Introduction
Business Liquidation is available to all companies and close corporations in South Africa.
Some events happened in the last few years that had long-lasting effects on our businesses. Some to this day never recovered from covid-lockdowns.
When facing financial difficulties, making decisions may seem complex. However, as cash flow dwindles options become limited, simplifying the choice. Confronted with debt, one must either pay it or, if unable to do so, find ways to eliminate it (liquidation). Borrowing more money to pay existing debt is rarely a wise financial decision.
It is generally cheaper, faster, and more effective to eliminate debt by liquidating the company and start over as soon as possible, rather than struggling to pay it with limited cash flow.
Liquidation is an excellent choice to eliminate debt. Trading out very seldom works and is too expensive, especially for a company with cash flow problems.
Liquidating a company immediately frees the business owner from the stress, worry and fear because liquidation brings an end to the problems. The result is that directors can sleep at night and use their energy to rather focus on new ventures or growing the company than to spend their energy on sleepless nights and trying to put out fires.
Liquidation is a structured process that stops legal processes against the company. Creditors are forced to stop with legal action against the company and to take part in the winding up process. A liquidator stands in the shoes of the directors and deals with the affairs of the company so that the directors do not have to.
In this comprehensive Comprehensive Guide Company Liquidation in South Africa, we examine the parties involved in liquidation process; discuss the process of liquidation, explore the advantages of liquidation as well as what happens to creditors and directors when a company liquidates. Additionally, we will provide information on the various company structures that are eligible for liquidation. We will also cover the different types of liquidation namely voluntary versus compulsory liquidation. We discuss the distinctions between the CIPC and High Court liquidation. We also discuss the mindset of company directors during times of financial hardship.
By the end of this guide, you should have a thorough understanding of the liquidation process in South Africa and the critical factors to consider when making significant decisions for your business.
It is worth noting that liquidation is only available to companies and close corporations. Sole proprietors and trusts will rather sequestrate to eliminate debt. We will shortly touch upon sequestration in this guide.
Throughout this guide, references to companies also include close Corporations. When we refer to individuals or sole proprietors, we also include Trusts.
What is Liquidation
Liquidation of a company falls under Chapter XIV of the Companies Act 61 of 1973. What is Liquidation is explained here. A company that is insolvent or solvent can be liquidated. We explain later in the document what insolvent and solvent means. There are different types of liquidation (voluntary liquidation and compulsory liquidation). Companies can be liquidated either at the CIPC or with a High Court application.
Importance Of Understanding Liquidation
Understanding liquidation is crucial for business owners, as it can be the key to saving a struggling business and helping a company to get rid of SARS debt. When used at the right time, business liquidation prevents companies from sinking deeper into debt, which often results in significant financial loss. Liquidation swiftly ends the issues of a failing company, allowing business owners to restructure and trade in a different format. Acting early frees up time, energy, and money to continue trading elsewhere, while the burden of debt is lifted.
Liquidation is not just for distressed companies; it is also an effective way to close solvent companies when needed. A solvent company can be liquidated even if it has no debt. Voluntary liquidation is a powerful tool that can prevent costly mistakes such as trying to repay historic debts (especially SARS debt), trading too long, or borrowing more money. Instead of enduring prolonged stress and fear, voluntary liquidation can be a lifeline for struggling businesses. It quickly resolves problem companies and offers directors a fresh start by wiping out the company’s debt. This makes it essential for every business owner to grasp how impactful liquidation can be.
Why Does Liquidation Exist?
Without business liquidation (and the personal sequestration of individuals) the economy will come to a standstill and shrink if this mechanism (which liquidation is) by which debt could be forgiven. If every company or individual that cannot pay debt were never allowed to get rid of the debt, it is possible that the international economy will collapse. The nature of business is risky: some are successful, and others are not. It is important for the economy that legal processes exist to remove unsuccessful companies from the equation in a structured manner as fast as possible. This means following a liquidation the directors can continue with business elsewhere or in a different format. If liquidation (and sequestration) did not exist, very few people would have taken the chance to start a business as the risk will be too high.
