LIQUIDATIONS A GENERAL SUMMARY:

In the current COVID economy there are so many well-established and new businesses which find themselves in dire times, wondering how much longer it can survive. Many businesses around them have already liquidated or are in the process of liquidating, but what exactly does liquidation entail?

The purpose of this article is to provide a general summary which would explain the liquidation process, when to commence therewith and the consequences thereof so as to assist the business owner who is at a crossroad where he/she needs to decide whether or not to continue.

When an insolvent company is liquidated, its affairs are being wound up by a liquidator who disposes of its assets in order to pay the creditors. The business will cease to exist.

A company is regarded as insolvent if either its assets exceed its liabilities (called factually insolvent) or if it is unable to pay its debts during the normal course of business (called commercially insolvent).

By law, a company which trades insolvent must liquidate and depending on each case and its own set of facts, failing to do so can bring personal liability of the directors or members into play. In reality however, most business owners will first attempt to save their business and will not simply close its doors. It is at this stage when due consideration must be given to the risk of personal liability and when legal advice should be sought

A company can be liquidated either by way of voluntary liquidation, which entails filing a resolution with the Companies and Intellectual Property Commission (CIPC) or by way of court order which entails an application to court. In both instances either the directors/shareholders or a creditor can initiate the proceedings.

It is not necessary to show that there is a benefit to creditors. Unfortunately, the creditors will only receive their portion of what is available and if there are no assets to share in, a creditor might end up not receiving anything.

Once the liquidation process has started, all legal proceedings instituted against and by the company will be suspended until a liquidator is appointed.

The company’s employment contracts will immediately be suspended and will terminate at the decision of the liquidator. Once suspended, the employees will have no right to receive their wages or salaries. Any outstanding wages or salaries will form part of the liquidation and such employees will have a limited preferent claim.

A company has limited liability and as such the personal assets of the directors are not taken into account for purposes of the liquidation. Once a company has been liquidated, all its affairs will have been concluded and it will cease to exist. As such releasing the directors and members of any possibly liability which allows them to move on.

Intellectual property disclaimer:
The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.