INSOLVENCY: LIQUIDATION - RATHER FAIL WITH HONOR THAN SUCCEED IN DEBT (PART 1)

“[Insolvency] is a serious decision that people have to make (quote by Herb Kohl).

In today’s economy, business and cost of living is difficult and although it is one’s objective to be financial stable, it is not easy in today’s economy.

Insolvency refers to a position of reduced legal capacity forced by the courts on persons or companies who are incapable to pay their arrears, whose debts surpass their assets.

Insolvency is broken down in two separate categories, namely liquidation and sequestration. Liquidation is the process which applies to businesses or entities, with the exception of sole proprietors and Sequestration is the process for persons or individuals.

I will explain the first category, Liquidation and how the process is conducted and the consequences thereof. Sequestration shall be discussed in part two to follow.

LIQUIDATION:

1.        What is Liquidation?

When you register your company, it never is your intention to fail. It is not easy to see your company and your sweat, blood and tears building your company deteriorate, but it would be irresponsible to continue to conduct your business as you are just incurring larger debt - “You just can't keep pouring money down an endless hole and never recoup any of it. It's got to be a business” quote by Don Bluth.

Liquidation is a procedure that comprises of the Company’s assets and sale thereof then allocating the proceeds between its creditors and stakeholders. The company will terminate its operations and cease to exist after the Liquidation process is concluded.

Difficulty to accept liquidation of your Company usually arises with the fear of the consequences of failure. One has to be realistic and determine how deep in debt the Company is and the likelihood of climbing out of the debt. So “forget about the consequences of failure. Failure is only a temporary change in direction to set you straight for your next success” (quote by Denis Waitley).

So, when deciding whether or not to liquidate your Company, one should note that it is usually better to bring a Voluntary Liquidation Application rather than have a creditor apply for the Liquidation of your company. This strategy is a tactic to which you are able to claim your small victory. “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat” (quote by Sun Tzu).  If you bring a voluntary Liquidation application, you will be in control of the process, whereby if the creditor brings the Compulsory Liquidation Application, they tend to become “aggressive”. Enjoy the small victories rather than reminiscing about failure of the successes of your business, as this failure is only temporary change setting you in the next successful venture.

2.        LEGISLATION

The Companies Act 71 of 2008 repealed the Companies Act 61 of 1973. The whole chapter 14 of the Companies Act 61 of 1973 pertaining to corporate insolvency procedures were retained and is applied in a broad fashion to the liquidation of insolvent (or not solvent) companies, subject to provisions such as section 79 of the 2008 Act, which is also applicable to the winding-up of solvent companies

3.        Who can bring an Application for Liquidation?

In terms of Section 346(1) of the Companies Act 61 of 1973, an application for liquidation may be brought by:

• The company itself, of which a resolution of the Company (hereinafter referred to as “Company”) must be provided authorising the Liquidation Application; or
• One or more of its creditors, of which the claim of the creditor must not be less than R100,00 and the claim must be due and payable; or
• One or more of its members, of which the member has to be registered as a member for at least six months prior to the date to the Liquidation Application or
• The Master of the High Court.

4.        JURISDICTION:

The High Court which has authority to hear the Liquidation Application is the court in which jurisdiction the Company has its registered address or principal place of business.

5.        Grounds for liquidation

In terms of Section 344 of the Companies Act 61 of 1973, the courts have the power to order the Liquidation of a company in which it is evident that the company is incapable to settle its debts, or it is just and equitable that the company be Liquidated.

6.          Consequences of Liquidation

• All share transfers after instigation of the Liquidation process is negated
• Disposition of any property after origination of the Liquidation place is invalid.
• All civil proceedings against the Company are postponed from date of the court order up until selection of a final liquidator
• Any attachment by creditors imposed against the company after the beginning of Liquidation is cancelled
• The Directors authority of being in control of the Company is terminated
• The property of the company is under the care of the Master who at that time hands it to the Liquidators as soon as they are selected
• The Master, the Court or a Commissioner may summon all individuals who have information of the company’s dealings to appear in a enquiry.