Definition of Liquidation
Liquidation is a legal process whereby a company is placed in the hands of a liquidator who will stand in the shoes of directors. All the creditors come together as one body of creditors (concursus creditorum) (not each one acting separately). The “body of creditors” act as one.
Liquidation is also known as “winding-up.”
Insolvency: The Umbrella Term
Insolvency is the umbrella term for the insolvent status of both an individual and a company or close corporation. Individuals sequestrate and businesses liquidate. A business or individual is insolvent when the liabilities exceed the assets or when the debt cannot be paid.
Concursus Creditorum
Concursus creditorum is a Latin term used in the legal system to describe the process where creditors come together as a group in a company liquidation in South Africa. This means that instead of taking individual legal action against the company, creditors must stop their individual efforts and deal with the liquidator as a group. The liquidator then oversees the distribution of funds (if any) among the creditors according to a set order of priority.
What Is an Insolvent Company
A company is insolvent when its liabilities exceed its assets, or the company is unable to pay its debts. A company can be commercially or factually insolvent. When a company is in an insolvent state, it must follow the voluntary liquidation process.
When Is a Company Insolvent
Factual versus Commercial Insolvency: Key Differences Explained
Factual Insolvency
Factual insolvency is a situation where a company is unable to pay their debts as they become due. If the liabilities are greater than the assets, the company is considered factually insolvent. The company should then do a voluntary liquidation.
Commercial Insolvency
Commercial insolvency is a situation where a company is unable to pay its debts as they become due, but the liabilities do not necessarily exceed the assets. For example if a company owns R10million worth of assets and the debt is R2 million, then the liabilities do not exceed the assets. It does not mean that the company can pay its debt and that will mean that the company is commercially insolvent and should do a voluntary liquidation.
When Is a Company Insolvent – The Solvency and Liquidity Test
Under Section 4 of the Companies Act, 2008, a solvency and liquidity test is required to determine whether a company is solvent or insolvent. In terms of this test, the assets must be valued at fair value. If the fair value of the assets of the company is equal to or exceed its liabilities, then the company is solvent. Additionally, the company must be able to pay its debts as they become due in the next 12 months.
When conducting the test, the company’s financial information must be based on its accounting records and financial statements.
On What Legal Grounds Can a Company Be Liquidated
Some of the legal grounds on which a company can be liquidated are for example: that the company cannot pay its debt, premature commencement of business, not commencing or continuing with business or the liabilities exceed the assets.
Types of Liquidation
Voluntary versus Compulsory Liquidation
In terms of Section 343(1) of the Companies Act 61 of 1973 the liquidation of a company can take place in two ways: by a Court order (sometimes referred to as “compulsory” liquidation. A liquidation application is compulsory if the directors and shareholders are not in agreement that the company is liquidated and one or a few of them lodge a High Court liquidation application. A liquidation application is also compulsory if a creditor of the company brings a High Court liquidation application.
A voluntary liquidation is when all the directors and shareholders of the company agree that the company should be liquidated, and everybody signs a special resolution to this effect.
Difference between a Solvent and an Insolvent Company Liquidation
Liquidating an Insolvent Company
CIPC Liquidation of an Insolvent Company
The voluntary liquidation process can be followed for an insolvent by special resolution in terms of Section 343 of the Companies Act 1971. A liquidation is voluntary if all the directors and shareholders decide that the company should be liquidated. To finalise the voluntary liquidation process, they need to sign relevant documentation which is then lodged with the CIPC. The CIPC registers the Special Resolution and the Company is liquidated. Only voluntary liquidations can be liquidated at the CIPC or the High Court. Other liquidations applications must go to the High Court.
Court Liquidation of an Insolvent Company
An insolvent company can also be liquidated by court order in terms of Section 343 of the Companies Act 1971.
