The Liquidation of a Company
If a company finds itself in financial difficulty and bankruptcy looms, the company can apply to court to be liquidated. As with sequestration, the liquidation of a company deals with finalising the affairs of the company by tracing its assets, taking control of them and realising them in a manner that is to the benefit of the company’s creditors. The proceeds are applied firstly for the payment of creditors according to the rating of their preferences, and thereafter the distribution of the residue among shareholder according to their rights.
Liquidation is not the same as deregistration of the company. This takes place only after liquidation by special resolution of the directors of the company.
To determine if liquidation is the right option, the company should consider what it stands to lose apart from the right to carry on business. Directors need to also consider if any directors or shareholders will be held personally liable for the debts of the company. This is especially important where money is owed to the South African Revenue Service (SARS) or if there was reckless trading, as directors can be held personally liable for a company’s tax bill. Directors need to also consider their duties in terms of sureties which the members/directors/shareholders might have signed.
Before the court will grant a liquidation order, the court must consider above all, whether liquidation in a particular case can reasonably be avoided, a question that is independent of the prospect of a business rescue option. And if the company can pay its debt, what is the source of funds.
If a company is over-indebted and is unable to make payments on all its debt, said company is deemed by law to be ‘financially distressed’. The Companies Act of 2008, “Chapter 6, Section 128, Application and definitions applicable to Chapter”, defines a financially distressed company as follows:
S. 128 (1) (f) “financially distressed”, in reference to a particular company at any particular time, means that-
(i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or [Subpara. (i) substituted by s. 81 of Act 3/2011]
(ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months
If a company is in financial distress, Section 349 of the Companies Act of 1973 states that the directors of the company must first make a special resolution that the company is to be wound up, before approaching the court.
349. Circumstances under which company may be wound up voluntarily.
A company, not being an external company, may be wound up voluntarily if the company has by special resolution resolved that it be so wound up.
The company must first take a special resolution that it wishes to be wound up and liquidated. It must then file a CM 26 Special Resolution Form with the Companies and Intellectual Property Commission (CIPC). Once this is done, the application for liquidation of the company can go ahead.
Once the liquidation application is granted a company in financial distress is declared insolvent and its assets are handed over to the liquidator and realised in a manner that is to the benefit of the company’s creditors. The proceeds are applied firstly for the payment of creditors according to the rating of their preferences, and thereafter the distribution of the residue among shareholder according to their rights.
This is similar to the sequestration of an individual, under the Insolvency Act of 1936, where a financially distressed person is declared as insolvent after he or she successfully applies to court for the voluntary surrender of his or her estate.
- Once the process starts, the company must seize trading, except for purposes of the winding up, or as the liquidator requires
- The company is no longer under the control of the directors
- The control of the company vests with the Master of the High Court, who hands them over to the liquidator once appointed by the Master
- The company is not divested of its assets
- The transfer of shares after the liquidation is void
- The change of status of the company or of the members without the approval of the liquidator is void
- The liquidator takes control of current and partly executed contracts
- The disposal of property including claims after the commencement of liquidation is void
- All legal processes against the company are suspended until the appointment of a liquidator
- An attachment or execution sale after the commencement of liquidation is void and the proceeds of the execution sale must be paid to the liquidator
The Companies Act of 2008, does not make full provision for the dissolution and liquidation of a company in financial distress. Instead, the Companies Act of 1973 continues to apply. Schedule 5, Section 9 of the Companies Act of 2008 states (Own italics):
- Continued application of previous Act to winding-up and liquidation:
(1) Despite the repeal of the previous Act (Companies Act of 1973), until the date determined in terms of subitem (4), Chapter 14 of that Act continues to apply with respect to the winding- up and liquidation of companies under this Act, as if that Act had not been repealed subject to subitems (2) and (3).
(2) Despite subitem (1), sections 343, 344, 346, and 348 to 353 do not apply to the winding-up of a solvent company, except to the extent necessary to give full effect to the provisions of Part G of Chapter 2 (deals with winding up of solvent companies – not relevant here).
(3) If there is a conflict between a provision of the previous Act that continues to apply in terms of subitem (1), and a provision of Part G of Chapter 2 of this Act with respect to a solvent company, the provision of this Act prevails.
Thus, an over-indebted company must concern itself with Chapter 14 of the Companies Act of 1973.
Chapter 14, Section 339 of the Companies Act of 1973 states that if the 1973 Act does not provide for a specific matter, the law of insolvency, thus the Insolvency Act of 1936, shall apply as is, with due regard to the necessary changes in wording, to the winding up of a company in financial distress:
- Law of insolvency to be applied mutatis mutandis.
In the winding-up of a company unable to pay its debts the provisions of the law relating to insolvency shall, in so far as they are applicable, be applied mutatis mutandis in respect of any matter not specially provided for by this Act.
Mutatis Mutandis meaning: as is, but with respect to the necessary changes in wording.