Legal Articles

While the business rescue procedure is aimed at rehabilitating financially distressed companies so that they can return to solvency, liquidation is aimed at winding the company upon realisation that the situation is so dire, and liquidation is the only option left.

Liquidation in South Africa

The realisation that the company’s liabilities exceed assets is known as factual insolvency, while commercial insolvency refers to the instance where a company will not be able to pay its liabilities as and when they become due.

Liquidation may also be initiated on a solvent company under the Companies Act 71 of 2008 as well as some sections of the Companies Act 61 of 1973. Section 81 of the 2008 Act provides that liquidation may be initiated if:

1. The directors, prescribed officers or other persons in control of the company are acting in a manner that is fraudulent or otherwise illegal;
2. The company's assets are being misapplied or wasted.

In Pinfold v Edge to Edge Global Investments Ltd [2013] ZAKZDHC 52 the applicants proved fraudulent activity through misrepresentation, and the Order for winding up was granted. In Knipe v Kameelhoek (Pty) Ltd (2012) ZAFSHC 160 the Court’s view was that a company is solvent even if not liquid, if it’s fairly valued assets exceed actual liabilities.

Grounds for Liquidation of Company in South Africa

Liquidation when initiated by a resolution of the company’s Board of Directors, is known as voluntary liquidation.

Such resolution must be filed with CIPC and then all the affected parties must be notified. This procedure is fast, inexpensive, simple, and expedient even though creditors’ rights may be frustrated due to them not immediately knowing about the liquidation resolution. Further, liquidation inquiries are more likely not conducted.

Alternatively, liquidation may be initiated through a Court application by the company’s creditors, the company itself or shareholders which is known as compulsory liquidation.

The Court will order liquidation upon satisfaction that the grounds as provided in the Companies Act 61 of 1973 such as inability to pay debts in section 345 have been proven. Even though this procedure may be expensive and long especially if opposed, it often presents the opportunity for an inquiry and the appointment of a Liquidator by the Master may be fast once the Order is issued.

Despite which party would have applied for the winding up of the company, the purpose of the procedure is so that, through the appointment of a Liquidator, assets are disposed by public auction or private treaty so that the proceeds may go towards settling the claims of the creditors as per legal order of preference.

Any residue is then shared by the shareholders in an order of preference as well. The Companies Act 61 of 1973 regulates the liquidation of insolvent companies while that of solvent companies is regulated under some sections of the 1973 Act and the Companies Act 71 of 2008. The Companies Act 71 of 2008 makes these provisions in Sections 79 - 81.

The legal consequences of a company going under the liquidation procedure include:

1. Civil proceedings instituted against or by the company are suspended until the appointment of a Liquidator;
2. Any attachment or execution of a Judgment against the assets of the company is deemed void;
3. Any suspension of legal proceedings by operation of the liquidation shall be revived by, after 4 weeks of the Liquidator’s appointment, notifying the Liquidator by giving 3 weeks’ notice and failure to do so will render the proceedings as abandoned;
4. Property of the company shall be deemed to be in the custody of the Master during the time a Liquidator is yet to be appointed or cannot perform responsibilities;
5. The Liquidator will effectively act as the contracting party where the sequestrated company concluded contracts prior to going under the liquidation procedure;
6. Lease agreements where the company is a lessee are not automatically terminated but within 3 months of appointment the Liquidator must decide on whether to proceed or terminate the lease and if no determination is made, they are deemed as terminated;
7. Liquidation of a company suspends the employment contracts of its staff and during this time they are not entitled to render services or receive salaries save for unemployment benefits. Should the Liquidator not terminate the suspended contracts, the contracts will automatically terminate after 45 days from date of appointment of the Liquidator.

Van Deventer & Van Deventer Incorporated – Insolvencies and Liquidation Attorneys South Africa

Navigating through the liquidation processes may be a daunting task, it is advisable to seek legal guidance and assistance.

We stand ready and equipped to assist all our clients through this process. Owing to our comprehensive, professional, and committed approach in all the matters that we handle, we will diligently assist you to achieve the desired outcomes. Make contact with us for a one-on-one consultation.

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