If the directors and creditors are not in agreement that the company should be liquidated, then one or some of them can lodge a High Court application for the company liquidation. This is referred to as a compulsory liquidation. Any director/shareholder can apply for the forced liquidation of a company if any directors are acting fraudulently or illegally, or if the company’s assets are being misapplied or wasted. The CIPC can also apply to court to liquidate a company on similar grounds. A creditor can also bring a compulsory liquidation application against a company. If the Court grants the liquidation order, the company is liquidated.
Liquidating a Solvent Company
What is a Solvent Company
A company is considered solvent when it can pay its debts or has no debts.
How is a Solvent Company Liquidated
In a solvent Liquidation, the company can be voluntary liquidated under the new Companies Act, 71 of 2008. A solvent company that wishes to voluntary liquidate, must file a resolution that the directors as well as the shareholders have signed. The resolution together with other supporting documents will be filed with the CIPC. Once registered, the business is liquidated.
Other Ways for Solvent Liquidation
Additionally, a solvent company can also be liquidated when the directors are deadlocked in the management of the company, or if it is just and equitable that the company be wound up. In this case it is not a voluntary liquidation but a compulsory liquidation. In this case the liquidation application will be lodged at the High Court in terms of Section 81 of the Companies Act 71 of 2008. Shareholders can also apply for the liquidation of a company at the High Court if directors or other relevant persons are acting fraudulently or illegally, or if the company’s assets are being misapplied or wasted, even if the company is solvent.
The court has discretionary power to grant a liquidation order in terms of Section 81 of the Companies Act 2008, irrespective of the ground upon which the application is based. One of the reasons for liquidating a solvent company is to ensure there are no potential issues in the future, and to avoid personal liability for any debt that may arise. Liquidating a solvent company is a better option to close its affairs for good than to just deregister it. The CIPC or the High Court may be used to liquidate a company, but the CIPC liquidation is usually the cheaper and faster option.
How to Liquidate a Business in South Africa
There are different steps for different parties for business liquidation.
All registered companies and close corporations can liquidate – whether they are insolvent or solvent. Trusts and individuals sequestrate and follow a different process. Voluntary liquidation is for both companies (by directors and shareholders) and close corporations (by members). A company can also be forcefully liquidated (compulsory liquidation) by creditors or by some of the directors and shareholders if they are not all in agreement.
Liquidating a Company Gets Rid of Business Debt
Liquidation blocks SARS and other creditors from taking legal action against the liquidated company.
Voluntary liquidation halts the chaos and brings calm and peace and focus. Instead of putting out fires all the time while the worry and stress overwhelms the business owner, they can rather follow the voluntary liquidation process so that the company is liquidated. This will enable the business to continue trading debt free and start over fresh if the business owner wishes to continue trading. If the business owner does not wish to continue to trade, liquidation will remove the problem from the equation for peace of mind. Company liquidation really is a lifeline for struggling businesses.
Benefits of Company Liquidation
There are many benefits to liquidation, the biggest of which is that the company gets rid of company debt while it continues to trade.
- For companies that cannot pay its debt, or
- companies where the directors/shareholders are in a deadlock, or
- simply because a solvent company is closing and want to make sure that there are no comebacks
- liquidation brings the chaos of a company being sued left right and centre by creditors to an end
there is no better tool to use than voluntary liquidation.
Once the company is liquidated a liquidator is appointed and all creditors must wait for the liquidator’s appointment and then they are forced to take part in the winding up processes, they cannot bring legal action against the company.
When To Liquidate a Company
Why It is important To Liquidate Sooner Rather Than Later
Timing is everything in the voluntary liquidation of a company.
Trading for too long with a company that cannot pay its debt before it proceeds with the liquidation process, places the directors at risk in more ways than one.
Legal Reasons for a Business Liquidation
The legal reasons alone are a strong indicator when a company should be liquidated. Section 22 of the Companies Act 2008 places the obligation on the directors to liquidate the company as soon as the company cannot pay its debt or when the liabilities exceed the assets (when it is insolvent). If the directors do not liquidate the company and continue to trade under insolvent circumstances, they can be held personally liable for the debt of the company because they traded recklessly.
