The Liquidation process or liquidation of company can be defined as the process in which a company voluntarily proceeds to declare itself as being insolvent or where a creditor of the company brings an application to court in order to have the company declared insolvent. The result thereof is that the company may no longer proceed to operate its business.
A Summarised Explanation of this Process
Insolvent Companies
The following explanation applies to Liquidation of Company where a Company is Insolvent. Liquidation or winding-up is a relatively simple process that involves the realisation of a Company’s assets (if any) in order to pay the costs and expenses incurred in the winding-up process. Funds remaining after costs and expenses, are distributed to Creditors in their prescribed order of preference and according to the Creditors’ rights and interests in the Company. If their are no assets then all debt is written off 100%. The test for placing a Company in Liquidation, in short, is that it cannot pay its debts as they fall due.
Voluntarily or Compulsory Liquidation - Liquidation of Company - Business Liquidation
A Company may be Liquidated either Voluntarily, by means of the board of Directors passing a resolution to that effect, or an application can be made to Court either by the Company itself (a Shareholders’ resolution is required) or by a Creditor or shareholder of the Company. In most instances a Court application is brought either by the Company or a Creditor on the basis that the Company is unable to pay its debts as they fall due.
Application in the Court having jurisdiction
The application is made on affidavit under oath in the Court having jurisdiction in the area where the Company has its registered address. The practice differs from one jurisdiction to the next (i.e. in different parts of the country), but in many instances the initial application is made for a Provisional Order of winding-up. Six weeks after the grant of the Provisional Order, application is made for a Final Order of winding-up.
Notice to all parties
Prior to the date of the hearing of the application, the applicant must ensure that a copy of the application for Liquidation is furnished to the Company; the Employees of the Company; any registered trade union representing the Employees of the Company; and the South African Revenue Services (SARS). Proof of having done so must be provided to the Court either before or during the hearing of the application.
Once a Court grants a winding-up order, the commencement of the winding-up is backdated to the time that the application was presented to the Court. Where Business Liquidation commences by way of resolution, winding-up commences when the resolution is registered with the Companies and Intellectual Property Commission (CIPC) established under the Companies Act.
Provisional Order and Provisional Liquidators
Once a Provisional Order of winding-up is granted, the Provisional Order must be delivered to the same parties referred to above (Employees, trade unions, SARS) and also to all known Creditors. In addition, the Provisional Order be published in both an English and Afrikaans newspaper in the area.
The Master of the High Court (Master) will appoint provisional Liquidators. The Master appoints Liquidators based on Creditor support. As soon as possible after the final winding up order is granted, the Master will summon a meeting of Creditors in order for Creditors to, inter alia, lodge their claims, and nominate final Liquidators.
The First Meeting
The first meeting usually takes place within six to eight weeks of final Liquidation. Notice of the meeting is published in the Government Gazette. The Master may oblige the Liquidators to give notice of the meeting to Creditors. Creditors have a further opportunity to prove claims at a second meeting, which must be held within three months of the Liquidators’ final appointment (which appointment usually takes place shortly after the first meeting).
The Liquidator must realise (sell) all assets and distribute the proceeds to Creditors in their order of preference (see Ranking of Creditors). The entire process usually takes between six months and two years, depending on the complexity of the Company and the number and nature of assets to be realised.
Company Status
Once a Company is placed in Liquidation it ceases to trade unless continued trading is necessary in the best interests of all Creditors (e.g. because the Liquidators want to sell the business as a going concern or because certain contracts need to be continued with in order to generate funds for Creditors). Continued trading must be approved either by the Court or by Creditors and Shareholders.
The Liquidators must lodge a first Liquidation and distribution account (L & D Account) within six months of the date of their appointment as final Liquidators. If the assets (if any) have all been realised and there are no unresolved issues, it could be a first and final L & D Account. If it is not a final L & D Account, the Liquidator must submit a revised L & D Account every six months until the winding-up process is complete.
Master of the Court Account Approval
Once the Master approves the L & D Account, he /she will give the Liquidators permission to advertise that the L & D Account will lie open for inspection. It must lie open for inspection for a period of not less than 14 days. During this period Creditors may inspect the L & D Account and lodge objections. Assuming that there are no objections, the Master will usually confirm the L & D Account within a few days of the expiry of the advertising period. The Liquidator must give notice of the confirmation of the L & D Account by the Master in the Government Gazette.
Once the L & D Account is confirmed, the Liquidator will distribute any funds that may be available for distribution. When the affairs of the Company have been completely wound-up, the Master transmits a certificate to this effect to CIPC and a copy to the Liquidator. The CIPC records the dissolution of the Company and publishes a notice to this effect in the Government Gazette.
