In South Africa, the winding-up of insolvent companies is governed by the Insolvency Act 24 of 1936 and the Companies Act 61 of 1973.
What is liquidation?
Liquidation of a company is a relatively simple process that involves the realisation of a company’s assets either by way of a private treaty or by way of public auction in order to pay the costs and expenses incurred in the winding-up process. Funds remaining after costs and expenses are distributed to creditors in their prescribed order of preference and according to the creditors’ rights and interests in the company. To determine whether a company should be placed in liquidation, the creditors, liquidator, owner, and court will establish if that company can pay its debts as they fall due (de facto insolvency). The primary effect of a company being placed in liquidation is that it ceases to trade unless continued trading is necessary and in the best interest of all creditors.
When a company finds itself in the above position, there are two forms of liquidation, namely:
Voluntary liquidation vs application by the company’s creditors to place the company under liquidation
Voluntary liquidation by the Board of Directors
The first possibility is voluntary liquidation. This is done by the Board of Directors passing a resolution to that effect.
Application by the company’s creditors to place the company under liquidation
Alternatively, the creditors of the company can apply to place the company under liquidation. In most instances, a court application is brought either by the company or a creditor on the basis that the company is unable to pay its debts as they fall due. The application is made on an affidavit under oath in the court having jurisdiction in the area where the company has its registered address. The general practice by the courts is to then wind up the company provisionally and then allow for a return date (usually six weeks later) to then grant the final winding-up order, this is known as a rule nisi application. Where liquidation commences by way of resolution, winding-up commences when the resolution is registered with the Companies and Intellectual Property Commission (CIPC) established under the Companies Act.
The Master of the High Court will appoint provisional liquidators to attend to the process. As soon as possible after the final winding-up order is granted, the Master will summon a meeting of creditors in order for creditors to, inter alia, lodge their claims, and nominate final liquidators. The first meeting usually takes place within six to eight weeks of final liquidation. Notice of the meeting is published in the Government Gazette. Creditors have a further opportunity to prove claims at a second meeting, which must be held within three months of the liquidators’ final appointment (which appointment usually takes place shortly after the first meeting).
Claims are supported by affidavits under oath and must include all necessary supporting documentation. Only creditors who submit claims can benefit from a distribution of funds.
The role of the liquidator
The role of the liquidator is to administer and wind down the company’s affairs. The liquidator must realise all assets and distribute the proceeds to creditors in their order of preference. The entire process usually takes between six months and two years, depending on the complexity of the company and the number and nature of assets to be realised.
The Gawie le Roux Institute of Law offers the following webinars and workshops which you might find useful:
Wills & estates – a webinar series
Wills & estates – a workshop series
You may also be interested in:
How to become an insolvency practitioner
Last updated on 6 May 2023.