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UNDERSTANDING LIQUIDATION


The current pandemic has forced many companies to close their doors permanently. This brief explains the process of liquidation as a means of preventing further damage and liability within and against a company.


What is liquidation?


Liquidation – also known as the winding up of an entity – occurs when a company is unable to operate as a result of debilitating financial strain and is forced to stop trading. The purpose is to wind up the company’s affairs by selling its assets in order to pay the company’s creditors and cover the costs of the liquidation process. Any remaining funds after these expenses and costs have been settled are distributed to the company’s shareholders.


When is a company placed in liquidation?


The test for placing a company in liquidation is when it can no longer pay its debts as they become due and payable. A company may either be liquidated voluntarily or through a court application.


1. Voluntary liquidation:


Voluntary liquidation occurs when a company, by a special resolution of its shareholders, resolves that it must be liquidated. The special resolution, together with other documents, must be filed with the Companies Intellectual Properties Commission (CIPC). As it does not involve the courts, this method of liquidation is relatively simple, cost-effective and quick.


2. Application to court:


A company may also be liquidated by means of an application to court by the company itself, its creditor(s) or its shareholder(s). However, the steep cost implications ordinarily associated with a formal court procedure will apply.


What does the process entail?


Once a company resolves to proceed with a winding up process, the Master of the High Court will appoint a liquidator who is usually nominated by interested parties, like the company or the creditors. The liquidator is tasked with administering the company’s affairs which includes liquidating the company’s assets and distributing the proceeds to the creditors. Creditors are then given the opportunity to prove their claim against the company.


Once the company is placed in liquidation, it is unable to trade unless continued trading is in the best interests of all creditors.


What are the implications of liquidation?


Liquidating a company has implications that extend beyond merely dissolving the company. It has an effect of employment contracts, lease agreements and civil proceedings that may be underway.


While the thought of liquidation may seem unnerving, it is a valuable mechanism used to mitigate any further loss and may even be a conduit for further entrepreneurial advancement. If you need assistance in navigating the ins and outs of liquidation during these tough economic times, contact Kern, Armstrong & Associates at 010 109 1055.

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