Legal Articles

When a company faces insurmountable financial challenges, liquidation may become the only viable option to resolve its debts. In South Africa, the company liquidation process involves selling off the company’s assets to pay creditors, after which the company ceases to operate. However, liquidation impacts not only creditors and shareholders but also the company’s employees. This article explores what company liquidation means, the process involved, and how liquidation affects employees’ rights and entitlements in South Africa.

What Does Liquidation Mean for a Company?

Company liquidation is a legal process where a company’s assets are sold to repay its debts when it can no longer sustain its financial obligations. The company stops all business operations, and its assets are managed by a liquidator appointed by the court or creditors. Once liquidation is finalized, the company is effectively dissolved, ceasing to exist as a legal entity.

In South Africa, liquidation is typically considered when a company is deemed insolvent—that is, when its liabilities exceed its assets, and it cannot pay its debts. The liquidation process has a direct impact on the company’s employees, as the cessation of business operations often results in job losses.

What Happens to Employees When a Company Goes Into Liquidation?

When a company goes into liquidation, employees’ rights and entitlements are affected in several key ways. In most cases, liquidation results in the termination of employment contracts, as the company is no longer able to operate. However, employees are granted specific protections under South African law to ensure they receive certain payments and benefits.

1. Employment Contracts Terminated

Once a company enters liquidation, employee contracts are typically terminated by the liquidator, as the company can no longer fulfill its obligations. The liquidator’s primary responsibility is to sell the company’s assets to pay off creditors, which generally means business operations cease and employees are no longer required to work.

2. Outstanding Wages and Benefits

Employees are entitled to claim any outstanding wages, leave pay, and severance pay owed to them up to the date of liquidation. In the liquidation hierarchy, employees are classified as preferential creditors, meaning their claims take priority over those of ordinary creditors. However, employee claims are still subordinate to secured creditors, such as banks or bondholders.

Under South African law, preferential claims by employees typically include:

• Unpaid salaries for up to three months before liquidation.
• Leave pay accrued up to the date of liquidation.
• Severance pay at the rate of at least one week’s pay for each completed year of service.

3. The Role of the Unemployment Insurance Fund (UIF)

If a company goes into liquidation and employees lose their jobs, they are eligible to claim benefits from the Unemployment Insurance Fund (UIF). This government fund provides temporary financial assistance to employees who have lost their income due to dismissal, retrenchment, or company liquidation. Employees must register for UIF benefits and submit an application to receive unemployment benefits.

What Happens to Employee Claims in Liquidation?

During liquidation, employee claims are managed by the liquidator, who is responsible for distributing the company’s remaining assets to creditors, including employees. Employee claims are classified as preferential claims and are prioritized over general creditors, but they are paid only after secured creditors have been satisfied.

Steps for Employee Claims During Liquidation:

1. Notification: Employees are notified of the liquidation process and the termination of their contracts.
2. Filing Claims: Employees submit claims to the liquidator for unpaid wages, leave pay, and severance pay.
3. Asset Liquidation: The liquidator sells company assets, using the proceeds to pay secured creditors first, followed by preferential claims (including employees).
4. Payment to Employees: Employees receive payments for valid claims, though the total amount depends on available funds after secured debts are settled.

While employee claims have priority, it’s important to note that the total amount paid depends on the funds available from the liquidation of assets. If the company’s remaining assets are insufficient, employees may not receive full payment for their claims.

Can Employees Challenge the Liquidation Process?

While employees have limited ability to stop the liquidation process, they are entitled to be informed and to raise concerns if they believe their rights are not being honored. Employees can seek legal representation or assistance from a labor union to ensure their rights are protected and that they receive any payments owed. In some cases, employees may challenge the liquidation if it appears that the company did not act in their best interests or if there were unfair labor practices.

Van Deventer & Van Deventer Inc. – Attorneys Johannesburg

At Van Deventer & Van Deventer Inc., our experienced labour law attorneys provide comprehensive guidance to both employers and employees navigating the impacts of company liquidation.

We assist employees in understanding their rights to claim unpaid wages, severance, and benefits, as well as filing claims to ensure fair treatment throughout the liquidation process. For employers, we offer legal clarity on liquidation procedures, helping them fulfill their obligations and manage the process in compliance with South African law.

Whether you’re an employee facing sudden job loss or an employer overseeing the liquidation, Van Deventer & Van Deventer Inc. is here to provide professional legal support. Contact us to discuss your options.