Voluntary Liquidation with SARS Debt
Liquidating too late especially while there is SARS debt owing can cause the following problems:
- SARS can empty the company’s bank account without any notice and leave the company with nothing or little
- A creditor could bring a compulsory liquidation application against the company at a most inconvenient time
- If they don’t bring a company liquidation application, SARS or other creditors may take judgment, blacklist the company (note: blacklist the company and not the directors) and obtain a Warrant for Execution which may cause the Sheriff to arrive at a very inconvenient time to attach assets
- Furthermore, the landlord may lock the doors with a rental interdict summons and attach assets which can block the company from trading.
Voluntary Liquidation with SARS Debt
- Liquidating too late especially while there is SARS debt owing can cause the following problems:
- SARS can empty the company’s bank account without any notice and leave the company with nothing or little
- A creditor could bring a compulsory liquidation application against the company at a most inconvenient time
- If they don’t bring a company liquidation application, SARS or other creditors may take judgment, blacklist the company (note: blacklist the company and not the directors) and obtain a Warrant for Execution which may cause the Sheriff to arrive at a very inconvenient time to attach assets
- Furthermore, the landlord may lock the doors with a rental interdict summons and attach assets which can block the company from trading.
How Long does the Company Liquidation Process take
How long a company liquidation takes will depend on in what manner a company is liquidated. A voluntary liquidation at the CIPC usually takes about 5 days. If it is a High Court liquidation application, it can take about 1 – 2 months to get a liquidation order.
Once a company is liquidated (whether at the CIPC or by the court) a liquidator is appointed. The liquidator’s process can take 6 months to 2 years.
What Happens After Liquidation of a Company
Once the business liquidation is complete, the affairs of the company is wound up by a liquidator. Once the liquidator’s work is complete, the Master of the High Court will deregister the company at the CIPC.
Let us take a closer look at what happens to the company’s affairs, assets and the directors after liquidation.
What Happens to the Bank Account of the Liquidated Company
The bank account will be closed by the liquidator if it is still open. If the bank finds out about the liquidation before the liquidator is appointed, the bank could freeze the bank account. The bank will usually only know about the liquidation if the director tells them or if they have done their own research and discovered the liquidation or if the liquidator informs them.
Any monies paid into the bank account after liquidation must stay there for the liquidator. Reminder that the liquidation date is when the special resolution was registered or when the application documents were filed at court. If monies are accidentally paid into the account by clients, it is possible that the liquidator can return it to the owner of the funds if there is a proper paper trail to prove that the monies do not belong to the liquidated company.
Are Directors Liable for The Debt of the Company After Liquidation
Directors are not affected by the liquidation of the company, unless they traded recklessly or unless they signed personal surety for the debt of the company. Read more. The same applies for members of a close corporation.
Since Section 22 of the Companies Act 71 of 2008 places an obligation on directors to liquidate the company as soon as it cannot pay its debt, a company can simply liquidate. A company does not need to own assets to be able to liquidate and the debt it owes only has to be higher than R100. A company with SARS debt can therefore also liquidate. If directors do not liquidate the company when it cannot pay its debt or when the liabilities exceed the assets, the directors can be held personally liable for the debt of the company if they continue to trade recklessly.
A company is a legal entity that stands separately from its directors and shareholders. If the company is liquidated that is the end of the company. The fact that the directors are the directors of the company does not make them liable for the debt of the company for that particular reason.
Directors can be held personally liable for the debt of the company after liquidation if they signed personal surety for the debt of the company.
The directors are also not blacklisted because of the liquidation of the company. If they are blacklisted and there is no surety in place that the director could have been blacklisted for, that will be unlawful and such listing must be removed by the creditor who placed it there.
What Happens to Personal Assets of Directors After Liquidation
Creditors cannot attach the personal assets of directors due to the company’s liquidation. Creditors can only take legal action against the directors if the directors signed personal surety for the debt of the company, or if they successfully won a legal case to prove that the director traded recklessly. The assets of the director are the property of the director and cannot be taken just because the company is liquidated.
