Article contributed by Somerset West attorney, Nanika Prinsloo
Liquidation falls under Insolvency Law. Any company should liquidate where the debt cannot be paid or where the liabilities exceed the assets. Solvent companies can also liquidate but that topic will not be discussed in this article.
In terms of Section 22 of the Companies Act, there is an obligation on the director of a company to liquidate the business as soon as it cannot pay its debt. For that reason, a company does not need to own any assets for it to be able to liquidate. If a director does not liquidate the company when the business cannot pay its debt but keeps on trading, the director can be held personally liable for the company debt even if no surety was signed.
Since Section 22 (mentioned above) places the obligation on the director, it is better to liquidate sooner rather than later. “Trading out” seldom works (especially in the current climate) and it just makes more financial sense to liquidate as soon as there are financial problems than to continue. A lot of the time trying to pay debt under financial pressure is throwing good money after bad. It is better from a financial point of view to start over sooner rather than later.
A company can be liquidated in either the High Court or the Companies Offices. The High Court application for liquidation is expensive and takes quite a while. Liquidation in the Companies Offices is fast and more affordable.
The director(s) of a company can liquidate the business voluntarily, or a creditor can bring an application to forcefully liquidate the company. It is much better to voluntarily liquidate the company, because then you can decide when and one can plan better. If a creditor liquidates the company, it is usually not a pleasant experience as the creditors are usually angry by that time and then they control the process.
Only voluntary liquidations can be done in the Companies Offices.
Once a company is liquidated, a liquidator is appointed. The liquidator must wind up the insolvent estate of the company. Winding-up means the liquidator must hold meetings with creditors, sell assets if there are any assets to be sold, and then pay creditors if there are any proceeds. Finally the liquidator must lodge a Liquidation and Distribution Account with the Master of the High Court and then the liquidation is finalised.
Apart from Section 22 of the Companies Act which places and obligation on the director(s) to liquidate a company that cannot pay its debt, the psychological toll on the director must also be taken into account, as well making wise financial decisions.
If a company is already under financial pressure, it is near impossible to keep on paying creditors. Apart from the payments that one can make, the creditors usually harass one to a border break-down. Trying to make the business work, plus putting out fires plus bringing in new work can have devastating effects on a director, to the point of an implosion where work is impossible in any case. Things can grind to a halt.
Liquidation affords on the opportunity to get rid of all the problems and continue with the business, usually without the worries and the fear. Immediately the business has better cash flow as one does not have creditors to pay. This way the company has a chance of survival (if it wants to continue) whereas without liquidation it does not.
Nothing, unless the director signed personal surety for any of the debt of the company. If no surety was signed, then the director will not have to pay the debt. Directors who liquidate their companies are not blacklisted. One can have many companies that are liquidated and many more that are successful. Again, Section 22 of the Companies makes it clear that directors are rather expected to stop trading in a company that experiences financial problems than to try and continue with it, causing bigger damage to creditors and staff.
For that reason directors are not blacklisted for the liquidation of a company. Our economy needs a mechanism where businesses are forgiven for their failure, so that new businesses can be opened so that the economy can continue.
If you would like more information, contact our attorney Nanika Prinsloo on 072 8558 106 (whatsapp calls/smses taken).
