Difference between Sequestration and Liquidation | South Africa

When you find yourself in a financial pinch and have exhausted all the options to recover, sequestration or liquidation becomes a prime choice. But what's the difference between the two? In this article, we discuss the key difference between Sequestration and Liquidation in South Africa. Furthermore, we shall also see the key differences in the legal procedure of the two.

The difference between Liquidation and Sequestration is the applicant. With Liquidation the applicant is a company and with Sequestration the applicant is an individual

Difference between Sequestration and Liquidation

The key difference between Sequestration and Liquidation is that the former process applies to an individual while the latter applies to a company.

In South Africa, a company or a close corporation (CC) can choose liquidation to wind up and clear all unsettled debts. Companies in South Africa choose this path when their liabilities exceed their assets. Through liquidation, they have a chance to clear all their debt and formally and legally close down the company.

On the other hand, sequestration involves an insolvent individual. People choose the sequestration route when they are neck-deep in debt with no possible relief options. With sequestration, a massive amount of your unsecured debt can be written off, thus providing you with relief.

That's the overall difference between Liquidation and Sequestration, more or less. Let's talk about each process individually for a better understanding.

A Brief Overview of Sequestration in South Africa

What does it mean to be insolvent as an individual?

The individual is neck-deep in debt, and their liabilities far exceed the total asset value that they own. In such cases, it would be unreasonable for an individual to repay all their debts, as they would never be able to recover from such a loss or move on with their lives. In an extreme situation like this, sequestration provides the much-needed relief.

There are two ways to go about this.

Voluntary Sequestration

Here, the individual declares themselves insolvent or bankrupt and applies to the court for sequestration.

Involuntary/Compulsory Sequestration

The creditors take the matters to the court and force an individual to undergo sequestration.

The Legal Process

In both voluntary and involuntary sequestration processes, a valuator will be appointed. Before the actual application process begins, the court needs to see whether the debtor has enough assets to satisfy the creditors. The valuator values the assets and sees whether they are enough to satisfy the interests of the creditors. Generally, a debtor is expected to pay at least 20 per cent of every rand they owe. So as an example, if you owe R200,000.00 then you can write off R150,000.00 of your debt. You get to pay the R50,000.00 over a negotiated period even though your court order is already granted. Why? Your assets stand as security for the R50,000.00 while you pay the fee off. The assets are not removed from your possession as long as you pay the installment over the negotiated term until settled. Once settled the assets are released as security.

If you do not have assets that can stand as security, then you can pay the R50,000.00 in full or also over a negotiated term, but now the sequestration order cannot be obtain until the cash amount is settled. This is why asset sequestration is recommended by most insolvency attorneys.

It is important to note that the assets we are referring to are paid off assets like household contents, electronics, devices and vehicles. Financed assets do not belong to you and must either be sold, transferred or handed back to the creditor that has provided the finance, before sequestration can commence. If financed assets have already been repossessed by a creditor, then the shortfall from the sale of those assets can form part of the sequestration.

Once the valuator makes an estimate and provides the asset report, the attorney on record can obtain a court date for the sequestration order to be granted.

Once sequestrated, a person can apply for rehabilitation within 4 years or even earlier, depending on the situation.

Note: In-Depth Insight into the Sequestration Process

A Brief Overview of Liquidation in South Africa

Liquidation can refer to a company director and shareholders wanting to voluntarily liquidate a company. If a company cannot pay its debts, it may consider liquidation to clear all its liabilities and wind up its business operations. If a company is insolvent and cannot be rescued through Business Rescue, such companies may also consider liquidation.

Alternatively, it can also refer to a creditor that forces a company to liquidate - called compulsory liquidation - due to outstanding debt owed to them.

Just like sequestration, liquidation also has two methods.

Voluntary Liquidation

The board of directors or shareholders unanimously submit a resolution to wind up the company, repay its debts, and cease all business operations.

Compulsory Liquidation

Compulsory liquidation is where a creditor forces a company into liquidation as the company cannot pay its debts.

The Legal Process

The process begins when a creditor or the board of directors apply to the High Court for a liquidation order. Once granted, a liquidator is appointed to take control of the company's assets (if assets exist), investigate its affairs, and sell assets to repay creditors according to the Ranking of Creditors. If there are no assets in the liquidation then the creditors in the application are not repaid.

The liquidator must report to the Master of the High Court and hold meetings with creditors to prove claims and decide on key matters. Once all assets are realised and debts paid, any remaining funds are distributed to shareholders.

The company is then deregistered, marking the official end of its legal existence.

Related: In-depth Insight into Liquidation Process

Conclusion

In this article, we saw the exact difference between Sequestration and Liquidation, the major key difference being the affected party. However, apart from that, they are pretty similar in nature. In South Africa, liquidation and sequestration are both legal procedures, and when there are legal procedures, you need legal support.

Solvendi is keen to provide you with the legal confidence you need to tackle these processes. Whether Liquidation or Sequestration, our experienced insolvency practitioners can assess your situation and offer you the right path to ensure your interests remain protected. For more information, we highly recommend contacting us today.

Disclaimer: This article is intended for general informational purposes only and should not be interpreted as legal advice. Any actions taken based on the information provided are done so at your own discretion. Solvendi cannot be held liable for any outcomes resulting from such actions. We encourage you to consult with us directly before making decisions solely based on the content of this article.

Considering Voluntary Liquidation or Sequestration? We have legal experts with 20 years experience that can guide you through the process. Our main aim is to be as informative as possible. Let's Chat.

If you require advice with regards to Sequestration, Business Liquidations, Insolvency, Bankruptcy or Credit Rehabilitation kindly contact SOLVENDI as follows:

National: 087 220 0710

Head Office: 010 880 7589

Email: consultations@solvendi.co.za 

Website: www.solvendi.co.za