People often confuse voluntary liquidation with property, with voluntary sequestration. The latter is when a person who owns property voluntarily surrenders their estate for the purpose of having the assets sold in order to realise enough benefit to the creditors as a means of paying off their debt. Voluntary sequestration with property thus applies to a natural person.

Voluntary liquidation with property is when a business entity applies to be declared insolvent. Unlike with voluntary sequestration, where the individual must have immovable property or enough other assets and security that can be surrendered to ensure that 80% of their debt can be paid off, a company doesn’t need to have any assets to the benefit of creditors.

Indeed, the law provides that, should a business entity’s liabilities exceed its assets, it may not keep on trading. If you find that your business is in financial trouble and unable to pay its creditors, it is essential to take proactive steps to protect your employees. If the business debt is more than six months in arrears, you will by law have to liquidate the firm. The best way to go about it is with shareholder resolution to voluntary liquidate the company with its property. If you wait for a compulsory liquidation, you can end up losing everything.

Of course, liquidation should the last resort. If at all possible, get investors on board or apply for business rescue. However, the situation may be so dire that the only option left is to voluntarily liquidate with or without property. Before you do so, you can register another business entity and trade in the new business entity’s name to ensure continuity of business. In this way, the employees don’t lose their jobs, though you may have to restructure to ensure better profitability and a few employees may have to be retrenched.

What is important to note is that, with liquidation (unlike with voluntary sequestration, where the creditors must be notified before the court hearing about the intention to sequestrate), you can bring the provisional application to court before having to notify all the creditors. The court will set a hearing date and in the meantime, the creditors must be notified of the date. They will have enough time to object to the liquidation application. If no creditors object or bring claims against your company, the liquidation can be completed rather quickly.

What Does the Voluntary Liquidation Process Involve?

It is basically a legal process whereby the company’s assets or sale of the operations takes place with the purpose of distributing the proceeds of the sale to the various creditors and, where relevant, to the shareholders. The company, once liquidated, ceases to exist.

When to Stop Trading

A decision must be made regarding the last day of trading of the business entity. Once made, the company should not pay any creditors, do business, or apply for loans. One creditor may not be benefitted to the detriment of another. By law, you may make no payments to creditors. Also note that any income after the date of final trading will be to the benefit of the creditors. It is thus not in your interest to keep on trading after the selected date.

What About Contracts?

Note that all the contracts that the business has concluded still remain valid. The liquidator decides which contracts to terminate and which ones to abide by. The decision always favours the creditors. What you should also keep in mind is that, if the liquidator decides to terminate the contract, the other party to the contract will have the right to submit a monetary claim against the liquidated business estate.

Are You Liable for Debts?

Avoid the mistake of thinking that, as a director, you are not liable for any of the debts of a private company. Even if you are a shareholder, you are still liable for debt for which you have signed surety for the business. If the court finds that it is because of your gross negligence or that of the other directors or shareholders that the business became bankrupt, the court can also hold you and the other parties responsible for the company’s debt.

What to Do?

If you find that your business is in deep financial trouble, take the responsible step to get legal guidance from our team on how to initiate liquidation with property or without.

CONTACT US
close slider