The Liquidation Process of Solvent Companies in South Africa

What is liquidation?

In the business world, liquidation also referred to as winding-up, refers to the process of bringing a company to an end by distributing the proceeds from its assets to its creditors and shareholders.

Close corporations are not specifically mentioned in the article but are, by implication, included in the explanation of the liquidation process. Keep in mind, the proceeds from a close corporation’s assets are not distributed to shareholders but to members.

Liquidation, described as ‘a relatively simple process’ by liquidation experts, basically comprises the following steps:

• Selling (liquidating) the assets of a company via public auction or by way of a private treaty, is a process whereby the deal to sell an asset is privately negotiated between the seller and the buyer.
• Using part of the proceeds from the sales of the assets to cover the expenses incurred in the winding-up process.
• Distributing the balance of the proceeds of the assets in a specific order to the creditors of the company and the owners (shareholders) of the company.

There are two types of liquidation processes: insolvent liquidation and solvent liquidation. This article will focus on the second one.

The liquidation of solvent companies

When is a company solvent?

Section 80 (1) of the Companies Act 71 of 2008 (hereafter referred to as the Act) allows a solvent company to wind up voluntarily if it has adopted a resolution to do so.

The Act (section 4 (1)) stipulates that for a company to be considered solvent, it is required to satisfy the solvency and liquidity test at a particular time, taking all ‘reasonably foreseeable financial circumstances of the company’ into consideration.

The requirements of the solvency and liquidity test are, inter alia:

• The fairly valued assets of the company must equal or exceed the fairly valued liabilities. (Fair value refers to the actual value of an asset or liability, i.e., the price of an asset agreed upon by both the seller and the buyer or the agreed-upon price paid to transfer a liability.)
• It must be clearly visible that the company will not default on its debts ‘as they become due in the ordinary course of business’ for a period of:
• twelve months after the date of the test, or
• in the case of a distribution contemplated twelve months following the distribution.

Furthermore, any financial information considered in the solvency and liquidity test must be based on:

• accurate and complete accounting records, and
• financial statements that ‘present fairly the state of affairs and business of the company and explain the transactions and financial position of the business of the company.’

The quickest way to determine the solvency of a company is to calculate its shareholder’s equity by subtracting the liabilities from the assets.

The process of voluntary liquidation of a solvent company

Voluntary winding-up by special resolution

A solvent company can be liquidated voluntarily by its shareholders, or by the creditors of the company, on the condition that the shareholders have adopted a special resolution to do so.

To effectuate the winding-up, the special resolution must be filed with the Companies and Intellectual Property Commission (CIPC) with the prescribed notice and filing fee (section 80 (2) of the Act) as well as the supporting documents.

In accordance with section 80 (3) of the Act, before the resolution and notice are filed, a company is required to:

• arrange security with the Master of the High Court to meet the debt payments of the company within no more than 12 months after the start of the winding-up of the company, or
• apply to the Master for consent to dispense with security, permitting that the company submits:
• a sworn statement by a director authorised by the board of directors, affirming that the company has no debt obligations, and
• a certificate by the company’s auditor, or a person who meets the requirements for appointment as an auditor, declaring that to the best of the auditor’s knowledge and in accordance with the financial records of the company, the company has no debts.

Once all the requirements have been met and the CIPC has provided the Master of the High Court with a copy of the filed resolution and notice, a liquidator can be appointed.

A liquidator appointed in a voluntary winding-up is allowed to ‘exercise all powers given by the Act’ (section 80 (5)). The responsibilities of the liquidator are, amongst others:

• assessing the value of the assets of the business,
• conducting meetings with creditors,
• selling assets,
• covering expenses incurred during the winding-up process, and
• distributing the balance of the proceeds, according to a specific ranking, to the creditors and shareholders of the company.

Voluntary winding-up by court order

The second mechanism available to bring a voluntary liquidation about is when a company applies to the court, based on a special resolution by the owners of the company, to have the company’s ‘voluntary winding-up continued by the court’ (section 81 (1) of the Act).

As soon as the application is accepted by the court, a provisional liquidation order will be issued, allowing the creditors of the company to be notified of the voluntary liquidation application and the court date.

The creditors are then allowed the opportunity to object. If there are objections, they must be dealt with before proceeding.

If no objections are lodged by the creditors, the provisional liquidation order can be made a final order of the court.

Consequently, a liquidator is then appointed to carry out the tasks, similar to those performed by a liquidator in the case of a voluntary liquidation by special resolution of the company.

Important facts to bear in mind concerning the liquidation process

• A company continues to exist as a juristic person (also called a legal person), retaining all its legal powers while it is being winded up voluntarily. (The Act (section 19 (1)) defines a company as a juristic person which ‘has all of the legal powers and capacity of an individual.’)
• From the start of the liquidation process, a company is legally bound to discontinue its business activities, except for those necessary to bring the winding-up process to a satisfactory completion.
• All the powers of the directors of a company or the members of a close corporation cease, except to the extent that certain powers are specifically authorised:
• by the liquidator or shareholders in a general meeting regarding the winding-up by the shareholders of a company, or
• by the liquidator or creditors if the winding-up process was initiated by creditors.

Dissolution of companies

When the affairs and business operations of a company have been completely wound up, and a court order of final liquidation has been issued, ‘the Master [of the Court] must promptly file a certificate to that effect, together with a copy of the court order’ (section 82 (1) of the Act).

Upon receiving the certificate from the Master, the Companies and Intellectual Property Commission (CIPC) must record the dissolution of the company in the prescribed manner and remove the name of the company from the companies register (section 82 (2) of the Act).

The dissolution – the action to formally bring a company to an end – of a company is effective from the date its name is removed from the companies register.

Section 83 (2) of the Act stipulates that ‘the removal of a company’s name does not affect the liability of any former director or shareholder of the company or any other person in respect of any act or omission that took place before the company was removed from the register.’

Furthermore, section 84 (4) of the Act makes provision that at any time after the dissolution of a company, ‘the liquidator or any person with an interest may apply to a court for an order declaring the dissolution to have been void, or any other order that is just and equitable in the circumstances.’

Hence, if the court nullifies the dissolution, any proceedings may be taken against the company as may have been taken if the company had not been dissolved.

Reasons for winding up a solvent company

It is important for the directors and shareholders of a company to carefully consider the reason(s) why they should apply for the winding-up of a solvent company.

It is advisable to obtain professional legal advice before a final decision is made.

Reasons to liquidate a solvent company are, amongst others:

• The retirement or resignation of the founder, a key executive, or a key person.
• The business serves no further useful purpose because it only had a specific purpose over a given period of time.

Disclaimer: This article does not intend to provide legal advice and is for information purposes only.