Liquidation is a formal process of closing a company and dealing with its debts in an orderly way.
Businesses typically undergo liquidation when they can no longer pay their debts, are no longer financially viable, or cannot continue trading on a solvent basis.
Once the liquidation process begins, a liquidator takes control of the company’s affairs. The liquidator sells the company’s assets, pays the costs of the liquidation, and distributes any remaining funds to creditors in the order prescribed by law.
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ANALYSING THE COMPANY’S AFFAIRS AND CHOOSING THE LIQUIDATION TYPE
Liquidation is the formal legal process of winding up a company and bringing its affairs to an end. It is generally used when a company can no longer pay its debts, is no longer financially viable, or should no longer continue trading.
Once liquidation begins, a liquidator is appointed to secure and realise the company’s assets, investigate its financial affairs where necessary, deal with creditor claims, and distribute available funds in the order prescribed by law.
RELATED ARTICLE : ‘How is a liquidator appointed?’
A company should consider liquidation when it cannot pay its debts as they fall due, has no realistic prospect of recovery, or will worsen the position of creditors by continuing to trade.
The board must also consider the business rescue provisions in Chapter 6 of the Companies Act 71 of 2008.
Section 128(1)(f) defines when a company is financially distressed. If the board has reasonable grounds to believe that the company is financially distressed and there appears to be a reasonable prospect of rescuing it, section 129(1) permits the board to begin business rescue proceedings.
If the board believes that the company is financially distressed but does not adopt a business rescue resolution, section 129(7) requires written notice to affected persons setting out the applicable signs of financial distress and the reasons why business rescue has not been adopted.
Where business rescue, a compromise with creditors or another realistic restructuring option is not available or is unlikely to succeed, liquidation may become the appropriate next step.
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A voluntary liquidation is when the company’s shareholders pass the required special resolution and the prescribed documents are filed or registered with CIPC. The “CIPC” liquidation.
A court-ordered liquidation begins with a High Court application brought by a person who has standing to apply.
A court-ordered liquidation is often described as a compulsory liquidation when a creditor brings the application. A company may, however, also apply to court for its own winding up in appropriate circumstances.
A company can be liquidated voluntarily by a shareholders’ special resolution or it may apply to the High Court for a winding-up order.
The correct route depends on the company’s financial position, the purpose of the liquidation, who wants to liquidate the company, whether sufficient shareholders will vote for a voluntary liquidation, whether court supervision is required, and the statutory grounds relied upon.
The winding-up of a solvent company is primarily governed by sections 79 to 81 of the Companies Act 71 of 2008. The winding-up of an insolvent company continues to be governed by Chapter 14 of the Companies Act 61 of 1973 through item 9 of Schedule 5 to the 2008 Act.
The distinction matters because the available procedures, filing requirements and commencement dates differ depending on whether the company is solvent or insolvent and whether the process is voluntary or court ordered.
Section 81 of the Companies Act 71 of 2008 allows a solvent company to be wound up by court order in defined circumstances.
The company may apply after resolving by special resolution that it be wound up by the court, or it may ask the court to continue an existing voluntary winding-up under court supervision.
Section 81 also permits applications by other parties on specified grounds. These include certain business rescue circumstances, deadlock, just-and-equitable grounds, fraudulent or illegal conduct, and the misapplication or waste of company assets.
Section 346(1)(a) of the Companies Act 61 of 1973 permits a company to apply to court for its own winding-up.
The application must rely on a recognised ground in section 344, most commonly that the company is unable to pay its debts as described in section 345 or that it is just and equitable for the company to be wound up.
Section 346(1)(b) of the Companies Act 61 of 1973 allows one or more creditors, including contingent or prospective creditors, to apply to court for the winding-up of an insolvent company.
A creditor will usually rely on the company’s inability to pay its debts. Section 345 includes failure to satisfy a properly served demand for three weeks, an unsatisfied execution process, or other proof that the company cannot pay its debts.
