Understanding Liquidation

Liquidation may be the only appropriate solution in tough times – the process explained

In the wake of the coronavirus and the national lockdown many businesses are experiencing or may in the near future experience financial difficulties.  Failing a timeous upturn in economic circumstances, such financial difficulties may be overcome by making payment arrangements with creditors.  However, if this is not possible or does not have the desired results, a business should consider business rescue or liquidation.

Business rescue is only a viable option if the economic climate is such that it is possible for a company to generate sufficient income to survive, following restructuring of the business and formal arrangements with creditors.

The liquidation of a company is a legal process – stakeholders of the company, such as creditors or shareholders of the company bring a court application for the winding-up of the company.  Both solvent and insolvent companies may be liquidated, but in this short article only insolvent companies are considered.

The process comprises two phases – provisional liquidation and final liquidation.

It takes between 4 to 6 weeks on average, from the date that we are given instructions for the liquidation of a company until the provisional liquidation application is heard, unless the provisional liquidation is opposed – which does not happen that often as creditors have the opportunity to oppose prior to the final liquidation.

Once the provisional liquidation order is granted, employment contracts and obligations towards SARS and other creditors are suspended.  No further legal action in respect of debts can be instituted against the company, and actions already instituted are suspended.

The court date for the granting of the final liquidation order generally will be set down for about 5 weeks after the date of granting the provisional order.

The Companies Act contains the grounds for liquidation.  If a company is unable to pay its debts in the normal course of business, it is considered commercially insolvent, which is one of the grounds for liquidation.  The Companies Act also contains provisions as to when a company is deemed not to be able to pay its debts.

When you make the decision to liquidate, you should no longer make any payments to creditors.  It can in fact be a contravention of the Companies Act or the Insolvency Act to make payments when the company is commercially insolvent.

An insolvent company may also be liquidated by a court on the alternative ground for liquidation, that it is just and equitable to do so.  If it can be shown that the liquidation would be to the advantage of all creditors, for example, that all the unsecured creditors will probably be paid some dividend, which is not negligible, this would be an important factor in the decision as to whether it would be just and equitable to liquidate – as opposed to some creditors being preferred.  A company can however be liquidated even if it has no assets, but if a decision to liquidate is left too long, it may result in the applicant, such as a shareholder, and unsecured creditors having to pay a contribution to the liquidator when the costs of the liquidation cannot be recouped from the liquidated company.

If your company is struggling financially in the current economic climate, you should seek legal advice sooner rather than later.

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