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FAQ
Many of our clients ask many questions about liquidation. We decided to put all the questions together in one document for easy referral. It is a Frequently Asked Questions: Liquidations Manual. We will further refer to Frequently Asked Questions as “FAQ”
The information and the questions provided in this document are not legal advice to any one entity or person, as each company’s situation is unique with their own set of facts where bespoke legal advice is necessary. The information given here is only for assistance and informational purposes in general.
This document was written on 8 July 2023 and will not include any legislative or other changes to the liquidation of Companies after the aforementioned date, unless it is indicated as updated.
Please consult our website www.empowerlaw.co.za for further information or contact us on 072 8558 106 or email us on nanika@nanikalaw.co.za for any enquiries.
A company should liquidate when –
- the company or close corporation is unable to pay its debts or when the liabilities exceed the assets. In this case the company can be voluntarily liquidated by the directors and shareholders.
- A solvent company (no debt) or close corporation can also be voluntarily liquidated by the directors and shareholders of the company.
Liquidation means that a company is voluntarily or compulsory liquidated, or otherwise described as “winding-up”. A liquidator is appointed to sell assets (if any), pay creditors and then the company is deregistered.
Compulsory liquidation means a creditor brings an application against the company to have it liquidated. If the directors and shareholders were to liquidate the company, it would be a voluntary liquidation.
Voluntary liquidation is when the directors and shareholders liquidate the company. A company can be voluntarily liquidated at CIPC or in the High Court.
Compulsory liquidation means a creditor (or a director/shareholder if there is conflict) brings a High Court application to have the company liquidated. A compulsory liquidation can not be done through CIPC.
Bankruptcy is not really a terms used in South African law, but it essentially means that the liabilities exceed the assets.
Liquidation means the process of winding up a company. The company can be solvent or insolvent, so the word bankruptcy does not really apply to liquidation of companies/close corporations in South Africa.
Insolvency is the umbrella terms for individuals or business where the liabilities exceed the assets. Insolvency also refers to the area of our law that deals with liquidation of businesses and sequestration of trusts and individuals.
Once a company is liquidated all assets are sold. If the proceeds are sufficient it will be paid to creditors. That which a creditor does not get must be written off and cannot be claimed from the company as the company does not exist any longer once claimed.
You can indeed restructure your business after liquidation so that it can continue in another format.
No. A company is a registered entity which is a legal person. Unless one company signed surety for the debt of another company, the creditors of a liquidated company cannot collect attach the assets of another company that the director owns if the other company.
An insolvent company can either be liquidated voluntary or it can be liquidated by a court order. The liquidation of a company is regulated by the Companies Act of 1973.
Yes, both can be liquidated.
The liquidation of a company and the liquidation of a close corporation is the same.
No, a sole trader will sequestrate and not liquidate. Only companies and close corporations can liquidate.
Once a company is liquidated, it is dissolved.
After the liquidator is finished with his work, the Master files a certificate with the CIPC and the CIPC records the dissolution and publishes a notice in this regard. The date of dissolution of the company shall be the date of recording.
For a close corporation however the date of the certificate of the Master shall be the date of the dissolution of the CC.
As soon as you sign the documentation to liquidate your company, you may not use the bank account of the company.
The company can cease trading and once the bank finds out about the liquidation, they will freeze the bank account. All monies received must stay in the bank account for the liquidator. The liquidator will collect any outstanding debt if there are any. The liquidator will sell assets if there are any or you can buy it back.
There are no implication for directors if they liquidate a company. The company is a separate legal entity and it is the entity that is being liquidated. The directors are employees of the company and are not liable for the debt of the company unless they signed personal surety. The shareholders are the owners of the company and cannot be held liable for the debt of the company unless they signed personal surety. Directors are not blacklisted anywhere because they liquidated a company.
Liquidation does not affect the directors or members of a liquidated company unless they signed personal surety for the debt of the company or close corporation. If they did sign personal surety, they will remain personally liable for the debt of the company or close corporation. If they did not sign personal surety, the debt will be written off.
Directors or members are not blacklisted in their personal company just because the company is liquidated. Directors are not blocked from being a director of other companies just because they liquidated one company.
