Today, South African business owners find themselves carrying on business against the backdrop of a tough (and uncertain) economic climate. As a result, more and more businesses are experiencing financial instability, often trading in insolvent circumstances (where the business’ liabilities exceed its assets), and being unable to pay its debts when they become due. Some businesses, if given some breathing room, will be able to trade out of their circumstances. If this is not the case, then the best remedy available to that business (in terms of law) may be to liquidate the Company/Close Corporation (as the case may be). Liquidation may also be considered by a solvent business that does not wish to continue to operate.
How Does It Work?
Liquidation (also known as “winding up”) is completed by way of an Application to the High Court and can be voluntary (when applied for by the Company’s Directors or members of a Close Corporation) or involuntary (when applied for by the Company’s creditors). When Application is made to Court, the Court may stay any proceedings instituted against the business as it sees fit. Further, once a liquidator is appointed, no creditor can institute or continue with legal proceedings against the business (or in relation to that business’ property), unless by agreement with the liquidator or if permitted by the Court. Creditors may often only receive a portion of the debt owing to them, if anything at all.
Implications To Consider
While this may sound very attractive, liquidation is not to be entered into lightly, and certain implications need to be considered –
- the moment at which liquidation proceedings are launched, the business ceases to operate (if it is still operating). In certain instances, the business will continue to operate on a limited basis, but only for the purpose of completing the liquidation process;
- following liquidation, the business will cease to exist;
- from the moment a liquidator is appointed, the powers of the business’ Directors come to an end, however, certain liabilities/obligations of directors may not (such as the Directors becoming liable for the business’ debts under certain circumstances).
It is therefore very important to consult a liquidation specialist when considering liquidation.