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The process of liquidation

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The process of liquidation

6th July 2017

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When a prospective business owner registers a new company, he or she does so with the confidence that they will make a success of that business. However, despite the intention of setting up and running a successful business, unforeseen situations can over time have a negative impact on these good intentions, resulting in such a business ultimately failing.

This is particularly common with small start-up companies which statistically never make it past year one. When a company has exhausted all alternatives, it is recommended that it, or its creditors, apply for liquidation. The brief differences between such voluntary versus involuntary liquidation is outlined later on in this article.

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The liquidation process can be defined as the process in which a company voluntarily proceeds to declare itself as being insolvent or where a creditor of the company brings an application to court in order to have the company declared insolvent. The result thereof is that the company may no longer proceed to operate its business. Sections 79 to 83 of the Companies Act No 71 of 2008 (hereinafter “the Act”) provides the  procedure to be followed when winding up a company, either voluntarily or through a court order (i.e. involuntary liquidation).

Legislation

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The South African law provides that a company can either voluntarily apply to the High Court to be liquidated or be forced into liquidation by its creditors or shareholders.

Section 79 of the Act  provides as follows:

“79. (1) A solvent company may be dissolved by—
(a) voluntary winding-up initiated by the company as contemplated in section     
80, and conducted either—
(i) by the company; or
(ii) by the company’s creditors, as determined by the resolution of the company; or

(b) winding-up and liquidation by court order, as contemplated in section 81.”

The process of Voluntary Liquidation

For a company to be voluntarily wound up, section 80 of the Act requires that a company’s shareholders must adopt a special resolution which will indicate that they agree to the  winding up of the company. The company is also required to submit security to the Master of the High Court for payment of the company’s debt. This will be for payments to be made within a 12-month period, commencing after the start of the winding up of the company, should it be required. The result of winding up a company, is that the affected company ceases to conduct any business and as a consequence thereof is being removed from the Companies and Intellectual Property Commission (CIPC) registration database.

The process of Involuntary Liquidation

Section 81 of the Act outlines the procedure that should be followed when a company is wound up based on an application by a creditor of the company.  This section provides for a variety of instances when an application can be used to wind up a company.

The most contentious instance is when a creditor or a shareholder of the company applies to the court for a liquidation order. The court will initially grant a provisional liquidation order which results in the company being given an opportunity to oppose the liquidation order. However, should the company not oppose the order by the specified date given by the court, the court will subsequently grant an order that the provisional liquidation be made a final liquidation order. The Master of the High Court then appoint a liquidator to liquidate the assets of the company and pay its liabilities.

Conclusion

No company owner wants to be in a position where his/her business has deteriorated to such an extent where the company either has to be voluntarily liquidated, or liquidated by  way of an application by a creditor of the company or its shareholders. It is recommended that a business owner seeks professional advice from a business mentor before the aforementioned situation occurs. 

However, should such a stage be reached, there are certain legal procedures that need to be followed and adhered to by the business owner. Contact an attorney at SchoemanLaw Inc. to guide you through the intricate legal procedures of winding up your company according to the Act to avoid exacerbating an already critical situation.

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