Liquidation can be used to restructure a company so that it can get rid of bad debt or problems. This will enable the company to continue to trade if it wants to, but then be rid of the problem (SARS debt included).
A company is solvent if the fair value of its assets is equal to or higher than the debt of the company. A company is also regarded as solvent if there is no debt. It does not have to own assets to be solvent. It is solvent as long is there is no debt even if there are no assets.
Section 4(1)(a) of the Companies Act, 2008 prescribes the solvency test. If the test is applied and the company passes this test, it is solvent.
The solvency test means:
- If the reasonably foreseeable financial circumstances of the company are taken into account; and
- The assets of the company are taken are fair value and the answer is that
The asset value is equal to or higher than the liabilities of the company, then the company is solvent.
If the company has no debt or assets, it is also solvent.
Yes, a solvent company can also liquidate.
A solvent company will liquidate, for example to settle disputes between directors or shareholders. If the company is liquidated, a liquidator is appointed who will independently sell assets and distribute the monies between shareholders. That way future problems can be avoided, or disputes settled by a structured process.
A solvent company can also liquidate if the directors and shareholders want to wind up the company to avoid any future problems, even if there are no disputes. It is a good way to wind up a company, to know there will be no come backs.
The process of the removal of a liquidated solvent company is the same as for an insolvent company: the Master will file a certificate with the CIPC (Companies and Intellectual Property Commission). that the company’s affairs were wound up. The CIPC will advertise the dissolution and then remove the company from the CIPC records.
Both the Companies Act of 2008 and to some extent Chapter 14 of the Companies Act, 1973 regulate the liquidation of a solvent company.
A solvent company can be liquidated either by the High Court on application (Section 81(4) of the Companies Act, 2008) or at CIPC with the filing of a Resolution to that effect. (Section 80(4) of the Companies Act, 2008)
Once a company is liquidated, no creditor may take legal action against the company and any legal action taken must be suspended.
Only the liquidator can deal with these legal actions and the liquidator will decide whether to proceed or stop these legal actions.
The Sheriff may not attach any assets and the attachment of any assets already attached prior to liquidation will fall away.
In a liquidation a process happens that is referred to as concursus creditorum. This means that the creditors “come together” as a body of creditors so that they all can take part in the winding-up of the liquidated company. This avoids that each creditor takes their own legal action against the company which will result in the first creditor taking all or most of the assets and nothing or very little remain for the last creditor.
With liquidation, the creditors stand together. But they are not treated equally. There are three types of creditors, namely Secured Creditors, Preferent Creditors and Concurrent Creditors.
Secured Creditors are creditors who hold some form of security for the debt, such as a bond over property, a hypothec (by a landlord), pledge or right of retention. If there are assets in the company, the proceeds of the assets will first be paid to Secured Creditors. Their claims must be paid in full if there are enough proceeds. If there is anything left, it will be paid to Preferent Creditors.
Preferent Creditors hold no security, but are Preferent Creditors by law, such as SARS (taxes) and employee salaries. If any monies are left after the Secured and Preferent creditors have been paid in full, the balance of monies will be paid to Concurrent Creditors.
Concurrent Creditors are all creditors that do not fall under Secured or Preferent Creditors. If the Secured and Preferent Creditors were paid and there are monies left, the Concurrent Creditors will be paid.
Yes, you can. There is nothing in our law that prohibits a director to be a director or shareholder of as many companies as is preferred after the liquidation of one (or more) companies.
A company can consider business rescue and maybe that will help the company to get out of the problem. The only way to deal with financial difficulties is either to pay the debt or to get rid of the debt. If the company cannot pay the debt, it should get rid of the debt and the quickest way to get rid of debt is with a liquidation.
The Master oversees the winding up of the affairs of the liquidator. This means the Master appoints the liquidator and the liquidator must report to the Master. Once the Master approves the liquidation and distribution account to be lodged by the liquidator, the liquidation is complete.
Yes they can. Creditors can bring a High Court application to liquidate a company if they have a liquid claim against a company that does not pay it.
