Insolvency and Liquidation

 

 

 

No. The procedures that apply in the winding-up of a close corporation are similar to those that apply in relation to companies under the Companies Act, 2008 and the Companies Act, 1973.

Statutory obligations continue once the liquidator becomes the representative taxpayer. The liquidator, as the representative taxpayer is required to submit all outstanding returns in respect of applicable tax types.

If a liquidator fails to comply with the requirements of the Income Tax Act and the Tax Administration Act relating to a company or
close corporation in liquidation, that person could be held personally liable for any tax payable in representative capacity. Such liability will arise if the liquidator alienates, charges or disposes of the income in respect of which the tax is chargeable, or disposes of any fund or money that is in that person’s possession from which the tax could legally have been paid

The liquidation of a solvent company results in the dissolution of the company and the removal from the companies register. Once the winding-up process is completed, the Master must file a certificate of winding-up of the company in the prescribed form. Once the Master’s certificate is received, the Companies and Intellectual Property Commission (CIPC) records the dissolution and removes the company from the companies register.
 

From the commencement of the winding-up, all the powers of the directors or members of the company or close corporation concerned shall cease, except insofar as their continuance is sanctioned by the liquidator or the creditors in a creditors’ voluntary winding-up or by the liquidator or the company or close corporation in a members’ voluntary winding-up.
 

Show all FAQs in Category

 

 

Winding Up and Liquidation

Navigating the complexities of winding up and liquidation can be daunting.  Whether you're facing financial distress or need to dissolve a business, understanding the legal processes involved is crucial.  Aucamp Attorneys provides expert guidance and support throughout the winding-up and liquidation process, protecting your interests and ensuring compliance with all applicable legislation.

What is Winding up and Liquidation? 

Winding Up is the overarching process of formally concluding a business's operations. It encompasses all steps necessary to bring the business to a close, including liquidation or dissolution.

Liquidation is a specific type of winding up where the company's assets are sold to generate funds to pay outstanding debts to creditors.  Any remaining funds may be distributed to shareholders.  Liquidation ultimately leads to the company's closure.

Members' Voluntary Winding Up of Solvent Companies in South Africa: A Guide by Aucamp Attorneys

Sometimes, even successful and financially sound companies reach a point where the shareholders decide to bring operations to a close. In South Africa, for solvent companies, this can be achieved through a Members' Voluntary Winding Up process, governed by Section 80 of the Companies Act. This streamlined process allows for an orderly and controlled dissolution when a company is in a healthy financial position and able to meet all its obligations.

At  Aucamp Attorneys, we guide companies through every step of the voluntary winding up process.  This page outlines the key aspects of members' voluntary winding up for solvent companies.

What is Members' Voluntary Winding Up?

Section 80 of the Companies Act clearly sets out the framework for this process:

"(1) A solvent company may be wound up voluntarily if the company has adopted a special resolution to do so, which may provide for the winding-up to be by the company, or by its creditors."

This means that for a solvent company, the process begins with a special resolution passed by the shareholders.  A special resolution typically requires at least 75% of the votes cast at a general meeting.  This resolution formally initiates the voluntary winding up.

Key Steps in Members' Voluntary Winding Up

1.  Passing a Special Resolution - The process starts with the company's shareholders passing a special resolution to voluntarily wind up the company. This decision is usually made when the company has achieved its objectives, or shareholders are looking to retire, restructure their business interests, or for other strategic reasons – all while the company is financially sound.

2.  Filing the Resolution - with CIPC  Once the special resolution is passed, it must be formally filed with the Companies and Intellectual Property Commission (CIPC).  The date of this filing with CIPC is the official commencement date of the voluntary winding up.  It's crucial to ensure this filing is done correctly and promptly.

3.  Notification to the Master of the High Court and Security - After filing, CIPC is legally obligated to promptly notify the Master of the High Court about the voluntary winding up.  In most cases, alongside filing with CIPC, the company is required to lodge security with the Master of the High Court. This security acts as a safeguard to cover any potential debts that might arise within 12 months following the commencement of liquidation.

