Debt Erazer
Liquidation of a Company
If a company finds itself in financial difficulty and bankruptcy looms, the company can apply to the 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 the 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.
When can a Company be Liquidated?
If a company is over-indebted and is unable to make payments on all its debt, said a 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.