The personal assets of a director are not affected by the liquidation of a company, because the assets are the property of the director and not that of the company. Creditors therefore cannot attach the personal assets of directors just because the company is liquidated.
Yes the company can be liquidated. The legal disputes will be suspended and dealt with by the liquidator. The liquidator can decide if they want to proceed with the dispute or not
The shareholders are the owners of a company and members are the owners of a close corporation. The shareholders and members cannot be held liable for the debt of the company unless they have signed personal surety for the debt of the company or close corporation.
To prove a claim against an insolvent company or close corporation a creditor can arrive at one of the meetings that the liquidator will hold. Creditors must attend one of the meetings held by the liquidator and give proof that the company owes them money (like an invoice or a contract) and a balance certificate. Only creditors who proved claims will be recognized as creditors of the company.
There are two legs to a liquidation: the first leg is to liquidate the company or close corporation. The creditors that you give us are listed. If you forgot about a creditor, the creditor may still prove a claim after liquidation, so all is not lost. Only creditors who prove claims are recognized as creditors, so even if you list a creditor and that creditor does not prove a claim, the creditor is forgotten.
You cannot sell assets of the business before liquidation. The assets must sold by the liquidator so that the monies can be paid to creditors. If you sell assets before liquidation, the liquidator can ask for the assets or the money back.
Financed vehicles (or other items) will be returned to the bank. The bank will sell the item and hold the director/member liable for any shortfall if surety was signed. You are allowed to sell the vehicle before liquidation, subject to the condition that you settle the full outstanding balance.
Encumbered assets are assets that are not paid in full and that is financed, like a property with a bond, a vehicle with finance. If there is a notarial bond registered over movable assets it is also encumbered. Unencumbered assets are assets that are fully paid. |
The liquidator will try and recover the monies owed to the company. If he can recover the monies, it will be paid to the insolvent estate of the company. If he cannot recover the monies the debt will be written off. The debtors can also be an asset in the company’s insolvent estate and the liquidator can sell the debt.
If the liquidator has decided that the debtors are not recoverable, you may indeed buy the debtors from the liquidator. The liquidator will determine the value. The purchaser can then collect the monies for their account after such purchase.
If a director’s loan is a debit loan account (the director owes the company money), the liquidator will call up the loan and the director will have to pay it back.
If a director’s loan is a credit loan account (the company owes the director money) the director will be a creditor of the company and can prove a claim against the insolvent estate like other creditors. If there are monies to be collected or assets to be sold and there are sufficient funds, the director may be repaid the loan or a portion of the loan, depending on how much money is available.
A debit loan account means that the person in whose name the loan account owes the company money. A good example is when a director takes a salary or drawing from the company, but instead of entering the drawing or salary as such, it is entered as a loan, so that the director does not have to pay income tax.
Of course a director can have a debit loan account because actual monies were borrowed from the company.
Liquidation cancels the lease agreement. There is usually a clause in the lease agreement in any case that cancels the lease agreement if there is a liquidation.
If the stock is fully paid for, it is an asset of the company and will be sold by the liquidator.
If the stock is on consignment or not yet paid for, it will be returned to the owner as the company is not the owner of the stock yet.
If the assets are property of the company/close corporation and fully paid, the liquidator may sell the assets on an auction. You will also be able to make an offer to purchase the assets (at second-hand liquidation auction value). If assets are financed and still in your possession, the liquidator will return them to the bank.
The money will be paid to creditors who prove claims against the company’s estate.
If there is a surplus the monies will be paid to the shareholders after the estate of the company was wound up.
SARS debt (except for customs and excise taxes) are written off in a liquidation. The company does not exist any longer so SARS cannot collect any debt from the company.
SARS is a preferred creditor in a liquidation. This means SARS stands second in line to secured creditors (bond (bank), pledge (the place the pledge was made to) or retention right (landlord). The secured creditors will get paid first and if there are monies left, SARS will be paid next.
It is not a requirement for financial statements to be up to date in a liquidation.
The liquidator steps into the shoes of the public officer. Any outstanding taxes will be included as a claim against the insolvent estate of the company.