  •     Dispensation of Security - In certain circumstances, particularly when a company demonstrably has no outstanding debts, an application can be made to the Master to dispense with the security requirement.  This can streamline the process and reduce unnecessary administrative burdens.

4.  Consequences of Voluntary Winding Up Commencement -  From the date of filing the special resolution with CIPC, several key changes take effect:

  •  Continued Legal Entity -  The company remains a legal entity throughout the winding up process.
  •  Limited Trading - The company must cease all trading activities, except to the extent necessary to facilitate the beneficial winding up. This might include selling off assets or completing existing contracts in a way that maximizes value for stakeholders.
  • Directors' Powers Cease (with exceptions) -The powers of the company's directors are significantly curtailed. They can only act to the extent specifically authorized, typically by the liquidator appointed later in the process, or as absolutely necessary for the beneficial winding up.

In Summary: Starting a Members' Voluntary Winding Up

  • Initiated by Special Resolution - Shareholders formally decide to wind up the solvent company through a special resolution.
  • Key Starting Point: Filing with CIPC - The voluntary winding up officially begins when this special resolution is registered with the Companies and Intellectual Property Commission (CIPC).
  • Security and Master Notification - Security for potential debts is usually lodged with the Master, who is notified by CIPC of the liquidation.

Why Choose Members' Voluntary Winding Up for a Solvent Company?

This process provides a structured and legally sound method for closing down a solvent company in an orderly manner. It ensures that all legal requirements are met and protects the interests of shareholders and any potential future creditors (even if unlikely in a solvent scenario).

How Aucamp Attorneys Can Assist You

Navigating the voluntary winding up process, even for solvent companies, requires careful attention to legal detail and procedure. Aucamp Attorneys offers expert legal services to guide you through every step, including:

  • Advising on the necessary resolutions and legal requirements.
  • Assisting with the preparation and filing of all required documentation with CIPC and the Master of the High Court.
  • Advising on security requirements and applications for dispensation if applicable.
  • Ensuring compliance with all aspects of the Companies Act throughout the winding up process.

Involuntary (Compulsory) Winding Up and Liquidation in South Africa: Expert Guidance from Aucamp Attorneys

When a company in South Africa faces insurmountable financial difficulties and is unable to pay its debts, a process known as involuntary winding up, or compulsory liquidation, may be initiated. Unlike voluntary winding up, which is a decision made by the company itself, compulsory liquidation is a legal procedure forced upon the company by an external party, most often a creditor seeking to recover unpaid debts.

At Aucamp Attorneys, we understand the complexities of compulsory liquidation and provide expert legal guidance to both creditors seeking to initiate this process and companies facing a liquidation application.

What is Involuntary Winding Up?

Involuntary winding up is a formal court-ordered process that commences when a company is deemed insolvent by the High Court.  It's a mechanism to ensure a fair and orderly distribution of the company's assets to its creditors when the company can no longer operate viably due to its financial state.

Initiating the Process: Application to the High Court

The process of compulsory winding up begins with an application to the High Court. This application is a legal proceeding where the applicant requests the court to declare the company insolvent and issue an order for its liquidation.

Who Can Apply for Compulsory Liquidation? (Locus Standi)

The Companies Act outlines who has the legal standing, or locus standi, to apply for compulsory liquidation.  These parties typically include:

  • Creditors - The most frequent applicants are creditors who are owed money by the company and have been unable to obtain payment.
  • The Company Itself -  In some cases, directors of a company, recognizing its hopeless insolvency, may responsibly apply for compulsory liquidation.
  • Shareholders -  Shareholders may apply under specific circumstances, such as instances of company mismanagement or oppressive conduct.
  • Employees - Employees who are owed outstanding salaries or other remuneration can also apply.
  • Other Specified Parties - The Companies Act may also grant standing to other parties in particular situations.

