Distinction Between the Processes
Understanding the nuances of business liquidation is crucial for company directors and stakeholders navigating financial difficulties. In South Africa, liquidation can occur voluntarily or be compulsory (otherwise referred to as forced) upon a company under certain conditions. This article delves into the distinctions between these two processes, providing essential insights for anyone considering how to liquidate a company.
When is a Company Voluntarily and When Compulsory Liquidated
Voluntary liquidation happens when the directors and shareholders collectively agree that the company should be liquidated. This cooperative decision leads to the signing of the necessary documentation and the company is voluntarily liquidated.
In contrast, compulsory liquidation occurs when one or more shareholders or creditors bring a High Court liquidation application.
The Difference in Processes Explained
Voluntary liquidation can be divided into two primary types:
- Creditors’ Voluntary Liquidation: This route is taken when an insolvent company opts to liquidate, prioritizing the interests of creditors. A liquidator is appointed who manages the business liquidation process. This includes settling debts if there are assets that can be sold and ensuring creditors receive as much as possible from the remaining assets. It is not necessary for a company to own any assets to be able to liquidate.
- Members’ Voluntary Liquidation: This option is available to solvent companies wishing to liquidate. The directors must declare solvency, affirming that all debts can be settled within a specified timeframe. Members’ voluntary liquidation facilitates a more organized distribution of assets to shareholders.
How Does Voluntary Liquidation Work
The voluntary liquidation process involves several steps:
- Resolution: The company’s directors must present a resolution to the shareholders, requiring a special resolution (usually 75% approval) to initiate the liquidation.
- Starting the liquidation process: The directors as well as the shareholders must sign the required documentation. The company can be liquidated at the CIPC or they can bring a High Court application. In both cases both the directors and the shareholds must voluntarily sign the required documentation.
- Asset Realization and Distribution: After liquidation a liquidator is appointed by the Master. The liquidator evaluates the company’s assets (if there are assets) sells them, and distributes the proceeds according to an order of preference prescribed by the Insolvency Act of 1936.
- Finalizing the Liquidation: Once the liquidator has finalised the sale of the assets and paid all creditors, the Master deregisters the company and it does not exist any longer. Any debt that is not paid by the company must be written off.
How Does Compulsory Liquidation Work
Compulsory liquidation, also known as forced liquidation, occurs a creditor liquidates a company,. If there is discord among directors and shareholders, one or more of the directors/shareholders may lodge an application for forced liquidation (that is when all the directors/shareholders are not in agreement that the company must be liquidated so that they can do a voluntary liquidation).
The Steps in Compulsory Liquidation
The steps involved in the compulsory liquidation process include:
- Court Application: A creditor, director, or shareholder files an application with the High Court, detailing the reasons for seeking liquidation.
- Court Order: If there is no one opposing the liquidation application, the Court will grant a provisional liquidation order. On a return date, if no one still opposed the liquidation application, the Court will make the liquidation order final and the company is liquidated.
- Appointment of a Liquidator: Following the court’s approval, the Master appoints a liquidator to wind up the affairs of the insolvent company. The liquidator deals with creditors and assets to finalise the winding up process.
- Asset Realization and Distribution: If there are assets, these will be sold and the liquidator will pay proceeds to creditors in a certain order of preference.
Conclusion
Whether considering voluntary liquidation or facing compulsory liquidation, it is essential to act promptly. Early intervention can facilitate a smoother transition and potentially mitigate losses. By understanding how liquidation works in South Africa, stakeholders can make informed decisions that align with their financial realities and future objectives. The aim is to rather voluntary liquidate than to wait until crisis hits and a creditor brings a liquidation application at a potentially very inconvenient time.