How Directors are Affected by Business Debt if the Company Does Not Liquidate
If the company does NOT liquidate, the creditors will take legal action against the company (blacklisting the company ((Not the directors)), take civil judgment, attach assets, bring a liquidation application). If the directors signed surety for the debt of the company, the creditors may start to take legal action against the directors to call up the sureties. If the directors did not sign surety the creditors can only take legal action against the company. If there is no surety the creditors can only take legal action against the directors if the creditors can prove that the directors traded recklessly.
Can You Start a New Business After Liquidation
You can indeed start a new business after liquidation. There is no restriction in our law that directors may not own a company after liquidation.
What Happens to Company Assets After Liquidation
There are different types of assets that a company can own with different rules. We are referring to assets that are registered in the name of the company to be liquidated and not assets in the name of the directors and shareholders.
Legal Action After Liquidation
In terms of Section 358 and Section 359 of the Companies Act legal action against a company is any summons, judgment, Warrant for Execution, court application or ongoing legal action against a company is referred to as civil proceedings and must stop when there is a liquidation. A Warrant for Execution (when the Sheriff is sent to attach company assets on behalf a creditor after civil judgment) is void.
The creditor may not proceed with the legal action as soon as the company is liquidated. The liquidator will decide whether to proceed or stop with such legal action.
What Happens to Creditors After Liquidation
When there is a liquidation, the creditors form one body and we refer to that body as (concursus creditorum). All the creditors must all stop legal action against the company and any legal action already taken is suspended. If any assets were attached the attachment lapses because the assets fall within the insolvent estate of the company and must be dealt with by the liquidator on behalf of all the creditors.
The creditors are dealt with by the liquidator in a certain order of preference, which we will explain more about next.
What Happens to SARS as a Creditor After Liquidation
SARS is a very expensive creditor to have, and small business cannot afford historic SARS debt once penalties and interest and admin penalty fees for the non-lodgement of tax returns are added. SARS is also not a forgiving or compromising creditor.
It is critical that businesses who are under pressure from SARS should liquidate sooner rather than later. A SARS compromise is a good idea if the business can afford to repay the debt, but a lot of businesses cannot afford to lose big amounts to one creditor. That is just a fact. We are not suggesting or advising that you do not pay your taxes, what we are saying is that if you are in arrears with taxes, it is virtually impossible to catch up because of the unrealistically high penalties and interest that are levied by SARS. Even if you compromise with SARS, they are usually unrealistic in their repayment expectations and very few small businesses can afford to pay the debt without shooting themselves in the foot.
Liquidation writes the SARS debt off for the company.
Liquidation does not write off taxes incurred by the company in terms of Section 103 of the Customs and Excise Act, Act 91 of 1964. as the manager of the premises is held personally liable for the debt of company for customs and excise taxes.
Traffic Fines are Not Written Off After Liquidation
Traffic fines issued to the company must still be paid and are not written off by liquidation.
Types of Creditors in Liquidation
Creditors are not treated equally in a liquidation as there is an order of preference. There are secured, preferent and concurrent creditors. Secured creditors are any creditors that hold security for their debt, such as the bank which holds a bond over an immovable property, or a landlord that has a hypothec over the assets of the tenant or a pledge. These creditors will get paid first if there are any proceeds from any assets that can be sold.
Preferent creditors stand next in line and they are SARS and salaries and wages.
Concurrent creditors are all the creditors that do not fall in the first two groups. These creditors stand last in line to be paid. These usually are loans, credit cards, vehicle finance etc.
The Impact of Business Liquidation on Emigration
Liquidation has no impact on emigration as it is the company, which is its own separate legal entity that is being liquidated therefore the directors are not impacted. If the directors signed personal surety for the debt of the company, they will remain personally liable for the debt of the company as liquidation does not cancel surety.
General Notes on Company Liquidation
In this chapter we discuss general notes that apply to company liquidations in South Africa.
Terminology
We are pointing out some terminology of language used in Insolvency.
Liquidation
Liquidation means that the affairs of a company is wound up by a liquidator and the company ceases to exist.