7.        PROCESS

To commence with the Liquidation process, the directors of a Company, or the members of a CC, or the trustees of a Trust, need to agree when the final day of operating will be.

7.1.          Voluntary Liquidation Process

In terms of Section 80 of the Companies Act of 71 of 2008, the company’s shareholders must approve a special resolution confirming their agreement and consensus to the Liquidation of the Company. The It is also further compulsory for the Company to submit security to the Master of the High Court for payment of the company’s debt.

7.2.       The process of Involuntary Liquidation

In terms of Section 81 of the Companies Act of 71 of 2008, the application procedure regulating the necessary requirements for a creditor of the Company to follow when applying for Liquidation of the Company. 

The Company should not keep on paying its creditors after instructions has been given to its Attorneys to proceed with Liquidation Application. Should the Company continue to pay specific creditors, it would be construed that the Company favors those creditors its pays above other creditors.

8.    The Court Application

8.1.       Contents of the Application

All information must be disclosed by the Company.

The application will be drafted with supporting Founding Affidavit by the Applicant, which must allege:

• the standing of the applicant, whether it be the Company or the Creditor of the Company;
• the Company’s details, including its name, registration number and principal place of business and/or registered office;
• jurisdiction;
• that the respondent, which is the Company, is insolvent;
• the grounds for application of Liquidation;
• any facts which are relevant to the exercise of the court’s discretion, including the ranking of the Creditor’s claim;
• that security for the costs of the application are in place;
• that service has been affected in accordance with section 346(4) of the Companies Act of 61 of 1973.

8.2.       Issue of Case Number and Court Date

When the Application and Founding Affidavit is completed, the application is sent to the High Court to be issued with a case number and a court date will be supplied. These documents will be served on the Company at its registered address.

The Applicant does not need to be present at the Court date for Liquidation as the Liquidation is done by way of a “motion” procedure., meaning that this means that everything that the Applicant wants to present to court must be on paper.

8.3.         Court Order

8.3.1.  PROVISIONAL ORDER

The first court date is for a provisional application. In terms of this first court date, the Applicant seeks immediate relief from the Court, so that the immediate relief of a provisional liquidation order is granted, without having to give notice to creditors first. Sars is the only creditor in which this application has to be served prior to the provisional application date

In terms of Liquidations, the intention is to apply to Court immediately and then it is postponed where notice is provided to all the Creditors. 

The effect of this order is that once it is granted, no creditor may take legal action against the Company and any legal action that is in process, is on hold.

8.3.2.  FINAL LIQUIDATION ORDER

Once the provisional liquidation order is granted, the matter is postponed for about one month, in which a return date is provided. In this month, the Applicant must then provide notice to all creditors of the provisional liquidation order by sending them a copy of the court order by registered post. 

In terms of Section 346A of the Companies Act 61 of 1973, the provisional order is served on any registered Trade Union or employees where applicable, SARS, and the Company (in cases of Compulsory Liquidation). The provisional liquidation must also be printed in the Government Gazette and a local newspaper.

On the return day, the court may exercise its discretion to place the company under final winding up.

Any creditor or other interested party who wants to oppose the application, must then do so before the return date. If creditors oppose the application, they must provide evidence that the Company is not insolvent and that it is not fair and just that the Company be liquidated.

On this return date, if nobody opposed the application, the order is made final and the Company is then liquidated.

However, a court can grant a final liquidation order at the primary hearing of the matter, where it is of the opinion that there is not any prejudice to the members or creditors.

8.2.3    Time-Frame of Court procedure

It takes between four to six weeks from date of instructions to proceed with Liquidation Application, before a provisional order is granted which must be advertised in the Government Gazette, newspapers etc. Some other external factors which will influence the time-frame relate to certain formalities such as the service of the provisional order by sheriff.

After the provisional order is granted, it takes about three weeks for the final order normally to be granted.

