By Pierre van der merwe and Simone jansen van rensburg
Liquidation is a procedure set out in the Companies Act of 1973, it is applicable to companies/close corporations only and not private individuals. Liquidation is a last resort and ultimately results in the demise of the business. The purpose of liquidation proceedings is to dispose of an insolvent company’s assets and utilise the proceeds of the assets to settle creditors’ claims.
WHAT CIRCUMSTANCES LEAD TO AN ENTITY BEING PLACED IN LIQUIDATION
An entity should be placed in liquidation if it does not satisfy the solvency and liquidity test, such that the company is:
Factually insolvent: the entity’s liabilities exceed its assets; and
Commercially insolvent: the entity is unlikely to be able to pay its debts as they become due in the ordinary course of business, in the ensuing twelve months.
PLACING OF AN ENTITY INTO LIQUIDATION
An entity may be placed in liquidation either by the Court or voluntarily.
A voluntary liquidation may be done by a resolution taken by directors of a company and/or a special resolution by shareholders of the company, or members of a close corporation – or by creditors.
Alternatively, an application can be made to Court to liquidate an entity, by the entity itself (in which case, directors of a company must have resolved to make such application), by one or more of its creditors, by one or more of its members, or a combination of such parties. There are various grounds for the liquidation of an entity, the most general of these being that it appears to the Court that it would be just and equitable in the circumstances.
APPOINTMENT OF A LIQUIDATOR
Once a company has been placed into liquidation, a liquidator will be appointed by the Master to administer the liquidation, which includes the power to sell the assets owned by the business. The liquidator has a duty to, without delay, recover and take possession of all the company’s assets and apply them in satisfying the costs of liquidation and creditors’ claims. This would include the sale of any immovable property owned by the company.
RANKING OF CREDITORS
Creditor’s claims are ranked and are paid out in accordance with an order of preference determined by South African legislation. Once all the costs of winding up have been paid, creditors will be entitled to their proportionate share of the residue of the company’s estate.
Preferent creditors are entitled to be paid before concurrent creditors. The secured creditors are those who hold security for their claims and they are paid from the proceeds of a sale of the security that they hold. The most common and relevant example of this is a mortgage bond holder over a property sold.
Concurrent creditors (which would include preferent and secured creditors whose claims are not satisfied in full from the security they hold) are paid out of the residue of the estate and are the last of the creditors to be paid.
SIGNING OF AGREEMENTS OF SALE
Once a business has been placed in liquidation, only the appointed liquidator may represent the business in signing any agreement of sale in respect of immovable property owned by the business. A liquidator may sell the immovable property by public auction, public tender or private contract. An agreement of sale signed by a director or member of the business after it has been placed in liquidation is not valid and binding. In fact, any disposition of a company’s property after it has been placed in liquidation, not made by the liquidator, is void unless the Court orders otherwise.
The liquidator must be mindful of dispositions of property made by the company before liquidation proceedings, as such transactions may be voidable and set aside by the Court – these include, but are not limited to, dispositions not made for value, or dispositions which have the effect of preferring one creditor of the company (and are therefore to the detriment of the other creditors) and made not more than six months before the company went into liquidation.
IF A SELLER / PURCHASER IS LIQUIDATED BETWEEN SALE AND TRANSFER
As a general rule, the liquidation of a company does not suspend or terminate a contract. A liquidator of a company has a discretion to enforce or abandon the contract concluded by the company before liquidation. In making such election, the liquidator must do so within a reasonable period of time. Should the liquidator elect to abandon the contract, the other party to the contract cannot compel the liquidator to perform and the other party is left only with a concurrent claim against the insolvent estate for the resultant damages from the termination.
Any party that suffers damages as a result of the liquidation of the other contracting party may lay a claim as a creditor against the entity in liquidation, this would include an estate agency’s claim for commission.
MUNICIPAL DEBT / BODY CORPORATE LEVIES / HOME OWNERS’ ASSOCIATION LEVIES
With regards to municipal debts owed by that debtor in liquidation, there is a preference in favour of the municipality that allows it to prevent transfer of immovable property by refusing a clearance certificate until all municipal debt owed for a period of two years immediately preceding the date of application for the clearance certificate has been paid. A municipality may not hold back the issuing of a rates clearance certificate if the past 2 years municipal debts have been paid. The municipality is still able to claim from the owner any balance that is outstanding and is in fact a secured creditor in the legislation.
Body corporates and home owners associations also enjoy an effective preference in respect of unpaid pre-liquidation levies and may refuse to issue a levy clearance certificate until the debt is secured, which means that a body corporate effectively ranks in priority before secured creditors.
DURATION OF LIQUIDATION:
Once a company is in liquidation, the liquidator is appointed to administer the estate and wind-it up. Liquidation proceedings, from start to finish, can take anything from 6 months to 2 years depending on the nature and complexity of the transactions in which the company or corporation was involved.
Owing to the complexity and implications of liquidation, readers are encouraged to seek the advice of one of our professionals, who will gladly assist you.