Liquidation is the process of bringing a business to an end and distributing its assets to claimants. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they come due. As company operations end, the remaining assets are used to pay creditors and shareholders, based on the priority of their claims,
Liquidation and deregistration are not the same things.
Liquidation Procedures for a Company
First, a liquidator is appointed, either by the shareholders or the court.
The liquidator represents the interests of all creditors. The liquidator supervises the liquidation, which involves collecting and realising the company’s assets (turning them into cash), discharging the company’s liabilities, and distributing any funds left over among the shareholders in accordance with the company’s constitution (or the COMPANIES ACT 1993 if there is no constitution). After these steps have been carried out, the company is formally dissolved.
The Procedure for Liquidation
Broadly speaking, the liquidation process is as follows:
- A liquidator is appointed, either by the company shareholders passing a resolution (voluntary liquidation) or by the Court making an order (compulsory liquidation).
- The liquidator collects the assets of the company (including uncalled capital; that is, amounts unpaid on shares) and pays the creditors in order of priority.
- The liquidator distributes any surplus funds to the shareholders.
- The company is then formally dissolved.
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What are the consequences of liquidating a company?
The main consequences of the company being liquidated are as follows:
- The company no longer has the power to dispose of its property.
- The company may carry on business only for the limited purpose of completing the liquidation process.
- The powers of the company directors come to an end when a liquidator is appointed.
- A liquidation order operates as a notice of dismissal to all of the company’s employees. Note, however, that if an employee is on a fixed-term contract and is required under this contract to be given a period of notice, then a liquidation order will breach this and the employee will be entitled to damages.
- When an application is made for a court-ordered liquidation, the court may stay or restrain any proceedings against the company as the court sees fit. When a liquidator is appointed, no person can begin or continue legal proceedings against the company or in relation to its property, unless the liquidator agrees or the court permits it.
Different Types of Liquidation
Solvent & Insolvent Liquidations
If the company is insolvent, this means it is unable to pay its debts as they fall due. In this situation, there is a potential conflict between creditors (those to whom money is owed), as there will be insufficient assets for all creditors to be paid in full.
The law attempts to maintain equality between creditors, so the assets are distributed proportionately according to the size of each creditor’s claim.
However, the law gives priority to secured creditors (those with a charge over some of the company’s property as security for the debt). In addition, a number of rules exist to prevent one or more creditors from gaining an unfair advantage.
Voluntary Liquidation (by Shareholders’ Resolution)
Voluntary liquidation refers to the process whereby the shareholders appoint a liquidator, who is then answerable to the creditors or shareholders. It is not necessary to make an application to the court for this; however, the liquidator may apply to the court for directions and the court has the power to remove a liquidator.
A voluntary liquidation may also be commenced by the board of directors if an event specified in the company’s constitution has occurred.
A company or close corporation is dissolved as of the date its name is removed from the companies’ or close corporation register. The removal of a company or close corporation’s name does not affect the liability of any former director or shareholder (for close corporation its members) or any other person in respect of any act or omission that took place before the close corporation was removed from the register.
To voluntarily liquidate your solvent company- this can be done via CIPC
- Complete the form CoR40.1.
- Scan and e-mail the completed and signed documents together with supporting information to liquidations@cipc.co.za
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