Liquidation proceedings should not be used merely as a debt-collection tactic where the debt is genuinely disputed on bona fide and reasonable grounds.
A creditor applies to the High Court by notice of motion supported by affidavits setting out the debt, the creditor’s standing, the grounds for winding-up and the facts showing that the company is unable to pay its debts or that another recognised ground exists.
The application must comply with the procedural requirements in section 346, including security for the costs of the proceedings, lodgement with the Master and the furnishing of copies to the persons specified by the Act.
The court may grant a provisional winding-up order, and usually does, before setting a return date for deciding whether to make the order final.
A creditor must establish its standing (its right to bring the application before court), the existence of the debt and a recognised ground for winding-up.
Where inability to pay is relied upon, the court considers whether the company can meet its liabilities as they fall due and may also take contingent and prospective liabilities into account.
The creditor must also address any genuine dispute concerning the debt. If the debt is bona fide disputed on reasonable grounds, liquidation will generally be inappropriate and ordinary action proceedings may be required.
The answer depends on the type of body corporate and the legislation under which it exists. Section 345 refers to a “company or body corporate” for the purpose of the statutory inability-to-pay test, but a sectional title body corporate for instance is not simply treated as an ordinary company and is governed by separate legislation.
Confirm that the company is solvent and decide whether the winding-up will be conducted by the company or by its creditors.
Prepare and pass a special resolution under section 80 of the Companies Act 71 of 2008.
If the winding-up is to be by the company, arrange security to the satisfaction of the Master or obtain the Master’s consent to dispense with security in accordance with section 80(3).
File the special resolution with CIPC together with the prescribed notice, currently Form CoR40.1, the supporting documents and the filing fee.
CIPC records the filing and delivers a copy to the Master. The company should retain the CIPC filing or status confirmation as part of its liquidation record.
Under section 80(6), the voluntary winding-up of a solvent company begins when the resolution is filed.
Where the company is insolvent or may be insolvent, the retained winding-up provisions of the Companies Act 61 of 1973 apply through item 9 of Schedule 5 to the Companies Act 71 of 2008.
The shareholders pass a special resolution under section 349 of the 1973 Act stating that the company is to be wound up voluntarily.
A members’ voluntary winding-up under section 350 requires security for the company’s debts or proof that the company has no debts. It is therefore not the usual route for a company that is in fact insolvent.
A creditors’ voluntary winding-up under section 351 is generally the practical voluntary route where the company cannot pay its debts. The special resolution is still passed by the shareholders; it is called a creditors’ voluntary winding-up because the process is conducted for the benefit of creditors.
The prescribed insolvent-liquidation documents are submitted to CIPC. This includes the special resolution, a completed statement of affairs (CM100), and other related forms.
CIPC registers the special resolution and provides confirmation of the liquidation status.
Under section 352, the voluntary winding-up begins when the special resolution is registered.
From commencement, section 353 requires the company to stop carrying on business except to the extent necessary for its beneficial winding-up, and the directors’ powers cease except where their continuation is properly sanctioned.
A solvent company may be wound up by court order under section 81 of the Companies Act 71 of 2008.
If the company itself applies, it will usually rely on a special resolution that it be wound up by the court or ask the court to continue an existing voluntary winding-up under court supervision.
Other applicants may rely on the specific grounds in section 81, including business rescue circumstances, deadlock, just-and-equitable grounds, fraudulent or illegal conduct, or the misapplication or waste of assets.
The applicant prepares a High Court application supported by affidavits setting out its standing, the applicable ground/s under section 344 and the relevant facts.
The applicant obtains the Master’s security certificate required by section 346(3) and lodges a copy of the application with the Master before presenting it to court.
The application is delivered to the employees, relevant registered trade unions, SARS, the Master, and the company, unless the company itself is the applicant or the court dispenses with service where the Act permits.
The court may first grant a provisional winding-up order and issue a return date. If the requirements for final relief are met, the court may then grant a final winding-up order.