Grounds for Compulsory Liquidation: Proving Insolvency

A successful application for compulsory liquidation hinges on proving to the court that the company is legally insolvent. South African law recognizes two primary forms of insolvency:

  • Factual Insolvency - This is established when a company's total liabilities exceed its total assets.  Simply put, the company owes more than it owns.
  • Commercial Insolvency -  Even if a company's assets might technically exceed its liabilities on paper (balance sheet solvency), it is considered commercially insolvent if it is unable to pay its debts as they fall due in the ordinary course of its business.  This "cash flow" test is often the more practical and commonly used indicator of insolvency.

Demonstrating Commercial Insolvency:

Applicants rely on various forms of evidence to convince the court of commercial insolvency. Common methods include:

  • Statutory Demand (Section 69 of the Companies Act) - A creditor can issue a formal Section 69 Demand, a written legal notice demanding payment of a debt exceeding R15,000. If the company fails to pay, secure, or reasonably settle the debt within 21 days, it is legally deemed unable to pay its debts, providing strong grounds for liquidation.
  • Return of Nulla Bona - If a creditor has obtained a court judgment against the company and instructs the Sheriff to seize assets, a Sheriff's return of "nulla bona" (meaning "no assets found" or insufficient assets to satisfy the debt) is compelling evidence of insolvency.
  • Cash Flow Test - Demonstrating that the company consistently fails to meet its payment obligations, such as dishonored cheques or repeated defaults to suppliers, can indicate commercial insolvency.
  • Balance Sheet Test - Although less commonly relied upon in isolation for commercial insolvency, evidence showing that a company's liabilities significantly outweigh its realizable assets can support a liquidation application.

The Court Procedure: From Application to Final Liquidation Order

The compulsory liquidation process involves a structured court procedure:

1.  Application and Service - The liquidation application, supported by an affidavit under oath, is lodged with the High Court and must be formally served on various parties, including the company itself (at its registered office and business address), trade unions, employees, SARS, the Master of the High Court, and any other identified interested parties, as required by the Companies Act.

2.  Initial Court Hearing and Provisional Liquidation Order - The court reviews the application. If a prima facie (on the face of it) case for liquidation is established, the court typically grants a provisional liquidation order. This is an interim order to:

  • Protect Company Assets -  Safeguard the company's property from further dissipation.
  • Stay Legal Proceedings -  Pause most legal actions against the company to allow for orderly liquidation.
  • Master's Custody and Provisional Liquidator - The company's property is placed under the custody of the Master of the High Court. A provisional liquidator is appointed by the Master to take control of the company and begin investigating its affairs.

3.  Rule Nisi and Return Date Hearing -  The provisional order is accompanied by a "rule nisi," directing interested parties (including the company) to appear in court on a specified return date. This provides an opportunity to present arguments as to why the provisional order should not be made final (i.e., to oppose the final liquidation).  The liquidation application can be either opposed or unopposed, with hearing dates determined by court rules and practice directives.

4.  Final Liquidation Order and Final Liquidator -  On the return date, the court considers all evidence and arguments.  If satisfied that the company is insolvent and should be wound up, the court issues a final liquidation order, making the liquidation permanent. The Master of the High Court then appoints a final liquidator (often the same person as the provisional liquidator) to administer the winding up process, realize assets, and distribute funds to creditors according to legal priorities.  From the date of the final liquidation order, the company cannot continue with business proceedings.

Why Compulsory Liquidation is Necessary?

Compulsory liquidation serves as a crucial mechanism within the South African legal framework. It provides a structured and legally enforced process to:

  • Protect Creditors - Ensure that creditors of an insolvent company have a mechanism to recover at least a portion of what they are owed, through the fair distribution of the company's remaining assets.
  • Orderly Asset Distribution -  Provide a regulated process for realizing the company's assets and distributing them according to legally defined priorities (secured, preferent, concurrent creditors).
  • Prevent Further Debt Accumulation - Stop an insolvent company from continuing to trade and potentially accumulating further debt, which would further prejudice creditors.

The Importance of Expert Legal Counsel

Compulsory liquidation is a complex legal process with significant implications for all stakeholders. Whether you are a creditor considering applying for compulsory liquidation or a company facing such an application, seeking expert legal advice is paramount.