Insolvent/Insolvency/Bankrupt/Bankruptcy/Over-Indebted
These terms more or less all mean the same thing: namely that an individual’s or a company’s liabilities exceed their assets and/or that the company or the individual cannot pay their debt. In South Africa we rather use the term “insolvency” as an umbrella term for liquidation (for companies) and sequestration (for individuals).
Master of the High Court
The Master of the High Court is a section of the Department of Justice. The Master of the High Court oversees all insolvent estates (companies that are liquidated and individuals that are sequestrated). The liquidator (in a liquidation) and the curator (in a sequestration) reports to the Master. Once the insolvent estate’s work is finalised by the liquidator, a liquidation and distribution account will be filed with the Master and if the Master is satisfied that all is in order, the account will be approved and the liquidation and winding up process finalised.
Liquidator/Trustee
After a liquidation, a Liquidator is appointed and the appointment is done by the Master of the High Court. The liquidator’s work is to wind up the affairs of the insolvent estate of the company. Liquidators are also referred to as Trustees.
Meeting of Creditors
After a company was liquidated the liquidator will hold meetings with creditors. The purpose of these meetings is that creditors can prove a claim against the insolvent estate and raise issues that they may have.
Prove a Claim
To prove a claim means that the creditor must provide the liquidator with a contract, an invoice or other document that proves that the company owes the creditor monies and what for Only creditors who proved a claim will be paid if there any funds available to be distributed amongst creditors.
Application
When one brings an application to the High Court for the liquidation of a company, the word “application” implies that the Court is requested to grant a liquidation order, which implies that the judge has a discretion to grant the liquidation order or not.
Deregistration of a Company Versus Liquidation
A company can be deregistered or liquidated at the CIPC.
Deregistration
A company is deregistered at the CIPC by following the processes prescribed by the CIPC. When a company is deregistered without being liquidated, any debts of the company remain alive. If a company is deregistered while there are still debts owing, the directors automatically become liable for the debt of the company.
Originally when the company was registered at the CIPC, it was allocated a registration number and entered into the CIPC register. Once the company is deregistered it is removed from the register and does not exist any longer.
Reasons for Deregistration of a Company
There are different reasons why a company can be deregistered instead of being liquidated, namely:
Voluntary Deregistration by a Director
Section 82(3)(b)(ii) of the Companies Act authorises the CIPC (Companies and Intellectual Property Commission) to initiate the deregistration of the company if the yearly annual returns (referred to in general as “CIPC fees”) which must be submitted in terms of Section 33 of the Companies Act 2008 are outstanding for a period of two years. Deregistration involves removing the entity from the CIPC’s active records. The result of this process is the withdrawal of the juristic personality, leading to the dissolution and cessation of the company or close corporation. A company can be restored after deregistration if the company can prove that it is still doing business or has an outstanding debt or owns property
Liquidation
If the company is liquidated, it is deregistered after liquidation and the directors only become liable for the debt of the company if they signed personal surety.
Deregistration After Liquidation
Once the company liquidation process is complete, the liquidator will file a liquidation and distribution account with the Master of the High Court. Once the Master has approved this account, the Master will file a certificate of winding up in the prescribed form in terms of Section 82(3)(a)(i) of the Companies Act 71 of 2008. Once the CIPC receives this Certificate the company’s name must be removed from the companies register (Section 83(b)(ii) of the Companies Act of 2008).
The Liquidator
After a company liquidation a liquidator must be appointed to wind up the affairs of the company. To only liquidate the company is not sufficient if you liquidator is appointed.
Who is the Liquidator
A liquidator is a person who is so registered at the Department of Justice after passing a specific exam and complying with the other requirements. A liquidator is appointed by the Master of the High Court, as the Master oversees all liquidations. A liquidator can be nominated by creditors of the company but the Master has the discretion to appoint any liquidator from the national list of liquidators. The nominations are taken into consideration and if accepted, the nominated liquidator can be appointed. If the nomination is rejected, the Master will approve any liquidator from the national list.
