Liquidation is the legal process of closing a company that can no longer pay its debts. In South Africa, the legal grounds for liquidation are detailed in Section 344 of the Companies Act, Act 61 of 1973. This article explores when and how a company can be liquidated, focusing on various scenarios prescribed by law.
The Importance of Timing in a Liquidation
If a company is unable to pay its debts (SARS debt included) —directors are obligated to act swiftly in terms of Section 22 of the Companies Act 2018. Continuing to trade while insolvent is not only costly but also risky, as directors can face personal liability for reckless trading. Liquidating early is a faster, more cost-effective solution, ensuring compliance with the aforementioned Section 22 of the Companies Act while halting creditor actions.
Legal Grounds for Liquidation
Inability to Pay Debts
The most common reason for liquidation is insolvency. Under Sections 344(f) and 345 of the Companies Act, a company is considered unable to pay its debts if:
A creditor can issue a letter of demand for payment. If the debt is not paid within three weeks, the company may be liquidated (Section 345(1)(a)).
If a creditor obtains a court judgment and attaches company assets, liquidation can follow if the assets are insufficient to settle the debt (Section 345(1)(b) of the Companies Act 61 of 1973).
3. Contingent and prospective liabilities
Directors and shareholders can opt for voluntary liquidation under Section 344(a). By signing a special resolution, the company can be liquidated through the Companies and Intellectual Property Commission (CIPC) or the High Court. While CIPC liquidations are faster and more affordable, High Court liquidations may be necessary in certain cases.
Premature Commencement of Business
A company that starts business operations before receiving certification from CIPC can be liquidated under Section 344(b).
Failure to Commence or Continue Business
If a company fails to start business within a year of registration or suspends operations for more than a year, it can be liquidated (Section 344(c)).
Insufficient Members in a Public Company
Public companies with fewer than seven members may face liquidation under Section 344(d).
Loss of Capital
A company that loses 75% or more of its share capital may also be liquidated (Section 344(e)).
Conclusion
If 75% of the share capital of a company has been lost for its business, the company can liquidate (Section 344(e) of the Companies Act 61 of 1973).
It is important to note that any one of these circumstances can lead to the liquidation of a company, and they do not need to exist together.
Understanding the grounds for liquidation is essential for all business owners in South Africa.
