Legal Articles

Liquidation Meaning

Liquidation is whereby a debtor entity, after the realisation that its liabilities exceed assets (factual insolvency) or inability to settle the liabilities as and when they become due and payable (commercial insolvency) is wound up. This usually happens either by a resolution of the company board voluntarily or by a Court Order upon application by a creditor, shareholder or the company itself. The latter is known as compulsory liquidation.

Liquidation is not limited to insolvent companies only, a solvent company may be wound up under the Companies Act of 2008 as well as some provisions of the 1973 Companies Act. In terms of section 81 of the Companies Act 71 of 2008, winding a solvent company due to its inability to pay its debts is not possible. The grounds for the winding up provided in that section are that upon resolution of the shareholders or court application, a solvent company may be wound up 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 its fairly valued assets exceed actual liabilities.

Despite which party would have initiated the winding up of the business, the purpose of the procedure is so that through the appointment of a Liquidator, assets are disposed so that the proceeds may go towards settling the claims of the creditors and the residue paid to shareholders. The distribution of proceeds follows an order of preference.

During the liquidation procedure the business may not trade and the assets are frozen, while civil proceedings are stayed and attachment/execution of judgments are legally ineffective. 

Business Rescue Meaning

On the other hand Business Rescue is defined in section 128 (1) (b) of the Companies Act 71 of 2008 as “proceedings to facilitate the rehabilitation of a company that is financially distressed”.

The process envisages the appointment of a Business Rescue Practitioner to superintend over the re-organisation and restructuring of the affairs, assets, equity, debts, property and liabilities of a distressed company so that it may resume normal business operations in solvency.

This can be achieved by way of;

1. Interim management of the company’s affairs by a Business Rescue Practitioner;
2. The suspension of creditor rights against the distressed company;
3. The development of a business rescue plan that seeks to restructure the company’s affairs and increase the prospects of solvency.

In other words, business rescue is a rehabilitation process which does not seek to wind up a company but to actually to do everything to save the business so that it continues. The winding up of a business not only affects its shareholders and creditors,  employees and the community at large will most likely feel the socio-economic effects when a company operating in such community shuts down. The Court in Van Niekerk v Seriso 321 CC & Another (2012) ZAWCHC 63 noted that business recue must be preferred over winding up if the indications are that the business can be saved from shutdown.

The business rescue procedure is initiated through an application of Court by an affected party when it is realised that the business is financially distressed. Alternatively the procedure may be initiated by a resolution of the board of directors as per section 129 (1) of the Companies Act who must file such with the companies and intellectual property commission (CIPC) so that its status will reflect accordingly, notify all affected parties and the appointment of a Business Rescue Practitioner will then have to follow.

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

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