Aucamp Attorneys possesses extensive experience in insolvency law and can provide comprehensive guidance and representation in all aspects of compulsory liquidation. We assist:

  • Creditors -  In assessing the viability of a liquidation application, preparing and lodging court documents, and navigating the liquidation process to maximize potential recovery.
  • Companies -  In understanding their rights and obligations when facing a liquidation application, exploring options for opposition or alternative solutions, and ensuring compliance with all legal requirements.

If you are involved in a situation that may lead to compulsory winding up, contact Aucamp Attorneys today for expert legal assistance and to protect your interests. We are dedicated to providing clear, effective, and strategic legal solutions in insolvency matters.

Ranking of Creditors in Liquidation

When a company is liquidated, creditors are paid in a specific order of priority.  There are three main categories:

1. Secured Creditors - These creditors hold security for their claims, such as a mortgage, pledge, or lien, over specific company assets. They have the first claim on the proceeds from the sale of those secured assets.  Generally, the secured creditor who registered their security first has priority. If the sale of the secured asset doesn't cover the entire debt, the remaining balance becomes a concurrent claim.

2. Preferent Creditors - These creditors don't have specific security but have a higher claim than concurrent creditors. They are paid from the proceeds of unsecured assets, in a specific order defined by the Insolvency Act. Common preferent creditors include employees (for outstanding wages, up to a certain limit) and SARS (for certain taxes).  Holders of unperfected general notarial bonds also fall into this category.

3. Concurrent Creditors - These creditors have the lowest priority. They are paid from any remaining proceeds of unsecured assets after secured and preferent creditors have been paid.  Concurrent creditors are paid proportionally to the amount they are owed.  If any funds remain after paying all concurrent claims, it's used to pay interest on those claims.

Liquidation has significant legal ramifications.  

1. Moratorium on Legal Proceedings -  Civil legal actions by or against the company are automatically suspended upon liquidation until a liquidator is appointed.  Attachments or executions against company assets after liquidation commence are void.  Anyone wishing to continue or initiate legal action against the company (for pre-liquidation claims) must give the liquidator at least three weeks' written notice within four weeks of the liquidator's appointment. Failure to do so may result in the proceedings being deemed abandoned.

2. Custody of Company Property - While a liquidator hasn't yet been appointed, or if the liquidator is unable to fulfill their duties, the Master of the High Court is responsible for the company's property.

3. Effect on Contracts - Liquidation doesn't automatically terminate existing contracts.  The liquidator must decide within a reasonable time whether to honor the contract.  Failure to decide implies the liquidator doesn't intend to perform. The other party cannot force the liquidator to perform specifically, but they retain common law rights to cancel the contract. If the liquidator breaches the contract, the other party has a concurrent claim for damages.

4. Effect on Leases -  Leases (movable or immovable property) are not immediately terminated by liquidation. Within three months of appointment, the liquidator must decide whether to cancel or continue the lease and notify the lessor in writing.  Failure to notify within this period is deemed cancellation.  Rent accruing after liquidation must be paid by the liquidator. Rent due from liquidation until cancellation is a preferent claim. Other lessor claims due to breach are concurrent claims.  The lessor retains common law rights, including cancellation for pre-liquidation breaches.

5. Effect on Employment Contracts -  Liquidation suspends employment contracts immediately.  Employees are not obligated to work and are not entitled to salary or benefits during suspension (though they may qualify for unemployment benefits). The liquidator may terminate contracts after consulting with employees/representatives to explore rescue options.  Unterminated contracts automatically end 45 days after the liquidator's final appointment. Employees have a preferent claim for a limited portion of unpaid salary/wages and contributions.  Any excess amounts owed are concurrent claims.

Legal Assistance

Don't leave your company's future to chance.  Liquidation is a high-stakes legal process where missteps can be costly. Mitigate your risk. Get expert advice from Aucamp Attorneys before you make any decisions. Contact us to make an appointment for a consulation.