Winding up of a Company - Liquidation South Africa
If you are a Company Director who wishes to shut down your business (also called winding up), or is being forced into that situation by Creditors, then you’ll need to understand your options. Entering Company Liquidation means your Company will cease to trade, your staff will be made redundant, and the Company itself will cease to exist as a legal entity. As a Director, your powers will cease, and you’ll no longer be able to access business bank accounts. If you’re Insolvent, a licensed insolvency practitioner will organise the Liquidation of corporate assets, and the proceeds are then distributed to the Company’s claimants to repay debts.
Why would a Company Liquidate?
South African legislation regulates the winding up of Solvent Companies and Insolvent Companies.
There are two different instances of insolvency, namely factual and commercial insolvency.
Factual insolvency occurs when a Company’s liabilities exceeds its assets, subsequently resulting in the Company’s inability to pay its debts as they fall due. Commercial insolvency occurs when a Company does not have enough cash on hand to pay its debts even though the Company’s assets exceed its liabilities.
Can a Company be placed in Liquidation if Commercially or Factually Insolvent?
The answer to this question is yes.
The distinction becomes important to Companies because it presents an indication on whether the Company may be rescued through a process called Business Rescue as per Chapter 6 of the Companies Act 71 of 2008.
The main difference is that if the Company is Commercially Insolvent, there is a possibility of rescuing the financial position by placing the Company under Business Rescue if a reasonable possibility exists that in doing so it will hold a better return for Creditors than Liquidation. This will obviously depend on various factors and must be determined on a case to case basis. Where a Company is Commercially Insolvent the Directors may Voluntarily Liquidate the Company by way of a resolution filed with Master of the Court.
In short, a Company is Liquidated when it can no longer pay its debts as they fall due. This is the test as to whether a Company should be Liquidated or not.
Liquidation or winding up is voluntary when the debtor makes a Court application to be Liquidated, the debtor must show cause that the declaration is in the best interest of the Creditors, and not done to prejudice their claims.
The Liquidation process includes the realisation of a Company’s assets through auction or otherwise in order to repay Creditors.