Voluntary liquidation of a company

On 15 March 2020 a national state of disaster has been declared in terms of the Disaster Management Act 57 of 2002, in response to the COVID-19 pandemic. Initial regulations were promulgated on 18 March 2020 and on 25 March 2020 certain supplementary and amending regulations were promulgated, with further amendments being promulgated on 26 March 2020.  The regulations of 25 March and 26 March 2020 (the lockdown regulations) provide for significant restrictions on movement and activity for a 21 day period, starting from 27 March 2020 (the lockdown).  The lockdown was thereafter extended by a 14 day period.

The regulations in essence affected all business owners who does not provide essential services. Not being able to trade for more than a month might prove to be the final nail in the coffin for businesses, already under financial strain prior to the pandemic.

It is unlawful to operate a business under insolvent circumstances in South Africa. A possible way out, is to apply to voluntary liquidate your business in terms of sec 349 & 351 of the companies act(“creditors voluntary liquidation”).

Any business owner, or board of directors can apply for liquidation of its business, regardless of whether the business has any assets, and even if there is no benefit to the creditors. The reason behind the application is so because, as mentioned above, the law stipulates that the moment the liabilities of the business exceed its assets, the business is factually insolvent (also known as balance-sheet insolvency) and need to stop trading. Commercially insolvency (or cash flow insolvency) can be distinguished from factual insolvency. Commercial insolvency is the state of being unable to pay any money owed to its creditors, by a company, on time. Or put differently, when a company has enough assets to pay what is owed but does not have the appropriate form of payment.

It is advisable to initiate the company liquidation process in South Africa voluntarily, as opposed to being forced by a creditor launching an application to court to be placed under liquidation (which is known as a “compulsory liquidation order”). Once the decision for voluntary liquidation is made, you will need to draft and sign a resolution to the effect that the company will apply for voluntary liquidation whereafter the voluntary liquidation process can commence.

The first step in the process is to decide on a date for the last day of trading of the business of the company. Once the date is reached, it is important to stop all trading, as any income derived from that date onward will be for the benefit of the insolvent estate and thus the general body of creditors. The company (nor the directors of the company) will have no right to those earnings and these income will be placed in the hands of the Master of the High Court and thereafter in the hands of the appointed liquidator after the company has been placed in voluntary liquidation. You must furthermore stop making payment of any debt of the company on that date, as you cannot, by law, benefit one creditor before an another. Such action can be viewed as collusion with a creditor, which is a voidable disposition and the said payment to the creditor can be set aside on this basis.

An affidavit is drafted on your behalf and an authorised person makes the application for voluntary liquidation of the business entity. The affidavit details the debt of the business and gives a summary of the circumstances that led to the liquidation. The affidavit will also include a statement of account setting out the assets, liabilities, creditors and debtors of the company. The affidavit is drafted by our attorneys. The voluntary liquidation application is thereafter submitted to the Companies and Intellectual Property Commission (“CIPC”) who shall, on the merits thereof, place the company in liquidation.

It is important that this decision be made sooner than later. The longer the business struggles financially, the more debt will accrue and the higher the risk of a creditor taking legal steps to recover debt owed and calling on any personal suretyships of the directors. An important fact to remember is that directors can be held personally liable for the debts of the company if the directors choose to conduct the business under insolvent circumstances.

Voluntary liquidation is one of the options available to companies and businesses suffering losses and who may be struggling financially after COVID-19. Further options available include Business Rescue applications and Liquidation via court process. These topics will be discussed in articles in detail within the next few days

If you need more details and information on this subject, alternatively to discuss your options, then feel free to contact us.  Our experts will explain the entire liquidation process and handle it on your behalf.

For further information on this topic and for more detail or consultation contact fred@bdplaw.co.za (083 6771026) or George@bdplaw.co.za (083 450 4514) or 021 941 7777. Video conference can also be arranged.

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)