Effects of Company Liquidation on Employees in South Africa
- Solvendi - A Tradition of Excellence
- Aug 15, 2025
- 4 min read
Liquidation is often a difficult decision for a company and its employees. During Company Liquidation, employees may face immediate concerns, including temporary suspensions, potential terminations, and claims for unpaid wages. In this article, we explore the effects of a Company's Liquidation, on its employees in South Africa.
Why Do Companies Consider Liquidation in South Africa?
In South Africa, a company is insolvent if it is unable to settle its debts. In such cases, the Company's Creditors may force the Company to Liquidate (Compulsory Liquidation) or the board of Directors or Shareholders may unanimously decide to liquidate the Company to settle the debts (Voluntary Liquidation).
During Voluntary Liquidations, the business often has enough assets to pay off all debts and distribute the 'free residue' amongst the employees (the preferent creditors) and unsecured creditors. If the Company does not have enough assets then the debt is usually written off. However, in Compulsory Liquidation, it may not be the case.
In every Liquidation process, secured Creditors are the primary beneficiaries of debt settlement. These Creditors may be banks or private investors having security in the Company's Assets. The appointed Liquidators use the Company's Assets to settle the debt within the limits. The remaining debt is completely written off.
In such cases, employees may not receive the share they deserve for facing abrupt suspensions and potential terminations.
Effects of Company Liquidation on Employees in South Africa?
As an employee, the suspension of your contract automatically begins when a liquidating company receives a provisional or final order. According to Section 38 of the Insolvency Act, employees are no longer obliged to render services, nor will they receive salaries, wages, and other employment-related benefits.
Losing your job abruptly has dire consequences. Suddenly, the people who are dependent on you lose their support. Employees may be unable to make ends meet. Not to mention the psychological burdens that will follow. Given the high unemployment rate in South Africa in 2025, finding a new employment opportunity can be especially psychologically draining.
During such a crisis, former employees may not have a choice but to hope for the best in the situation. The hope may come in the form of Business Rescue, transfer of business to a different ownership or receiving your fair share during the asset distribution. Alternatively, you are also eligible to benefit from the UIF Unemployment Benefits. They may provide a temporary relief during your transition.
Suspension does not automatically mean Termination
Once an employee's suspension period begins during liquidation, it usually lasts for 45 days. During this period, the liquidator will consult with you or your representative trade union members to explore alternatives to employment termination, including the sale or transfer of the business as a going concern under new leadership/ownership.
Section 197A of the Labour Relations Act 66 of 1995 states that if an insolvent business is considering selling it, the employees may be transferred to their new employers. The transfer does not interrupt an employee's job in manner whatsoever, and the employment continues under the same contract but with a new employer. The Labour Relations Act also governs retrenchment procedures and ensures fairness.
What is Business Rescue?
As an alternative to Liquidation, a determined business may consider the business rescue option to save its business. A business rescue starts with adopting a resolution in terms of Section 129 of the Companies Act 71 of 2008. On the other hand, affected employees not represented by a registered Trade Union, a Trade Union that represents the Company's Employees, or the Creditors of the Company may also apply to the court to rescue a business (Section 131 of the Companies Act).
In simple words, a business rescue proceeding focuses on restructuring a company, its operations, and outstanding liabilities to give it some breathing space. This breathing space allows the company to devise a strategy to fend off the issues and get the company back on track.
As safeguarding employees' positions and rights is one of the primary goals of business rescue, employees may retain their jobs as stated in their contracts. There will be no changes.
As an Employee, You are a Preferential Creditor
The Insolvency Act 24 of 1936 determines a Company's Employees as Preferent Creditors during Liquidation. On the ranking of creditors, that would be after the secured creditors.
During Liquidation, Employees of a Company are entitled to notice pay (up to 3 months' salary), leave pay, and severance pay. For severance pay, the employees receive 1 week's remuneration for each completed year of continuous service with the respective employer. For more information, check Section 35 of the Basic Conditions of Employment Act 75 of 1997. This only applies if there are enough assets in the business to satisfy these claims.
Conclusion
The effects of a Company's Liquidation can have lasting consequences on its employees in South Africa, considering the current unemployment rate. Not to mention, the legal process often favours the interests of Creditors over Employees. For a fair legal procedure, we highly recommend connecting with one of our attorneys. We believe that you deserve to receive what you are owed.
For more information, a free assessment, or a quote on our Company Liquidation services, kindly check our website or contact us today.
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