If there are assets that can be sold, SARS will be paid after secured creditors (any bond, landlord, pledge) has been paid in full. If there are no assets that can be sold or if the proceeds of the assets are not sufficient to pay the secured creditors AND preferent creditors, the SARS debt will be written off.
When a company is liquidated, it is brough to an end and does not exist any longer (it is ultimately dissolved). All debt is written off, assets sold and a liquidator appointed. The company cannot continue with business.
When a company is deregistered, it is only deregistered at the CIPC (Companies and Intellectual Property Commission). The company can continue with business. If a company is deregistered while there is still debt owing, the directors become personally liable for the debt of the company even if they did not sign personal surety.
A CIPC liquidation takes about one week then the company is liquidated. The liquidator’s winding-up process can take anything from 6 months to two years, as it will depend on what is going on in the company.
The important point for the directors is the date of liquidation. From that date creditors cannot take legal action and any legal action taken is suspended
The liquidator stands in the shoes of the directors or members and creditors must only deal with the liquidator and not with the directors or members.
Liquidator Responsibilities of the liquidator in a liquidated company or close corporation
A liquidator is a person who is registered on the national liquidators’ list at the Master of the High Court’s offices and is a person who is qualified to do liquidator’s work.
Liquidators must register with the Master. Liquidators are usually qualified attorneys, accountants, business rescue practitioners who is registered on the national list of liquidators after complying with the requirements.
The Master of the High Court appoints a liquidator after liquidation.
A liquidator can be nominated by creditors, but the Master has the discretion on who will be appointed as liquidator.
Once the company is liquidated, the Master will appoint a liquidator. A previously disadvantaged person will probably also be appointed as a co-liquidator.
If there are sufficient assets in the company to be sold, the liquidator will take his cost from the proceeds as the liquidator is paid a percentage of the sale of the assets or any cash. If these proceeds are not sufficient to cover the cost of the liquidator, the directors or members will be liable to pay the liquidator’s cost.
The liquidator will step in the shoes of the directors and take control of the company as soon as the liquidator receives a certificate of appointment from the Master.
If there are assets in the company, the liquidator will take control of the assets and bank accounts.
He will deal with creditors and ultimately report to the Master by filing a Liquidation and Distribution Account to show what happened in the company.
The liquidator will communicate with creditors
After liquidation the Master will appoint a liquidator. Once the liquidator receives a certificate of appointment, work can start. The liquidator will contact you as soon as the certificate of appointment was received. The Master should appoint a liquidator within 30 (thirty) days after liquidation, but it does not always happen. The appointment of a liquidator can take longer and until then everything will stand still.
The liquidator will ask for the financial information of the company such as financial statements, the financial books, bank statements and any other relevant financial information the directors can give to the liquidator. They will also ask for contact details of creditors and debtors, as well as a list of assets that the company owns. You will sign a CM100 form (Statement of Affairs) which we will draft for you to sign. This will give a financial picture of the status of the company.
The liquidator will act as the public officer of the liquidated close corporation or company.
The liquidator will also file the liquidation notice with SARS.
The liquidator will take control of assets and bank accounts. He can issue IRP5’s to staff and do anything that is necessary for the company.
When the liquidator received the certificate of appointment, he/she will contact the director or member to obtain further financial information.
The liquidator will send a questionnaire and ask for all the financial information of the company, all books and lists of assets.
A liquidator must wind up the company. Winding up means he must–
- Find assets and property of the company. If there are assets, the assets will be sold. If there are monies the monies will be collected.
- Pay the proceeds of sold assets (if any) and collected monies and pay the creditors.
- If any monies are left after creditors have been paid, it will be refunded to the shareholders of the company. to distribute the balance to the
- It is not obligatory for a company to own assets or monies to be able to liquidate. If there are no assets or monies the creditors will not get paid anything and the liquidator will not have to collect anything.
A liquidator’s winding up of a liquidated company can take 6 months or longer depending on what happens in the insolvent estate of the company.
The liquidator must sell all assets, collect all monies, hold meetings with creditors, pay creditors who proved claims. Once all the tasks were completed, the liquidator will file a liquidation and distribution account with the Master. Once this account was approved by the Master, the liquidator’s work is finished.