A company can be liquidated regardless of whether it is solvent or insolvent. If a company is insolvent, it is unable to satisfy its debts as and when they come due (this is referred to as commercial insolvency). If the company is solvent, it has the option of being liquidated for reasons other than that of financial distress. For example, if the directors can no longer work together or if the company has served its purpose, the company can file for voluntary liquidation. Filing for voluntary liquidation, whether the company is solvent or insolvent, can either be by way of an administrative request to the Companies and Intellectual Property Commission (“CIPC”) or by way of a court application.
The Companies Act 61 of 1973 (“the Old Companies Act”) regulates insolvent companies. In terms of the Old Companies Act, there exists an obligation on the company to be liquidated when it is insolvent and / or unable to trade.
A company is forced to liquidate when a creditor brings an application or when a shareholder initiates liquidation proceedings (this is compulsory liquidation). The company itself, with the requisite special resolution, can also initiate these proceedings and commonly does so, in order to prevent the shareholders and creditors from suffering any further prejudice (this is voluntary liquidation).
This article focuses on the steps involved in voluntary liquidation proceedings.
Requesting voluntary liquidation from the CIPC
- A shareholder’s special resolution, a statement of affairs of the company and other compulsory documentation is filed with the Registrar of Companies at CIPC. The liquidation commences on the day of filing these documents.
- The statement of affairs can be in the form of an affidavit and is prepared and deposed to by a director of the company. The statement of affairs includes the following:
- Details regarding the company’s assets and liabilities;
- Any litigation proceedings which the company is currently involved with;
- The contact details of each creditor of the company and their respective claims against the company;
- Details regarding any security held by the company’s creditors for the amounts owed to them.
- After consideration of the documents, the Registrar of Companies will register the company as being “in liquidation”. Thereafter, the company approaches the Master of the High Court, with the special resolution previously passed, to request the appointment of a provisional liquidator.
- The company will be liable for the costs incurred in the above process.
- If the process is commenced by the company itself, the creditors are not privy to the proceedings. There is a risk of creditors applying to CIPC or to court to have the liquidation proceedings set aside if it can be proved that the liquidation of the company is prejudicial to them. The company runs the further risk of bearing the costs of such objection proceedings brought by creditors.
- The advantages are that this process is quicker and less costly.
- Although the administrative process can largely be driven without the guidance of attorneys, we suggest that attorneys remain onboard given that their experience with the unpredictable offices of CIPC and the Master of the High Court. We are also able to assist with the drafting and/or settling of the statement of affairs.
Issuing a court application for liquidation
- A court application by a shareholder or by the company itself asks the court to place the company in liquidation.
- Strategically, a (friendly) creditor bringing an application bears a lesser onus than an out-and-out voluntary application. The legal requirements are less stringent, and the court is mindful of the creditors’ limited knowledge of the functioning of the company.
- An affidavit motivating the application is deposed to by a director of the company and is filed at the Cape Town High Court.
- At the first hearing date (roughly 2 weeks after filing) a provisional/interim order is granted, placing the company in liquidation. The court will make provisions for a return date, usually around 6 weeks after the provisional date.
- The 6-week period allows for any creditors or affected parties to object to the application. If none come forward, the liquidation proceeds unopposed. This notice period offers some protection to the company as it becomes very difficult for creditors to have the liquidation proceedings set aside at a later stage.
- After the 6 weeks has passed, the applicant returns to court to have the order made final. Thereafter, a final liquidator is appointed.
- The court process is more expensive as opposed to the administrative process, considering the obligatory involvement of attorneys and a junior counsel.
The processes above, although seemingly straightforward, do require the guidance of attorneys experienced in the field of insolvency law.
Do not hesitate to contact our offices if you would like to discuss the most suitable option applicable to your company and any questions relating to the information above.