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VolunTary Liquidation

The what, why, how

VolunTary Liquidation

The what, why, how

What Is Voluntary liquidation and how does it work?

When a company is unable to pay its creditors as they fall due, a company or close corporation can resolve to be voluntary liquidated. Voluntary Liquidation means that the company stops trading, sells all its assets and distributes the proceeds amongst its creditors, and if there are no creditors, or they have been satisfied fully, the proceeds get divided amongst its shareholders.

What Is Voluntary Liquidation?

Voluntary Liquidation refers to the company, through its shareholders or creditors, resolving to place the entity into liquidation. The process is applied for by either resolving it on a special resolution or by approaching the Court for a liquidation order.

What Is Voluntary Liquidation?

Voluntary Liquidation refers to the company, through its shareholders or creditors, resolving to place the entity into liquidation. The process is applied for by either resolving it on a special resolution or by approaching the Court for a liquidation order.

Want to get advice about liquidation?

Want to get advice about liquidation?

What Is Hostile Liquidation?

Hostile Liquidation refers to a creditor (or any other hostile party) applying for the liquidation of a company or close corporation. If a company can not pay its creditors, the creditor can send the company a demand for payment in terms of section 345(1)(a)(i) of the companies act. Should the company not adhere to the demand for payment, the creditor obtains the legal right to bring an application for the hostile liquidation of the company.

Grounds for Liquidation?

R

Ending a company

The reason for the company’s existence has come to an end

R

Liabilities

The companies liabilities exceed its assets

R

Resolved

The company has resolved to liquidate

R

unprofitable

It is no longer profitable due to changing market circumstances

R

Debt

The company is unable to pay its creditors as they fall due

R

Right thing to do

It is just and equitable to liquidate the company

What is the liquidation process & how does the wind-up work?

The company either takes a special resolution to liquidate or has to approach a court to obtain a court order that the company be placed in liquidation.

A

CIPC

When 75% of the shareholders who wish to liquidate the company, has signed a special resolution that the company be liquidated, the resolution gets captured and filed with the company registrar. The confirmation of liquidation is then forwarded to the Master of the High Court to appoint a liquidator. The liquidator has to sell all the assets, assist creditors in proofing claims, do the administrative tasks required to wind-up the estate and pay out the proceeds to creditors (insolvent company) and/or shareholders (solvent company)

A

Court

A liquidation by Court can either be a voluntary liquidation or a hostile liquidation. Any party can approach a court to liquidate a company if there are good legal grounds to liquidate the entity. This can happen if the creditor has demanded payment from the company in terms of section 345(1)(a)(i) or it is otherwise just and equitable that the company be placed in liquidation. Please see Hostile Liquidation for more hereon.

What is the liquidation process & how does the wind-up work?

The company either takes a special resolution to liquidate or has to approach a court to obtain a court order that the company be placed in liquidation.

A

CIPC

When 75% of the shareholders who wish to liquidate the company, has signed a special resolution that the company be liquidated, the resolution gets captured and filed with the company registrar. The confirmation of liquidation is then forwarded to the Master of the High Court to appoint a liquidator. The liquidator has to sell all the assets, assist creditors in proofing claims, do the administrative tasks required to wind-up the estate and pay out the proceeds to creditors (insolvent company) and/or shareholders (solvent company)

A

Court

A liquidation by Court can either be a voluntary liquidation or a hostile liquidation. Any party can approach a court to liquidate a company if there are good legal grounds to liquidate the entity. This can happen if the creditor has demanded payment from the company in terms of section 345(1)(a)(i) or it is otherwise just and equitable that the company be placed in liquidation. Please see Hostile Liquidation for more hereon.

Appointment of a Liquidator

Upon the liquidation of the company, the Master of the high court shall appoint a liquidator to oversee the wind-up of the company. The Master keeps a list of approved liquidators who can be appointed. The appointment of the liquidator happens on a requisition or a vote on number and value. Number refers to the amount of creditors whom have proved claims and value refers to the value of that creditors claims. The liquidator gets appointed if he/she has the most value support and the most number of creditors that support his/her appointment.

After the liquidator is appointed, the liquidator will take possession of the assets, and typically appoints an auctioneer to sell the assets of the estate either out of hand or by way of auction.

Appointment of a Liquidator

Upon the liquidation of the company, the Master of the high court shall appoint a liquidator to oversee the wind-up of the company. The Master keeps a list of approved liquidators who can be appointed. The appointment of the liquidator happens on a requisition or a vote on number and value.

Number refers to the amount of creditors whom have proved claims and value refers to the value of that creditors claims. The liquidator gets appointed if he/she has the most value support and the most number of creditors that support his/her appointment.

After the liquidator is appointed, the liquidator will take possession of the assets, and typically appoints an auctioneer to sell the assets of the estate either out of hand or by way of auction.

Distribution of assets and priority of claims

The distribution of assets and payment of creditors happen according to the priority in terms of the insolvency laws of South Africa. Firstly the administrative costs get paid. Next the creditors who hold security over an asset gets paid from the proceeds obtained from that specific assets. The creditor shall have a second claim for his unsecured amounts due.

Thereafter Sars and employees stand next in line to receive payment. Please note that employees claims are very limited in terms of the insovency act. After all these costs, the remainder or free residue assets gets devided amongst creditor in a pro-rate fashion. The concurrent creditors will thus receive payment in proportion to the amount of their claim as opposed to the total value of all concurrent claims.

Striking off from the company register

After liquidation the company is striked off of the company registrar. In practice though, the companies details are still listed on the company registrar but gets referred to as a company in liquidation, with the words being added to the companies name in brackets.

The seperate legal persona of the company is ended and the company is not allowed to trade anymore.

In some instances, especially where it would be improper to close the company down prior to the appointment of a liquidator, the company can trade in liquidation. This is usually only done in situations where there are perishable stock or the comany will yield a higher dividend for creditors or shareholders, by being sold as a going concern.

Sars before, during and after liquidation

When an estate gets liquidated sars will “code” the file. This means that a long reference is placed behind the registration number of the company. This number alocates the file to sars’s insolvency department. The insolvency department splits the files between large estates and normal estates. Large estates consist of companies that owe sars more than R10m. A tax liability of R4m can easily increase to over R10m with interest and penalties of sometimes 200% that can be added by sars in certain cercumstances. 

Large estates have a far higher rate of being examined by sars officials. Normal estates, or estates that owe sars less than R10m, are usually not examined. After determining that there were no illegalities commited and that there are no further dividends recoverable by sars, sars is allowed to write off the taxes (which they normally do).

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