9.        AFTER FINAL LIQUIDATION ORDER IS GRANTED

The liquidator gets appointed after the provisional order was granted and the full effect of the final order is in force once the provisional order has been granted and placed under Liquidation.

A liquidator will also be selected to sell all the assets, pay the creditors, divide any remainder between the previous shareholders and then terminate the business.

9.1. Company’s obligations

Before and during liquidation the Company has a duty to guard the assets of the Company. If the Company is incapable of shielding the properties of the Company, then the Liquidator will assist the Company in placing guards at the premises etc.

In the application for liquidation order, a request can be made to the court for these guards or institutions that protected the assets of the Company be remunerated, of which would be recognized as an administrative cost from the Company.

You as the liquidated Company is to do the following with the appointed Liquidator:

• The liquidator will arrange a meeting in which the Company is to make full disclosure of all assets and liabilities
• Support the Liquidator in so far required.
• Assist the liquidator by providing the liquidation with wholly information, disclosure, books and paperwork and to furthermore divulge which assets belong to the Company and where they are situated.
• Where meetings are held at either the offices of the Master of the High Court or Magistrates Court with creditors, the Company is to be present in order to disclose amounts that the creditors are owed and able to assist the Liquidator to identity dishonest claims against the insolvent estate.

9.2.     TERMINATION OF COMPANY’S OPERATIONS

9.2.1. No payment of debt

It is essential to note that no payment of debt must be paid to creditors once the final decision has been granted. 

9.2.2.  Company’s Contracts

Income generated from the operation of the business after the decision to stop operating will form part of the “assets” of the insolvent estate.

The Company can still generate more business. All contracts with the Company will continue. It is the decision of the liquidator, within a reasonable period of time, whether or not he or she aims to stand by the contract or cancel it, dependent on what would be maximum advantageous to the creditors.

Should the liquidator choose to cancel the contract, the other party to the contract has a pecuniary claim against the insolvent estate as a creditor who does not hold any security.

9.3.      LEGAL ACTIONS

9.3.1.  ACTIONS PENDING AGAINST COMPANY

Until such time that the provisional liquidation order has been granted and is final, creditors are not banned from continuing with legal action against the Company.

9.3.2.  ACTION AGAINST DEBTORS

Legal action is suspended in cases where the Company had instituted legal action prior to liquidation order being granted. The Liquidators can choose as to whether they want to continue to take the legal action further.

If the liquidator elects to refuse to continue with legal action against third parties after liquidation order has been granted, a member of the Company or someone else can negotiate with the Liquidator to purchase the rights from the Insolvent Estate to continue with the legal action.

9.4.    Costs of liquidation

In terms of the Insolvency Act 24 of 1936, determination of the payment of the Liquidator is prescribed.

9.5.              PERIOD FOR THE LIQUIDATION OF THE INSOLVENT ESTATE

For the whole liquidation process to be completed, it generally takes between six months to eighteen months. In more complex insolvent estates where for example legal action is required by the Liquidator on behalf of the insolvent estates, it could take many years.

CONCLUSION

As hard as it is to say good-bye to your Company, it is recommended to send your farewells in cases where the Company has deteriorated to such an extent, that by keeping the doors open, you will continue to dig a deeper hole in debt. We never start a business with the intention of closing it, but our economy is in such an unpredictable period that we have to be realistic and see the end result of insolvency if we continue to operate a business that does not generate income. “We will bankrupt ourselves in the vain search for absolute security” – quote by Dwight D. Eisenhower.

Cut your losses now rather than later where the situation would be detrimental not only to yourselves, but to the economy, as creditors will inevitable have to deal with losses of your debt and ultimately end up in a position where they are placed in position of considering liquidation as well. This would result in a domino effect in that the consequence will be more job losses and further deterioration of the economy, which would ultimately affect you and others.

“Today, certain people file for bankruptcy, businesses and individuals, and it no longer has the stigma it once had. Now it's almost considered wise, a way to regroup and come back again” (quote by David Dinkins).

(NOTE: this article is for information purposes only. Each case depends on merits of matter and should be consulted with an attorney)