The Liquidator Stands in the Shoes of the Directors
The liquidator deals with the body of creditors (concursus creditorum) in a certain order of preference. Assets are sold (if any), proceeds are paid to creditors in a certain order, various administrative processes take place and ultimately the company is dissolved. Any debt that is not paid is written off.
The Liquidator’s Role in a Liquidation
Once a company is liquidated, the Master of the High Court must, in terms of Section 367 of the Companies Act 61 of 1973 appoint a liquidator to wind up the affairs of the insolvent company.
Note that Section 367states that the Master “shall” appoint a liquidator, which means it is obligatory to have a liquidator appointed.
The liquidator takes control of the assets of the business and must act in the interest of the creditors of the company. This means that the assets must be protected, which in turn means the liquidator must manage the affairs of the company in the winding up process in the best interest of creditors.
The Liquidator’s duties
The Liquidator has several duties which are aimed at winding up the affairs of the insolvent estate of the liquidated company.
The Liquidator’s Duties After Liquidation with Regards to SARS
Once a company is liquidated, the company does not exist any longer and therefore the taxes owed by the company cannot be collected from the company after liquidation. SARS is a preferent creditor (meaning SARS stands second in line to get paid if there are any proceeds). SARS is not above the law and apart from being a preferent creditor does not get treated different than other creditors. Any debt not paid by the company cannot be collected which essentially means the debt must be written off against the company by SARS.
SARS is directly linked to the CIPC so they are automatically informed as soon as the liquidation is registered at the CIPC. If SARS was listed as a creditor, the liquidator will also file the certificate of appointment directly at SARS and deal with SARS like with any other creditor.
Why is Liquidation better than Business Rescue?
Our point of view is that liquidation is always better than business rescue, simply because liquidation gets rid of the problem, while business rescue manages the problem. The majority of business rescues in our experience fail, as most companies should not go under business rescue in the first place.
What is Business Rescue
Business rescue is a legal process that allows a company to restructure its affairs with the aim of returning to profitability in terms of Chapter Six of the 2008 Companies Act. It is an alternative to liquidation. A Business Rescue Practitioner (“BRP”) is appointed to take control of the business affairs of the company so that the BRP can deal with creditors and help the company to pay its debt in a structured manner.
In terms of Section 129 of the Companies Act 2008, a company can begin Business Rescue Proceedings by signing a resolution but cannot do so if liquidation proceedings have been initiated by or against the company.
How do You Know When to Choose Business Rescue or Liquidation
Here are some guidelines:
If a company is under financial pressure, the first question to ask is “why” is there financial pressure:
- Is it because the company is just not working any longer? Business rescue will definitely not solve this problem, so liquidation is the answer.
- Is it because the company has too much debt and too little turnover to recover? Business rescue likely will not solve this problem. In fact, it could make things worse due to the high costs associated with the process, which must be paid first, regardless of the company’s financial situation. If turnover is low or non-existent, business rescue will not fix that and liquidation is the answer.
- Is it because the company experiences a temporaryproblem but will definitely recover In this case business rescue can be considered, although we will still argue that liquidation is the better option, because it almost immediately gets rid of the problem. The company can restructure to continue to trade without the burden of trying to save the company over a period of many expensive months.
An example of a temporary problem could be that the company is waiting for a creditor to pay who will definitely pay but has not paid yet and the company experiences temporary cash flow problems.
Conclusion
Liquidation is an invaluable tool for business owners facing insurmountable debt and financial pressures. By opting for liquidation, a business owner can swiftly bring closure to ongoing financial struggles, halt legal actions from creditors, and prevent the accrual of further debt. This process allows for a fresh start, enabling the entrepreneur to focus on new opportunities without the burden of past liabilities. Liquidation provides a structured and legally supervised method to dissolve the company, ensuring an orderly distribution of assets and fair treatment of creditors. This mechanism not only alleviates stress but also safeguards personal assets from being seized, provided no personal guarantees were made. Ultimately, liquidation offers a pragmatic and strategic solution for business owners to exit untenable situations and reset their entrepreneurial journey.
