I
n addition, if the business's financial position is so severe that it can no longer honour its contracts with creditors. This means that the company is factually insolvent. So, basically, the company can no longer function and can no longer continue trading under the corporate name.
Can a Creditor bring a Liquidation Application?
Yes, creditors can apply for the liquidation of a company if there's an outstanding debt owed. Directors must act swiftly because if creditors apply for liquidation for obligations owed, it might pose a serious financial threat to the directors, something the company must avoid at all costs.
The process of business Liquidation and what it entails?
Contrary to popular belief, an entity can be liquidated whether it is solvent or insolvent, in accordance with
CIPC, the
Companies Act and the
Insolvency Act.
When do Factual Insolvency Occur?
Factual insolvency occurs when a company is unable to honour its monthly obligations. When a business's liabilities exceed its assets, it is said to be commercially insolvent.
How can a Solvent Company be Liquidated?
Solvent companies can be liquidated for causes other than financial difficulty. For example, if the directors can no longer operate together or have served their purpose, they can file for voluntary liquidation.
Different ways of Dissolving a Business:
A business can be liquidated voluntarily in several ways, namely:
1.
By its directors and shareholders; or
2.
Through a court application usually started by a creditor. Which is also known as compulsory-, Forced, or Involuntary liquidation.
What Is Voluntary Liquidation?
Voluntary Liquidation may be unavoidable in instances where Business Rescue is not encouraged or is ineffective, and it may be the most appropriate approach that provides the best outcome for all stakeholders.
When do Voluntary Liquidation occur?
Voluntary liquidation occurs when the directors/shareholders decide to wind up the company on their own terms, agreed upon by way of Director and / or shareholders' resolution.
Will the stakeholders in a Business be able to participate in the liquidation process?
While it is a formal legal process handled by an insolvency practitioner, voluntary liquidation still provides directors greater control and participation throughout the process.
Benefits of Voluntary Business Liquidation
The benefit of voluntary liquidation of an insolvent company is that it eliminates creditors' pressure and allows you to walk away debt-free.
How stressful is Voluntary Business Liquidation to its' stakeholders?
Voluntary liquidation is a considerably more relaxed approach, and it is the quickest and most efficient way to deal with an insolvent corporation with no future.
How is a Company Voluntary Liquidated?
When applying for voluntary liquidation in South Africa, whether solvent or insolvent, there are two options:
1.
Through an administrative request to the Companies and Intellectual Property Commission (CIPC); or
2.
Through a court application.
Who will appoint a Liquidator?
Following the completion of the filing process, the Master of the High Court will appoint a liquidator to take care of the business and protect the interests of the creditors and shareholders in both scenarios.
At what point must a company apply for voluntary liquidation?1.
When is a Business Insolvent?
2.
When a business or closed corporation is unable to meet its obligations to creditors, it is commercially insolvent. It has a legal obligation to apply for voluntary liquidation by a special resolution passed by the directors and shareholders.
Important to remember…
It should be noted that dealing while insolvent is both a civil and criminal offence.
If you have assets that you want to safeguard, trading while insolvent can put them in jeopardy. Because a liquidator or creditors can pursue you personally for debts accumulated after the business went bankrupt.
Liquidating a Solvent Company
If a company is solvent, it can file for liquidation for reasons other than financial difficulties. For example, if the directors are no longer ready to work together or if the company has served its intended purpose.
Benefits of Voluntary Liquidation?
If your firm has no future, there are several advantages to filing for voluntary liquidation in South Africa, which include:
• What happens to the Company Debts?
All your company's debts will be written off. If a corporation is voluntarily liquidated, the directors have no legal need to repay any money due by the firm if no personal guarantees are signed.
• SOUTH AFRICAN REVENUE SERVICES (SARS) Debt – Will it also be written off?
YES!!! All debts owed to the South African Revenue Service will be written off when you continue with a Voluntary Liquidation Application.
• Legal action is halted, and no more measures can be taken.
If a corporation files for liquidation, all legal action against it must cease, and no further legal action can be undertaken. This means creditors can't come after you.
• Leases are terminated.
Leases on buildings and equipment, as well as any hire purchase arrangements, are often ended on the day of liquidation. If arrears are to be sought, the landlord will do so through the liquidator, as will all other creditors.
• Start Living Again...
Voluntary liquidation allows you to move on to the next chapter of your life, confident that the company will be closed legally and properly.
When Does Liquidation Become Mandatory?When a company or close corporation is unable to satisfy its creditors, then it is insolvent.
Or its obligations exceed its assets. Then the company is commercially insolvent, and the directors do not choose to petition for liquidation; an affected creditor or creditors may file a court motion for compulsory liquidation.
The creditors can continue with a Forced Liquidation. This process can be lawfully imposed on the company if the creditor's demands for immediate payment are not met, and they have sufficient grounds to believe that the company is commercially insolvent.
Compulsory Liquidation
Compulsory or involuntary liquidation is following by court order, and creditors will have an active role in the nomination of the liquidator, who must then work on their behalf.
What will happen to the Assets in the Liquidated Business?
They are obligated to sell all the company's assets. The obvious adverse effect is that you have no control over when or even if the liquidation process starts.
Liquidation is a complicated process, and it is essential that a business owner obtain professional guidance before the aforementioned circumstance occurs.
How Much Does It Cost to Liquidate a Business in South Africa?
The cost of liquidation can vary depending on the specifics of each case. Several other criteria, such as the number of creditors, the complexity of the task, the quantity of assets owned by the company, and so on, can also play a role.
When Can a Company Be Liquidated?
• If the company cannot pay its debts and is factually insolvent.
• If the company's liabilities exceed the company's assets (commercially insolvent).
• The stockholders have agreed not to continue with the firm.
• The company is no longer profitable as a result of market changes.
• A major employee or director has left the organisation or died.
• The company's directors cannot agree on how to administer the company or conduct business.
How Long Does Voluntary Liquidation take in South Africa?
A company can be liquidated in as little as 10 to14 days. However, the timeline will be largely dependent on the type of liquidation and the procedures followed by the insolvency practitioner. However, the current state of things at the organisation will also have an impact on the timetable. For instance:
1.
If the liquidation is merely a distribution process (i.e., all assets have been liquidated and are held as cash, and the business has zero creditors), shareholder payouts can be given within hours of the company going into liquidation.
2.
If assets must be sold and creditors' claims must be agreed upon and paid, the procedure may take several months to complete; for example, if a property must be sold, the standard conveyancing steps must be followed.
What Happens to the Company's Directors When It Goes Bankrupt?
A director/member is not inherently accountable for the company's debts. The exception to this regulation is debts for which they have signed surety in their personal capacity.
If the creditors' claim for payment from the liquidator is not realised, they might take up this surety. In some cases, creditors may write off the obligation regardless of the sureties.
The director/s may also be held accountable for the company's obligations if it can be established in court that they acted fraudulently or grossly negligently in administering its activities.
What Is the Difference Between Liquidation and Sequestration?
The applications for liquidation and sequestration proceedings are frequently paired up. Many individuals believe that the procedures are the same. However, there is a significant difference between the two.
• Liquidation
When a company, close corporation, or other legal entity declares bankruptcy. If a company's liabilities surpass its assets, it is declared bankrupt and must cease operations under the law. Insolvency occurs when a business is unable to pay its bills.
• Sequestration
When an individual, sole proprietor or trust declares bankruptcy. "Surrender of the Estate" refers to the process by which a natural person petitions a court to declare him insolvent.
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