Is Your Company Insolvent? Is Liquidation the Immediate Next Step?

Understanding the process of liquidation can help you to take the necessary steps to minimise the effects on your employees. It can also help you to determine whether it is the appropriate route to follow. First, you need to determine if your firm is insolvent and if alternatives to liquidation are relevant to your situation. To start, let us take a closer look at what liquidation is in terms of South African companies.

 

When is a Company Insolvent?

in debtIf a company or close corporation is no longer able to pay its debts when due or likely not to be able to do so within the next six months, and its liabilities exceed its assets, then the business entity is insolvent. A company can be cash-flow insolvent for a while and through business rescue procedures or the necessary restructuring, return to a solvent state. This can be the case where the firm’s assets are not liquid and where the firm waits for payments from clients. However, if the liabilities exceed the assets and the company is unable to pay its debts, it must stop trading.

The necessary steps must be taken to bring it back to a level of solvency or to liquidate the company or the close corporation. To determine if the company is insolvent, one cannot just look at the here and now. It is imperative to consider projections for the next six months from the date of insolvency (cash-flow or capital). Where the liabilities exceed its assets, the company is factual insolvent. If it is cash-flow insolvent, the company is said to be commercially insolvent. In many instances, companies are factual, but not commercially insolvent.

To determine if the company needs administration help through business rescue procedures or must be liquidated, it is essential to determine the level of financial distress. If you want an assessment of your firm’s financial state for the mentioned purpose, use our online liquidation assessment form to receive a legal opinion regarding the solvency level of your firm and possible routes to follow in dealing with the situation.

 

Procedures to Deal with a State of Insolvency

Liquidation is not the only option. It is possible to restructure certain aspects to bring the company back to a state in which it can trade. Formal or informal restructuring can take place.

Business rescue is a formal restructuring procedure as alternative to liquidation. The new Companies Act, in particular, deals with the procedures for restructuring through business rescue. A business rescue practitioner is appointed to oversee the process. Part of this entails meeting with the boardroom members and relevant affected parties. The practitioner assesses the financial state of the business and, if it is possible to restructure, proceeds with the necessary steps. If, at any stage, it becomes apparent that the company cannot become solvent again, then the practitioner must inform all relevant parties, whereafter liquidation of the company must follow.

The company can also enter into a compromise according the new Companies Act regulations. Section 155 of the new Companies Act deals with the procedures in this regard. The compromise entails negotiation with the creditors, whereby a settlement or compromise is reached between the parties.

It is possible for a company to get to a compromise through an informal procedure whereby the company arranges for a meeting with the creditors with the aim to get a settlement compromise on its debts. This is usually relevant to smaller firms with fewer employees. In this instance, it is imperative to get commitment in writing from the creditors that they will not apply to court for the liquidation of the debtor company while the company pays back the debt as agreed upon. It is imperative that the company makes use of insolvency lawyers or practitioners to help with the meetings and drafting of the relevant agreements.

 

What Does Liquidation Entail?

The insolvent company’s assets are sold to pay for the costs incurred as part of the winding-up procedures and dividends to the relevant creditors. The firm’s assets are thus liquidated. The selling of assets can be through a public auction or by means of a private arrangement. Once the costs of winding-up have been paid and the creditors have received their dividends, any money left from the sale of assets goes towards payment of dividends of the firm’s shareholders.

A solvent company can be liquidated according to the stipulations of the old Companies Act. For the purpose of this article, we look at liquidation of an insolvent company as allowed for under the new Companies Act.

With an insolvent business, the liquidation can be set in motion voluntarily by the board of directors through a special resolution, followed by the submission of the needed documents with the Registrar’s office. This can be a decision based on the company’s insolvent state or as the direct result of a formal request for the company’s liquidation made to court by one or more of its creditors, shareholders, or the company.

 

When Does the Liquidation Process Start?

It depends on whether it is a voluntary or compulsory liquidation of an insolvent company. Where the company voluntary liquidates, it starts when the board of directors passes the special resolution to liquidate the business. In the instance of compulsory liquidation, it starts with the granting of the liquidation order by the court.

 

How Long Does It Take to Liquidate an Insolvent Company?

The process can be completed within six months or it can take up to five years, depending on the complexity of the company’s assets the existing contracts, obligations, the number of creditors, objections, and more.

 

How do Creditors Claim Against the Company’s Assets?

The court-appointed liquidator oversees the winding-up process. The first and second meetings are held with the creditors. They must submit their claims during these meetings. If a creditor fails to do so, but still wants to submit a claim, then the creditor must request a special meeting for their own cost and submit their claim at this meeting. A creditor must have proof that the company owes the particular amount to the creditor. The creditor must also submit an affidavit in support of the claim.

 

When is the Liquidation Formally Completed?

The process comes to an end when the company’s name is formally removed from the CIPC register. This follows after the liquidator has completed the necessary processes and has met all the requirements of the Master of the Court. A certificate can be issued to the effect.

It is imperative to seek legal guidance before opting for the liquidation of the company. We offer you a convenient online assessment form that is automatically saved, enabling you to complete it at your own pace. The information submitted helps us to determine the best course of action for your particular company. Complete the online form for a liquidation assessment.

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