The recent worldwide health crisis and the subsequent world economic crisis have led to many business failures. In South Africa, hair stylists, restaurants, and many accommodation establishments, such as resorts and bed and breakfast type guesthouses are still not operational. Puzzle room operators, flea market vendors, and event companies cannot yet operate. The same applies for tour bus companies. For many of the businesses, it is not a question of if, but rather when they will go into insolvency due to the lack of cash-flow.
Maybe your business falls within one of the mentioned categories and is now in financial trouble. Read on to gain a better understanding of company insolvencies in South Africa.
We take a closer look at the question of what happens when a company goes into insolvency to remove some of the fears and misconceptions surrounding liquidation and insolvency proceedings.
What Is Insolvency?
Before we can answer the question of what happens when a company goes into insolvency, we must understand what insolvency means.
Insolvency is not a legal status. A person can be insolvent and not yet bankrupt. A company can be temporarily insolvent, but not bankrupt. So, what is the difference? A company is solvent when it is able to pay its debts when due and its liabilities do not exceed its assets. The interesting aspect is that the Companies Act requires a company to liquidate if its liabilities exceed its assets. As such, a company can liquidate even if it does not have any assets.
Difference Between Liquidation and Sequestration
In the case of a natural person, the individual must have sufficient assets to ensure the sale of the assets on auction under the supervision of the trustee/curator can provide for enough funds to pay for the sequestration process, court application, and the minimum benefit as required by law for each of the creditors. A person’s debt can be too little, and the person can be too poor to sequestrate. The law provides that the sequestration must be to the benefit of the creditors. If all the requirements are not met, then the court can reject the application for the individual to be declared bankrupt.
But when it comes to a company, the law is a bit different. Since it is legally required that a company’s liabilities cannot be more than its assets, if the company is not able to pay its debts when due, the company can apply for liquidation before notifying the creditors. The provisional application is lodged, and the notice of the intended liquidation is published in the relevant government gazette and newspapers. The winding up process follows once the liquidation has been approved and the liquidator appointed.
The company is also deregistered with CIPC. If a firm owes money to SARS, then SARS is one of the preferred creditors. Where the directors have signed surety for debts of the company, their estates form part of the insolvency proceedings.
How to Declare Insolvency
The board of directors and shareholders can, through a special resolution, decide to liquidate the firm. They must sign the resolution to show that they agree within the winding up of the company. In this instance, the company has to submit security to the Master of the High Court for payment of the company’s debts. Any money left after the sale of the assets and distribution of the proceeds to the creditors is then shared among the shareholders. The company is no longer registered at CIPC. Keep in mind that this is the process for a company that is solvent.
What About A Company That Is in Financial Trouble?
A creditor, shareholder, employee, or director of the company can apply for the liquidation of the company if the entity is unable to pay its debts due and its liabilities exceed its assets. A liquidator is appointed to dispose of the assets and pay the creditors from the proceeds of sale.
Last Day of Trading
Once the decision to liquidate has been made, the board of directors must decide when the last day of trading will be. The date should be announced and the employees notified. It is imperative to keep to the date as any trading after the date is to the benefit of the company’s creditors.
In the instance where the directors realise that the company is in financial trouble but does not apply for business rescue or the liquidation of the firm, they can be held accountable for the financial situation of the firm. It is thus important to take the necessary steps in saving the firm and the jobs of the employees or to apply for its liquidation if insolvency is inevitable. With business rescue having a low long-term success figure, the best option may be to voluntary liquidate.
The directors can apply to the High Court to have the company liquidated. The application is placed on the court roll. The court also issues a provisional granting on the day of the application. This protects the company until the return date where the final court hearing takes place for the liquidation of the firm.
What About SARS?
A company that faces insolvency and owes SARS money can still liquidate. Indeed, if the amount owed to SARS is crippling the firm, it may be the only way to start over without the tax debt hanging over the firm.
What About the Employees?
An employee is a preferred creditor. This means employees are first in line along with SARS when it comes to benefit payments. However, most employees will not be happy to lose their jobs. They would most likely prefer to keep the firm operating. It is, therefore, imperative to notify employees of the intended or liquidation application as soon as possible to give them time to search for new jobs. The directors should provide the employees with sufficient time off to find other jobs and attend interviews. Where possible, training should be funded or provided to help improve their skill sets. Managers should provide the employees with certificates of service as required by law and help them prepare their resumes. It is also important to provide them with written recommendations.
Can the Company Still Trade?
No. The business activities must seize after the official last day of trading. Keep in mind that an individual cannot be a director of a company if the individual is sequestrated. It is likely that the directors have signed surety for debt and must therefore sequestrate as well. They can then not act as directors in other companies. To ensure that operations can go on and job losses minimised, it is possible to register another business entity before the company reaches a state of insolvency and to then start trading from that firm while the company is liquidated. Some of the employees can then work at the firm. However, only the persons not sequestrated can be on the new board of directors.
Why Seek Legal Help?
It is imperative to understand the implications of business insolvency in South Africa and how it affects the director and the employees. We have looked at the basics but recommend that you consult with our attorneys for more information on how to apply for liquidation, seek business rescue help, and minimise job losses.
Get in touch with our insolvency lawyers for legal advice and help with the liquidation or business rescue process in South Africa.
Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.