We examine the reasons why a company would want to liquidate, when it is applicable, and what the process entails. We also explain why it is often in the shareholders and directors best interests to liquidate as soon as the company is insolvent.
Why a company would liquidate: factual vs commercial insolvency
South African legislation regulates the winding up of solvent companies and insolvent companies.
There are two different instances of insolvency, namely factual and commercial insolvency. Factual insolvency occurs when a company’s liabilities exceeds its assets, subsequently resulting in the company’s inability to pay its debts as they fall due.
Commercial insolvency occurs when a company does not have enough cash on hand to pay its debts even though the company’s assets exceeds its liabilities. In short, a company is liquidated when it can no longer pay its debts as they fall due. This is the test as to whether a company should be liquidated or not.
The liquidation process includes the realisation of a company’s assets through auction or otherwise in order to repay creditors.
Who can apply for liquidation?
There are various parties who are able to apply for the liquidation of a company. A board of directors can pass a resolution in order to commence a voluntary liquidation process, or an interested party, such as creditors or shareholders can apply to court.
What is the liquidation process?
A person wishing to liquidate an insolvent company may do so by applying to a court with jurisdiction.
A liquidation via the courts begins with an application requesting a provisional liquidation order. Subsequently, parties will be given a return date in order for any parties wishing to oppose the liquidation to do so. If the court, on such return date, finds that all relevant rules and regulations have been complied with, and that the company is indeed insolvent, it will make the provisional order final and the winding up of the company will commence. Usually, the court that will have jurisdiction is the court in whose area the company has its registered address.
Why a company should liquidate as soon as it becomes insolvent
Liquidating a company can seem like a daunting step to take, however, in most instances it is in the shareholders and directors best interest. One of the benefits of being a shareholder is the protection limited liability provides. A company enjoys a separate legal and financial identity. In most instances when a company is liquidated the outstanding debts are written off, and shareholders are not held personally liable for the debts of the company.
If however, it is found that the company had been operating when it should in fact have applied for liquidation, a court may make a ruling that the directors/shareholders may be personally liable.
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The articles on these web pages are provided for general information purposes only. Whilst care has been taken to ensure accuracy, the content provided is not intended to stand alone as legal advice. Always consult a suitably qualified attorney on any specific legal problem or matter.