Written by: Nadia Gava
COVID-19 has had a devastating impact on South African businesses, leaving many with no option but to liquidate. Liquidation is a last resort for a company struggling to stay afloat and is not a step that should be taken lightly. The purpose of liquidation is essentially to wind up the company and sell all the assets in order to pay the costs of the liquidation, as well as to settle creditors’ claims.
A company is factually insolvent if its liabilities exceed its assets, and commercially insolvent if it is unable to pay its debts when they fall due. An insolvent company can be wound up either voluntarily or by the Court. This article will deal with the advantages and disadvantages of liquidation proceedings that are voluntary, versus those that are instituted by way of a Court application.
Voluntary winding up
It is possible for a company to pass a special resolution in which it is resolved that the company will be liquidated. This process is regulated by the Companies and Intellectual Properties Commission (CIPC). The special resolution, along with various other forms and documents, as prescribed by CIPC, must be filed with CIPC, who will provide a copy thereof to the Master of the High Court for the appointment of a liquidator.
All company trading will cease, and company assets will be sold in order to repay creditors. It is important to note that creditors enjoy different preference, based on the nature of their claim against the company — secured creditors will generally take preference, followed by the insolvency practitioner fees, and then ‘ordinary’ creditors.
Advantages and disadvantages
The main advantage to voluntary winding up proceedings is that it is simple, inexpensive, and expeditious since it manages to avoid court processes. The other advantages include the following:
- Outstanding debts are written off;
- Legal action is halted;
- Eligible staff may claim redundancy pay; and
- Where applicable, lease agreements may be cancelled.
From a creditor’s perspective, however, voluntary winding up holds more frustrations than benefits, as the voluntary process does not make provision for insolvency inquiries to be conducted and creditors will not immediately be aware of a special resolution having been passed. Other disadvantages include the fact that all business assets will be sold, and all staff will be made redundant.
Winding up by Court order
In the instance that a company does not wish to file for voluntary liquidation, the option of liquidation by way of a Court order is still available, since any interested party may bring an application to Court asking for the liquidation of a particular company. This is thus a route usually followed by the creditors of the company who envision liquidation as a way in which they may receive payment of their claims.
Advantages and disadvantages
It might seem counter-intuitive to associate any advantages with compulsory liquidation, since the purpose of the process is, after all, to put an end to the business permanently. However, for the board of directors that already has no prospect of recovery, there are certain advantages, such as an end to creditor pressures.
Unlike in the instance of voluntary winding up proceedings, the advantage of winding up by way of a Court order is that insolvency inquiries can be made. It is also likely that where a Court order has been granted, confirming that a company is to be liquidated, the Master of the High Court may act more swiftly in appointing a liquidator.
The disadvantages, however, is that this route will be more expensive and more time consuming since it is a High Court application. The cost and time disadvantages especially come into play when considering that it is possible that an application for liquidation can be opposed by the company a creditor wishes to have liquidated. From a reputational perspective, liquidation by way of a Court order will naturally put an end to the business and some damage may be caused to its business image in the market.
Conclusion
If your business is in a tough financial position, carefully consider the advantages and disadvantages of liquidation. It is always best to contact a specialist to discuss your options and determine the best way forward.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).