If you have a company with financial problems and you cleaned up the business by getting rid of staff, or sold assets, or tried to get new clients for new business. Perhaps you made payment arrangements with creditors or took a bond on your own house to put extra money into the business. If nothing worked and you find that the problems are worse than before, then you might consider liquidation to get rid of the problem company.
You are probably wondering why I give that advise and ask; will liquidation wipe out my company debt?
If the answer is no, what can you do to help manage the debt if it is not wiped out? Below, we will cover what happens to company debt after a liquidation.
What Is Liquidation?
When a company cannot pay its debt or its liabilities exceed the assets, the company should liquidate. Liquidation is prescribed by the Companies Act and the process is regulated by the Insolvency Act.
Before diving into whether a liquidation will wipe out company debt, it is important to know how liquidation works. A liquidation order can be granted by a High Court. The directors of a company can bring a voluntary liquidation application or a creditor can liquidate the company in the High Court. Also, the directors of a company can voluntarily liquidate the company at CIPC offices, but creditors cannot liquidate a company at CIPC offices. High Court cost is close to R100 000 and CIPC cost is close to R30 000. The details about the actual liquidation process will not be discussed in this article.
Liquidating a company can happen as a result of a High Court order or CIPC liquidation letter
Once the company is liquidated, whether as a result of a High Court order or CIPC liquidation letter, the result is the same: the company is liquidated. The Master will appoint a liquidator and the latter will wind up the insolvent estate of the company.
Will liquidation wipe out my company debt?
Indeed, it will. The liquidation process means that all the creditors of the company “come together” (concursus creditorum) and they share in a certain order. If there are assets that can be sold, the proceeds will be divided amongst creditors who prove claims against the insolvent estate in this order. There are secured, preferent and concurrent creditors.
If there is a property and there is a bond on the property, the bank that holds a bond over the property will be a secured creditor and will be paid first. If the company owes SARS, then SARS will be a preferent creditor and will be paid second. If there is no money left after the bank was paid for the bond, then SARS will not be paid any money and it must write the debt off. (SARS does not prove a claim against the insolvent estate in any case so they usually don’t get paid and they write the debt off). All other creditors that do not fall under the class of secured or preferent creditor, are referred to as concurrent creditors. If there is any money left, they will all get what is left over. If there is no money left for them, they will get nothing and they must write all the debt off.
As an example, let’s say the company had assets that were sold and the proceeds were R1million. There was a bond on a property for R1million. The bank will get all the money and no other creditor will get paid anything and must write the debt off.
A further example is that the company had assets that were sold and the proceeds were R1million. There was a bond on a property for R700 000 and the company owed SARS R500 000. The bank will get R700 000 and SARS will get R300 000. SARS must write the balance of R500 000 off. SARS will only get paid if SARS proved a claim against the insolvent estate. If SARS did not prove a claim against the insolvent estate, SARS will not get paid anything and they will have to write the full R500 000 off. SARS does not prove claims against insolvent company estates, nobody knows why, and I am certainly not going to ask them as I am happy about that.
A last example, let’s say there is property in the liquidated company with a bond of R700 000. The property is sold and the proceeds are R1 million. The company owes SARS R300 000 and other creditors such as suppliers are owed R600 000. SARS did not prove a claim against the insolvent estate of the company. In this scenario the bank will get R700 000. SARS will get nothing and the R300 000 balance will be divided amongst the creditors of R600 000. They will each get the same amount. Only the creditors who proved a claim against the insolvent estate of the liquidated company will get paid. That which they don’t get must be written off.
If there are no assets in the company, no creditor will of course be paid anything. It is not necessary for a company to own assets to be able to liquidate.
So yes, liquidation will wipe out the company debt, as that which a creditor is not paid must be written off.
If a director signed surety for the debt of the company, the debt of the company will shift to the director because of the surety. If the director did not sign surety for the debt of the company, the liquidation will wipe out the company debt. If a director did sign surety for the debt of the company, he/she can make payment arrangements to pay the debt, or sequestrate or if sequestration is not an option, consult with writer so that we can protect your personal assets.