WINDING-UP OF SOLVENT AND INSOLVENT COMPANIES
- Companies experiencing financial distress may not necessarily qualify for business rescue and must therefore resort to liquidation, which is also know as winding-up.
- A distinction must be drawn between the winding-up of a solvent and insolvent company. The winding-up of insolvent companies is governed by the provisions of Chapter 14 of the old Companies Act, 61 of 1973 (“the old Act”) and the winding-up of solvent companies is regulated by the provisions of Part G of Chapter 2 of the new Companies Act, 71 of 2008 (“the new Act”).
- When a company is placed in liquidation, the company remains a corporate body retaining all of its powers, but from the date that the winding-up commences, the company must in principle cease to carry on all of its business and may only carry on business in so far as may be required for the winding-up of the company.
- A liquidator will be appointed to manage the liquidation of the company and ultimately take control of the company to protect the interests of creditors and shareholders.
- The purpose of this article is to assist companies who experience financial distress, by answering frequently asked questions about liquidation.
- LIQUIDATION (WINDING-UP): FREQUENTLY ASKED QUESTIONS
- WHAT IS THE AIM OF LIQUIDATION?
When a company is no longer capable to trade as a result of it being insolvent, the company’s assets are liquidated and sold either by private treaty or public auction and the proceeds thereof will be apportioned as follows:
- Firstly, the costs, charges and expenses incurred in the winding-up of the company is paid;
- Secondly, a dividend is paid to the creditors of the company;
- Lastly, any residue that is left will be divided amongst the former shareholders of the company.
- WHEN WILL A COMPANY BE REGARDED AS BEING INSOLVENT?
The tests for insolvency are as follows:
- Factual Insolvency: A company will be said to be factually insolvent if its liabilities exceeds its assets;
- Commercial Insolvency: A company will be said to be commercially insolvent if it cannot pay its debts as and when they fall due for payment.
- WHAT IS THE DIFFERENCE BETWEEN THE WINDING-UP OF A SOLVENT AND INSOLVENT COMPANY?
- Insolvent Company:
- The liquidation of insolvent companies is regulated by Chapter 14 of the old Act.
- A company is insolvent if it is unable to pay its debts as they become due (commercial insolvency) and its liabilities exceed its assets (factual insolvency).
- There are two ways in which an insolvent company may be liquidated, namely:
- Voluntarily, by the company passing a special resolution (Section 350 and 351 of the old Act); or
- By the bringing of a formal court application by either the company’s creditors, the company itself, or one or more of its shareholders (Section 346 of the old Act).
- Solvent Company:
- The liquidation of solvent companies is regulated by Part G of Chapter 2 of the new Act. A company is solvent if it is able to pay its debts (commercial solvency) and its assets exceed its liabilities (factual solvency).
- There are two ways in which a solvent company may be liquidated, namely:
- Voluntary winding-up initiated by the company and conducted by either the company itself or by the company’s creditors, which will be determined by the company’s special resolution (Section 79 and 80 of the new Act); or
- Winding-up and liquidation by court order (Section 81 of the new Act).
- In the Supreme Court of Appeal case of Boschpoort Ondernemings (Pty) Ltd v ABSA Bank Ltd, it was held that for the purposes of the new Act, a company will be deemed solvent if it is commercially solvent. It was therefore held that a company can be commercially insolvent while being factually solvent. In essence, this means that if a company’s assets exceed its liabilities but the company cannot pay its debts as they become due, the company will be commercially insolvent and therefore Section 345 of the old Act applies to the solvent liquidation of such a company.
- WHAT ARE THE ADVANTAGES OR DISADVANTAGES OF VOLUNTARY WINDING-UP?
- The advantages of voluntary winding-up are that it is simple, inexpensive and expedient.
- The disadvantage of voluntary winding-up is that enquiries into the affairs of the liquidated company cannot be commenced with in accordance with Section 417 of the old Act.
- WHAT ARE THE ADVANTAGES / DISADVANTAGES OF WINDING-UP BY COURT ORDER?
- The advantage of winding-up by court order is that enquiries into the affairs of the liquidated company can be commenced with in accordance with Section 417 of the old Act.
- The disadvantages of winding-up by court order are that it is expensive and timeous.
- HOW IS A LIQUIDATOR APPOINTED?
A liquidator is appointed by the Master of the High Court, subsequent to the creditors/members being allowed to submit their nominations of their chosen liquidator. After the liquidator is appointed, he/she will see to the administration of the estate, i.e. liquidating the company’s assets and the apportionment of the proceeds.
- WHAT EFFECTS DO LIQUIDATION HAVE ON EMPLOYEES?
- As soon as the liquidation process commences, all employment contracts are immediately suspended and may in time be terminated by the liquidator, subject to certain requirements. All suspended employment contracts that have not been terminated by the liquidator will automatically be terminated after 45 days from the date of the final appointment of the liquidator.
- Once liquidation proceedings commence, employees are not compelled to render services to the company and the company is not compelled to remunerate employees rendering services during this time.
- Employees become preferent creditors of the company and are therefore entitled to a limited portion of their salaries, remuneration for leave, severance packages and all contributions made towards any pension, medical aid, provident fund and UIF. Employees are thus second in line and their claims will only be considered once the company’s secured creditors have been paid.
- WHAT EFFECT DOES LIQUIDATION HAVE ON CONTRACTS CONCLUDED BY THE COMPANY?
In general, all contracts concluded with the company remain in force and the liquidator must within a reasonable period of time decide whether or not to continue with the execution thereof.
- WHAT EFFECT DOES LIQUIDATION HAVE ON PENDING CLAIMS AGAINST THE COMPANY?
Upon liquidation of the company and until a liquidator has been appointed, all civil claims instituted by or against the company will be suspended and any attachments ordered against the assets of the company become void.
- WHAT EFFECT DOES LIQUIDATION HAVE ON THE COMPANY’S ASSETS?
It often happens that there is a time delay between the company being placed in liquidation and the appointment of the liquidator. During this period, as well as any period when the liquidator is unable to perform his/her duties, the control of the company’s assets vest in the Master of the High Court.
For guidance and assistance in these unprecedented economically challenging times, feel free to contact our experienced team of lawyers to assist you in taking the right actions at the right time to protect your company and its directors.
Berna Koch Etienne Fourie
BCom (Law); LLB LLB
Head of Litigation Litigation Department
E-mail: Berna@sstlaw.co.za E-mail: email@example.com
Phone: 012 361 9823