What is Concursus Creditorum
Concursus Creditorum means that the different creditors of a company that is liquidated “come together” and form “one body”. Once a company was liquidated, all creditors must stop and wait for the liquidator to be appointed and then follow the liquidator’s process. No creditor (not even SARS) can act on their own, they must wait their turn in the winding up process by the liquidator. Concursus Creditorum is essential for maintaining order and transparency in the often-chaotic environment of company liquidation in South Africa.
The Purpose of Suspension of Legal Actions
When a company enters liquidation, one of the significant protections that arise is the suspension of all legal actions against it. This includes any summons, civil judgments, court applications, or ongoing litigation. Essentially, legal actions are put on hold, preventing creditors from pursuing individual claims. The reason is exactly because of the legal principle of concursus creditorum that kicks in as soon as there is a liquidation and because all creditors then come together and wait for the liquidator to deal with the company’s affairs. They cannot go rogue and that is the great protection a liquidation gives a company.
The Purpose of Suspension of Legal Actions
1. Prevention of Asset Dilution: If multiple creditors were allowed to pursue their claims independently, the assets of the company could be quickly depleted. This would undermine the principle of concursus creditorum where all creditors are entitled to a share of the company’s remaining assets. By suspending these actions, the liquidator can manage the estate to maximize the value available for distribution among all creditors.
2. Orderly Resolution: The suspension allows for a more orderly and structured resolution of claims. The liquidator, once appointed, can assess the company’s financial situation, prioritize claims, and determine the most effective way to handle the liquidation process. This approach minimizes the potential for conflict among creditors and ensures that everyone has a fair chance of recovering their debts.
3. Legal Framework: The legal framework surrounding liquidation in South Africa is designed to protect both the company and its creditors. According to Section 359(1) of the Companies Act 61 of 1973, any legal action—whether ongoing or forthcoming—is suspended as soon as liquidation commences. This legislative measure is crucial in maintaining the integrity of the liquidation process.
Void Legal Actions versus Suspended Legal Actions - Liquidation Stops Both
- Void Legal Actions: Once a company is liquidated, any attachments of assets made by the Sheriff following a Warrant for Execution or a Rental Interdict Summons become void immediately. This is crucial because allowing one creditor to sell off a company’s assets would unfairly disadvantage other creditors. The law recognizes that, in a liquidation scenario, all creditors should be treated equitably. Therefore, any individual efforts to attach or liquidate assets independently are rendered null and void. This protection is in place to ensure that the interests of all creditors are safeguarded.
- Suspended Legal Actions: In addition to void actions, legal actions that are ongoing at the time of liquidation are also suspended. This means that creditors cannot advance their claims through the courts without following the proper channels. According to Section 359(1) of the Companies Act, the liquidator has the discretion to either proceed with or stay legal proceedings depending on various factors, including the nature of the legal action and the cash flow available to the estate.
Procedures Creditors Must Adhere To Post Liquidation
- Notification to the Liquidator: Section 359(2)(a) of the Companies Act 71 of 1973 mandates that any creditor wishing to enforce a legal action against the company post-liquidation must notify the liquidator in writing. This notification must be given three weeks’ notice, and it has to be delivered within four weeks of the liquidator’s appointment. This requirement emphasizes the importance of communication between creditors and the liquidator, ensuring that all claims are appropriately documented and handled.
- Proving Claims: Creditors with claims against the company must prove their claims against the insolvent estate to be recognized. This process typically involves submitting documentation that verifies the debt owed. If a legal action was initiated before liquidation, it will be automatically suspended. The liquidator then assesses whether it is viable to proceed with the action based on the available resources and the merits of the case.
- Impact on Judgments: If the liquidator determines that the legal action cannot be pursued, the creditor may seek a judgment. However, obtaining a judgment does not exempt the creditor from the requirement to prove their claim against the insolvent estate. In effect, no creditor can act independently without following the established winding-up process. This ensures that all actions taken are in alignment with the broader liquidation goals and the principles of concursus creditorum.
Why Liquidation is Important to any Company in Distress
Liquidation is an excellent tool in the hands of any business owner as it can help the directors to get rid of company debt.
Given the mechanisms outlined above, it becomes evident why timely liquidation is critical for companies facing financial distress. Delaying the liquidation process can lead to several adverse consequences such as:
- Escalating Legal Costs: Prolonging legal actions against the company can result in increased legal costs for both the company and its creditors. By initiating liquidation sooner, the company can halt these proceedings, potentially saving significant amounts in legal fees and limit the damages of creditors.
- Asset Devaluation: As time goes on, the value of the company’s assets may decline. Market conditions can change, and assets can deteriorate, leading to a lower recovery for creditors. Liquidation allows for a quicker assessment and sale of assets, maximizing the potential returns.
- Creditor Relations: The longer a company delays liquidation, the more strained its relationships with creditors can become. By addressing the issue proactively, a company can foster a more collaborative atmosphere among creditors, potentially leading to more favorable outcomes for all parties involved.
- Preservation of Value: Concursus creditorum ensures that all creditors receive equitable treatment. By liquidating sooner, the company can preserve the value of its assets and facilitate a fair distribution process. This preservation is crucial for maintaining trust and confidence among creditors, which can be beneficial in future dealings.
Take Action Sooner Rather Than Later
If your company is entangled in legal disputes and facing financial difficulties, it is imperative to consider how to liquidate a company as a viable solution. Consulting with us as senior commercial lawyers who deliver liquidation services to business owners with companies in financial distress is one of the best steps any business owner can take.
