according to the provisions of the Companies Act 71 of 2008. A solvent firm can also liquidate voluntarily through CIPC. To liquidate as an insolvent business entity, an application is made to court. Note that every business faces a unique situation. To this end, rather speak with our consultants to discuss your firm’s particular situation.
WHAT IS INSOLVENCY AND WHEN IS BUSINESS RESCUE AN OPTION?
If the business is unable to pay its debts when due, but the assets are more than the liabilities, then it can be a temporary situation. In this instance, the business is cash-flow insolvent. Business rescue can be pursued if it is possible to restructure the organisation for profitability and overcome the temporary cash-flow situation.
If the business has sufficient cash-flow to operate, but its liabilities far exceed its assets, it is capital-insolvent. In this instance, it is also insolvent, but restructuring or a large cash injection from an investor can solve the problem.
True insolvency is when the business’ liabilities far exceed its assets, and it is unable to pay its debts when due or is unlikely to be able to do so within the next six months. Even in this situation, it is possible to have it rescued with the help of a business rescue practitioner. However, the situation might be too dire and then it is best to have the business liquidated.
To qualify for business rescue, the saving of the company must be in the best interest of the public and the assessment must show that the business can be saved. See the test for business rescue here to determine if your business qualifies.
WHAT HAPPENS TO YOUR COMPANY WITH LIQUIDATION?
It is dissolved. The assets are sold. Debts are paid and it is de-registered from CIPC. It no longer exists. See the form for a liquidation assessment here.
WHO ARE SEEN AS CREDITORS?
SARS is a preferred creditor, which means SARS is among those creditors who are first in line to receive their benefits. Employees are also preferred creditors while secured creditors are the people or companies to whom your business owes money, but for which you have given security for the debts. Unsecured creditors are those who have claims against your company, but you have not given security for the debts. Creditors are all parties with financial claims against the company.
CAN DIRECTORS BE HELD RESPONSIBLE FOR DEBTS OF THE COMPANY WITH LIQUIDATION?
Yes, if the directors have signed surety, they are responsible for those debts. An example is the lease agreement for the premises. What often happens is that the landlord only allows the tenant company to rent if the directors sign surety. In this instance, the directors will be responsible for the lease payment. This can become a complicated affair and is best handled by an insolvency attorney. We recommend seeking legal help to determine your director debt responsibilities as you might have signed surety for the business on several occasions.
Failure to take the appropriate action, such as liquidating the firm when it is insolvent and fraud by directors, can also cause them to be held responsible for debts of the business. Best speak with our attorneys on the steps to minimise risk for the directors.
WHAT HAPPENS ON THE LAST DAY OF TRADING?
If your directors agree via a special resolution to liquidate the business, then you must decide on the official last day of trading. It is imperative to keep to this date and not to keep trading afterwards as all income generated then will be to the benefit of the creditors.
Reach out for legal help and information on what happens to your company during and after liquidation.
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.