What happens to creditors during a business liquidation

In South Africa, when a business goes into liquidation, its creditors are left wondering what will happen to their outstanding debts. It can be a confusing and stressful time, but understanding the liquidation process can help creditors manage the situation more effectively.

If your business cannot pay its debt and struggles with SARS debt, speak to us today to learn how liquidation can help you get rid of debt while you continue to trade.

How does liquidation work for creditors

During the liquidation process, the business’s assets are sold off to pay its debts (if there are any assets). The proceeds from the asset sales are distributed among the creditors in accordance with the order of priority set out in the Insolvency Act. Secured creditors, such as banks (only for bonds, not credit cards, vehicle finance and loans) and landlords  as well as staff and SARS are  given priority and will be paid off before unsecured creditors (credit cards, loan accounts, vehicle finance, hire agreements ((like copiers)). If there are insufficient assets to cover all of the debts, then the creditors may not receive the full amount they are owed and they must write the shortfall off. 

What must creditors do after liquidation

Creditors will receive a notice of the liquidation from the liquidator and will get notice to attend a creditors’ meeting to prove a claim. If creditors do not prove a claim they will not get paid.  The creditor will receive details of the liquidator and the procedures that will be followed. It is important for creditors to provide the liquidator with any documentation relating to their outstanding debts, including invoices, contracts, and other relevant information. This will help the liquidator to determine the amount of the debt owed and to include it in the distribution of the assets (if there are any).

The liquidator and payments to creditors

Creditors can expect to receive payment for their outstanding debts during a business liquidation in South Africa, but the amount and timing of the payment will depend on the order of priority and the amount of assets available (if any).  It also depends on what happens in the particular insolvent estate of a company: maybe there are property to be sold and it takes longer, or maybe the process is dealt with quickly with no problems.

By understanding the liquidation process and working closely with the liquidator, creditors can manage the situation more effectively and ensure that their debts are paid in accordance with the law.