Business Owners need liquidation in these trying times
Business Liquidation is available to all companies and close corporations in South Africa.
Business owners are hit from all sides and it is difficult to survive. Loadshedding and covid had massive impacts on businesses which a lot are still struggling to recover from. Crime, the high cost of electricity, wages, water, rates, SARS taxes, a slow economy and inflation, make owning a business challenging.
That is why we say that business owners need liquidation in these trying times. It is important that every business owner knows there is a way out to restructure the business and get rid of the debt. Liquidation is such an excellent tool that every business should know and understand it so that they can use it when the time is right.
Why is Liquidation an excellent tool
Liquidation is an excellent tool to eliminate debt. Trading out of debt seldom works and is too expensive and time-consuming, especially for a company with cash flow problems.
Liquidating a company immediately stops all legal action and the debt does not have to be paid (excluding sureties, traffic fines and customs and excise taxes, but all other debt is written off).
Without the pressure of creditors, the business owner can focus on generating income as opposed to putting out fires with little or no success.
What is Liquidation
Liquidation is a structured process for every business, no matter how big or how small, that stops legal processes against the company. Creditors are forced to take part in the winding up process that follows after liquidation. A liquidator stands in the shoes of the directors and deals with the affairs of the company so that the directors do not have to. The liquidator sells assets (if any), pays creditors and that which they don’t get must be written off (unless the director(s) signed surety).
How is a Company Liquidated
Liquidation of a company falls under Chapter XIV of the Companies Act 61 of 1973. A company that is insolvent or solvent can be liquidated.here are different types of liquidation (voluntary liquidation and compulsory liquidation). Companies can be liquidated either at the CIPC or with a High Court application.
We advise that a company is liquidated at the CIPC as it is much faster and much cheaper than a High Court liquidation.
When is a Company Insolvent
Factual Insolvency
Factual insolvency is a situation where a company is unable to pay their debts as they become due. If the liabilities are greater than the assets, the company is considered factually insolvent. The company should then do a voluntary liquidation.
Commercial Insolvency
Commercial insolvency is a situation where a company is unable to pay its debts as they become due, but the liabilities do not necessarily exceed the assets. For example if a company owns R10 million worth of assets and the debt is R2 million, then the liabilities do not exceed the assets. It does not mean that the company can pay its debt and that will mean that the company is commercially insolvent and should do a voluntary liquidation.
The Solvency and Liquidity Test
Under Section 4 of the Companies Act, 2008, a solvency and liquidity test is required to determine whether a company is solvent or insolvent. In terms of this test, the assets must be valued at fair value. If the fair value of the assets of the company is equal to or exceed its liabilities, then the company is solvent. Additionally, the company must be able to pay its debts as they become due in the next 12 months.
When conducting the test, the company’s financial information must be based on its accounting records and financial statements.
Voluntary versus Compulsory Liquidation
In terms of Section 343(1) of the Companies Act 61 of 1973 the liquidation of a company can take place in two ways: by a Court order (sometimes referred to as “compulsory” liquidation. A liquidation application is compulsory if the directors and shareholders are not in agreement that the company is liquidated and one or a few of them lodge a High Court liquidation application. A liquidation application is also compulsory if a creditor of the company brings a High Court liquidation application.
A voluntary liquidation is when all the directors and shareholders of the company agree that the company should be liquidated, and everybody signs a special resolution to this effect.
Liquidating a Company Gets Rid of Business Debt
Liquidation blocks SARS and other creditors from taking legal action against the liquidated company.
Voluntary liquidation halts the chaos and brings calm and peace and focus. Instead of putting out fires all the time while the worry and stress overwhelms the business owner, they can rather follow the voluntary liquidation process so that the company is liquidated. This will enable the business to continue trading debt free and start over fresh if the business owner wishes to continue trading. If the business owner does not wish to continue to trade, liquidation will remove the problem from the equation for peace of mind. Company liquidation really is a lifeline for struggling businesses.
Conclusion
It is advisable to liquidate a company as soon as it cannot pay its debt or when the liabilities exceed the assets. Too many business owners trade for too long trying to solve the problem and it creates too many problems. If you stop and liquidate as soon as possible, the recovery time is usually much shorter. Contact us so that we can assist your business with liquidation.
