How Company Liquidation Works in South Africa

Your company has run out of money: its assets exceed its liabilities, it’s deep in debt, it’s seen a significant drop in revenue, or its creditors have applied for liquidation – or, you would like to liquidate it. Directors and shareholders have the authority to apply for company liquidation.

How does one liquidate a company, and what does the law have to say? This post discusses the types of company liquidation, the CIPC, different ways company liquidation can happen, and the workings of company liquidation when it’s insolvent versus solvent.

Types of Company Liquidation

There are two types of company liquidation: voluntary and compulsory liquidation — a type of sequestration.

Voluntary Liquidation

Voluntary liquidation allows a company to sell its assets, terminate its operations, and dismantle its corporate structure to pay creditors and shareholders. It can be initiated by shareholders and directors when they vote for a resolution to cease operations.

Voluntary liquidation is usually initiated when a company has enough money to pay its debts – when it is solvent. Shareholders pass a special resolution to liquidate the company. At least 75% of its administration must agree. A liquidator is appointed to sell assets, settle debts, and distribute the remaining funds to shareholders. Once the process is complete, the CIPC deregisters the company, and it no longer exists.

Involuntary Liquidation

A company can also be involuntarily liquidated. This happens when a creditor or shareholder applies to the High Court to have it dismantled. They must prove insolvency. If their application is successful, a liquidator is appointed to administer the liquidation.

Involuntary liquidation is used when a company is insolvent (can’t pay its debts). Its creditors call a meeting, and they vote to liquidate. A liquidator is appointed to administer the liquidation – it sells its assets and distributes the proceeds to creditors by priority. After the liquidation is completed, the CIPC dissolves the company.

Specifics of How Voluntary Liquidation Works (Solvency)

A solvent company can be dissolved through voluntary winding-up, which is initiated by a special resolution (meeting). The resolution sets out whether the winding-up should be administered by its creditors or directors. The resolution for voluntary winding-up must be filed along with the prescribed notice and filing fee, which is set out by the relevant legislature: the Companies Act, the Insolvency Act 24 of 1936 (Insolvency Act), and the Old Companies Act (Act 61 of 1973).

After the Resolution Is Filed

The resolution provides for the wind-up of the company, which should be given to the Master of the High Court to pay its debts, usually within 12 months, or otherwise as approved by the Master. The Court will appoint a liquidator.

The liquidator in a voluntary winding-up can exercise all powers given to them in a winding-up in court without the need for a specific order. This is subject to any directions from the shareholders or creditors, depending on who conducts the wind-up. Then, the resolution of the company is filed, and the wind-up becomes official.

After the Wind-Up Is Official

Once a resolution has been filed, the CIPC delivers a copy to the Master of the High Court. It must stop conducting business, except to the benefit of its wind-up (e.g., to pay creditors). All directors in the company lose their power, except as authorised by the liquidator, creditors (if the creditors initiated the wind-up) or the shareholders.

Specifics of How Involuntary Liquidation Works (Insolvency)

Involuntary liquidation is a fair bit more complex than voluntary liquidation. Here are its specifics.

A company can voluntarily liquidate if its board of directors passes a resolution. Alternatively, the company itself, or a creditor/shareholder, can apply to the court. If a company applies to the court, a shareholder’s resolution is required.

The company can liquidate via insolvency if its liabilities exceed its assets or it’s over-indebted (unable to pay its debts when they’re due).

Court Application

The company would apply to the court with an affidavit in the province where it’s registered. This involves applying for a provisional order of winding up. After six weeks, an application for a final order is made.

Before any hearing, the company must notify all of its employees, the company, any registered trade union representing the employees, and SARS. To prevent the company from unfairly disposing of assets or paying back certain creditors and not others once liquidation starts, the liquidation has a set wind-up date: when the application was presented to the court. This is the date the company is considered to be liquidated – when the resolution was lodged with CIPC.

After the Order

After the winding-up order, the Master of the High Court calls a meeting with creditors so they can lodge monetary claims and appoint final liquidators. The first meeting typically happens within six to eight weeks of the final liquidation, and creditors must be informed of the meeting.

If the company’s creditors would like another opportunity to lodge claims, they can do so at the second meeting. Only creditors who submit claims can benefit from fund distribution. Then, the company can’t trade anymore, except to the benefit of fund distribution and as sanctioned by creditors and shareholders.

An Account of How Everyone Will Be Paid Is Submitted

An account detailing how creditors and shareholders will be paid is submitted to the court. When the Master approves it, creditors are allowed to make objections.

If there are no objections, the Master confirms the account, and the liquidator notifies the confirmation in the Government Gazette. After that, funds are distributed.

When everyone has been paid and the company’s affairs are wound up, the Master sends a certificate to the CIPC, which declares the company officially dissolved. The company then no longer exits.

What’s the CIPC?

The CIPC, also known as the Company and Intellectual Property Commission, is the government department responsible for company registrations and dissolutions. They’re the department that will officially dissolve your company and review your resolution.

How Can Credit Rehab Help?

We can help you file your company’s resolution with the Master of the High Court during voluntary liquidation. Credit Rehab will ensure your liquidation goes as smoothly as possible without compromising the needs of your creditors, shareholders, or directors.

If you would like help navigating voluntary liquidation or need an advocate during involuntary liquidation, contact us. We would be glad to be of service.