Under section 348 of the 1973 Act, a court winding-up is deemed to commence when the winding-up application is presented to court (the date on which the application is issued by the Registrar of the High Court).
The commencement date depends on the type of liquidation and the statutory route used. It can affect transactions, creditor rights, legal proceedings and the validity of dealings with company assets.
Solvent voluntary winding-up: the filing date of the special resolution under section 80(6) of the 2008 Act.
Voluntary winding-up of insolvent company under the 1973 Act: the registration date of the special resolution under section 352.
Court winding-up of an insolvent company: the date on which the application is presented to court under section 348.
Court winding-up of a solvent company: section 81(4) determines whether commencement is the application date or the date of the court order, depending on the ground and applicant.
The company remains a juristic person while it is being wound up, but it must generally stop trading except to the extent required for its beneficial winding-up.
The directors’ powers are curtailed, and the administration of the estate moves into the statutory liquidation process under the supervision of the Master and the control of the appointed liquidator.
Concursus creditorum is the principle that, once liquidation takes effect, creditors must look to a single collective process rather than enforcing their rights individually against the company’s assets. Its purpose is to protect the general body of creditors and prevent one creditor from improving its position at the expense of the others.
Once a winding-up order has been made, or a voluntary winding-up resolution has taken effect, a copy of the court order or the CIPC registration certificate “CM26LIQ” must forthwith be delivered to the Master of the High Court.
The Master may, and will in almost every case, appoint a suitable person as provisional liquidator under section 368 of the Companies Act 61 of 1973.
The provisional liquidator holds office until the final liquidator is appointed.
The liquidator must recover and take control of the company’s assets and property, obtain the company’s records and information, preserve the estate, investigate the company’s affairs where necessary, and begin administering creditor claims. The general duty to recover and reduce the assets into possession appears in section 391.
After a final court winding-up order, or after registration of a creditors’ voluntary windingup resolution, the Master must convene the first meeting contemplated in section 364.
At the first meeting of creditors, creditors may prove claims, consider the statement of the company’s affairs and nominate one or more persons for appointment as liquidator.
A corresponding meeting of members or contributories is also held for the purposes set out in section 364.
Section 367 requires the Master to appoint the liquidator or liquidators who will conduct the winding-up.
In a creditors’ voluntary winding-up or court winding-up, the Master considers the nominations made at the meetings and applies sections 369 and 370 when making the appointment.
After the first meeting and the appointment of the liquidator, a further meeting is held for the proof of additional claims, receipt of the liquidator’s report and directions concerning the administration of the estate. This is commonly referred to as the second meeting of creditors.
Except in a members’ voluntary winding-up, section 402 requires the liquidator, as soon as practicable and generally not later than three months after appointment unless the Master consents otherwise, to submit a report to a general meeting of creditors and contributories.
The liquidator realises the company’s assets, collects debts due to the company, deals with legal proceedings, investigates relevant transactions and applies the proceeds toward the costs of the winding-up and creditor claims.
The liquidator may convene further general or special meetings where authority, directions or decisions are required.
In suitable cases, formal enquiries may also be used to investigate the company’s affairs and the conduct of persons involved in its business.
The liquidator must prepare and lodge a liquidation and distribution account under section 403.
The account records the assets realised, money received and paid, liquidation costs, admitted claims and the proposed distribution of available funds.
The account lies open for inspection under section 406. Interested persons may object to the account under section 407.
Once the statutory process has been completed, the Master may confirm the account under section 408, after which the liquidator proceeds with distributions under section 409.
Once the liquidators have performed all duties required of them and complied with the Master’s requirements, they may apply to the Master for a certificate of completion under section 385 of the Companies Act 61 of 1973.
When the affairs of the company have been completely wound up, the Master issues or transmits the prescribed certificate. The dissolution is then recorded and the company is removed from the companies register under section 82 read with section 83 of the Companies Act 71 of 2008, or under section 419 of the 1973 Act as applicable.
