A company can liquidate by any of the legal grounds as per Section 344 of the Companies Act, Act 61 of 1973,which we will discuss in this article.
If your company cannot pay its debt (especially SARS debt), a good time to liquidate the company is when the problems start. It is very expensive to try and trade out of debt and unless there big amounts are received, it can prove to be impossible to trade out of debt. It is cheaper and faster to liquidate a company and apart from that the Companies Act places an obligation on a director to liquidate a company when it cannot pay its debt.
When can a company be liquidated is a question that we often get asked. This article will explain the legal grounds on which a company can be liquidated. Let us discuss the grounds:
Cannot pay its debt
The most common liquidations especially lately with the bad economy and all the pressures on business owners, are companies that liquidate because the company cannot pay its debts. In terms of sections 344(f) and 345 of the Companies Act 61 of 1973 a company is regarded as being unable to pay its debt under the undermentioned circumstances. Take note that any ONE of these circumstances below can exist to liquidate a company, they do not all have to exist:
Owing more than R100
- If the company owes any creditor more than R100 (One Hundred Rand) and the creditor has delivered a letter of demand for payment and the company has not paid the debt for three weeks after the letter was delivered, then the company can be liquidated (Section 345(1)(a) of the Companies Act 61 of 1973). If a letter of demand was delivered and the company makes a payment arrangement, or does not settle the debt in full, the company can still be liquidated.
Judgment and Attachment by a creditor
- Section 345(1)(b) of the Companies Act, Act 61 of 1973 states that when a company owes monies to a creditor and the creditor has obtained judgment against the company and issued a Warrant for Execution, the Sheriff will visit the company and attach assets, so that the assets can be sold to pay the debt and costs. If there are no assets or if the assets are not sufficient to settle the debt, then the company can be liquidated. Despite what this section says, a company can still be liquidated if there are assets that were attached. Liquidation will then suspend the attachment as the assets will fall within the insolvent estate of the company and cannot be sold by just one creditor.
Contingent and prospective liabilities
- In terms of section 345(1)(c) of the Companies Act, Act 61 of 1973, it can be proved any other way that the company cannot pay its debt and to be able to determine this, the court can take into account “the contingent and prospective” liabilities (in other words debts) of the company (Section 345(2) of the Companies Act, Act 61 of 1973). If the facts show that the company cannot pay its debt (factual insolvency) then it can be liquidated.
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For a more general discussion on the reasons on when and how a company is liquidated, read here https://www.empowerlaw.co.za/liquidation-in-south-africa/
Voluntary liquidation
All the directors and shareholders can sign a special resolution in terms of section 344 (a) that the company be voluntarily liquidated. In this case the company can be liquidated at CIPC or at the High Court. Once the aforementioned special resolution is registered by CIPC, the company is liquidated. After liquidation a liquidator is appointed to wind up the affairs of the company. The court can also issue a liquidation order in the case of a voluntary liquidation, but since it is more expensive and takes longer it makes more sense to do a CIPC liquidation.
Premature commencement of business
If a company commences with business before CIPC has certified that it is entitled to do so, such a company can be liquidated in terms of Section 344(b) of the Companies Act 61 of 1973. (No company having a share capital may commence business until CIPC has issued a certificate entitling it do so ((Section 172(1) of the Companies Act 61 of 1973)).
Not commencing or continuing with business
If a company has not commenced its business within a year from when it was registered, or if it did do business and then suspended its business for one year, then a company can also be liquidated (Section 344(c) of the Companies Act 61 of 1973).
If the members of a public company fall below seven
In terms of section 344(d) of the Companies Act 61 of 1973 a company can be liquidated if its members have fallen below seven.
Loss of capital
If 75% of the share capital of a company has been lost for its business, the company can liquidate (Section 344(e) of the Companies Act 61 of 1973).
Conclusion
It is imporatnt to note that any one of these circumstances can lead to the liquidation of a company, and they do not need to exist together.
Understanding the grounds for liquidation is essential for all business owners in South Africa.