Article by listed Attorney: Nanika Prinsloo
Insolvency is the umbrella term for liquidation and sequestration. Businesses (except for a sole proprietor) liquidates and individuals sequestrate.
One can only sequestrate, in terms of the Insolvency Act, if one owns a property (or other big, fully paid assets) or if one has cash. If one does not own property and if one does not have a certain amount of cash, then one cannot sequestrate. The reason for this is because in terms of the Insolvency Act, when one sequestrates there must be a benefit to creditors. If one cannot make out a benefit to creditors, the Court cannot grant the order. (The benefit will be that the creditors can share in the proceeds of a property sale or that they can share in the cash that the individual pays in).
Businesses are different and do not need to own assets or cash. The reason for this is, because, in terms of the Companies Act, the Close Corporations Act and the Trust Property Control Act, a Company, or a Close Corporation or a Trust (“the entity”) is insolvent the moment its liabilities exceed its assets. The entity must then cease trading. For this reason the entity does not have to own assets to be liquidated.
Sometimes it is a difficult decision to make whether to liquidate an entity or not. Sometimes entities are on the edge of solvency and insolvency. A bigger worry is always what if a creditor applies for the liquidation of the entity.
It is always better for the entity to bring a voluntary liquidation application first, as opposed to being liquidated by a creditor. Although it seems to be a paradox, it is true that if the entity brings the liquidation application voluntarily, the entity is in control of the process: you decide when to lodge the application, you have time to mentally prepare; you have time to position yourself so that you can carry on with business; you nominate the liquidator (the person that is going to finalise the insolvent estate). It is just a calmer and more controlled process. One never wants to give control to a creditor, because if a creditor brings the liquidation application, it is usually aggressive (because they are upset with the entity). They scratch harder and can make life difficult for you unnecessarily. They also nominate the liquidator. If they have a nasty liquidator (and his mandate will most probably be to aggressively test whether the entity is hiding assets), then you may be in for a nasty experience. If it is (hopefully) your nominated liquidator, you have a better chance of smooth sailing.
So the bottom line is this: if you have the opportunity and it is necessary, let the entity bring the liquidation application itself before creditors act.
Creditors often threaten entities that they are going to liquidate them, without proceeding. If an entity has no assets, it will not be really worth the while of any creditor to liquidate the entity, because liquidation is one of the more expensive application procedures in the law. The purpose for a creditor to liquidate an entity would be to have the assets of the entity sold so that the creditor can rather get something than nothing. If there are no or little assets, it serves no purpose to liquidate an entity. Many threats are issued to liquidate, but creditors do not necessarily proceed.
To start the liquidation process, the directors of a Company, or the members of a CC, or the trustees of a Trust, need to decide when the last day of trading will be.
As soon as the basic decision was made to close the entity down (this is basically the most difficult decision!), all else can flow from that. The first important item is that no further debt must be paid once the decision has been made. More business can be generated, but keep in mind that, in that case, the income derived from business that was generated after the decision was made to stop trading, will go into the insolvent estate and cannot be used by the entity.
One must still earn an income and liquidating an entity will mean to a lot of people that their livelihood falls away. This is one of the reasons why people trade too long in entities when it should have been closed down or liquidated a long time ago. There is nothing in our law that prohibits anybody from trading in another entity, so one can proceed with business as usual in a new entity. If you do your homework right and if the timing is right, you can carry on with business almost as usual, whilst the other entity is being liquidated.
Once the decision was made, a resolution will be signed to the effect that the entity will be liquidated.
We will simultaneously draft an affidavit to be signed by the authorised person (a director, a member or a trustee), who will bring the application, meaning the entity will apply for its voluntary surrender (liquidation application). This affidavit will set out the debt of entity and a short bit of history as to why the entity needs to liquidate. We draft these documents.
Once the aforementioned documents have been signed, the application is drafted and this is send to the High Court, where it will be issued: a case number will be issued and a court date supplied.
These documents will be served on the entity at its registered address as supplied in the aforementioned Affidavit.
The first court date is for a provisional application. A liquidation application is brought on a semi-urgent basis, meaning that it is brought “ex parte” (“by one party” – being the Applicant. ) The immediate relief from the Court is requested in the provisional application, so that the immediate relief of a provisional liquidation order is granted, without having to give notice to creditors first. (In other applications one must give notice to the other affected party(ies) first with a number of days of notice, before you can place the matter on the court roll. With liquidations this is different – one approaches the court straight away and then the matter is postponed where after notice must be given to all affected parties (creditors). The only party it is served on before the court date is SARS.
As soon as the provisional liquidation order is granted, no creditor may take any legal action against the entity and any legal action taken is suspended.
Once the provisional liquidation order is granted, the matter is postponed for about one month to a return date. During this month, the applicant (the entity) must give notice to all creditors of the provisional liquidation order by sending them a copy of the court order. Any creditor or other interested party who wants to oppose the application, must then do so before the return date. On the return date, if nobody opposed the application, the order is made final and the entity is liquidated.
If the Application is opposed, the party who opposes must file an affidavit which sets our reasons why the application is opposed. If the entity (or the party who lodged the application) believes that the entity must be liquidated, the matter will have to go to trial and the judge will have to make the decision.
Once the provisional order has been granted, sometimes, depending on the province you are in (the province determines the efficiency of the Master who makes the appointments of the liquidator) a provisional liquidator is appointed and then this appointment is confirmed after the final order has been granted. The liquidator will then determine the assets of the entity, hold meetings with creditors and proceed to sell assets, collect outstanding debt, pay creditors and finalise the estate, after which the matter will be closed.
If the entity is liquidated, make very sure whether the director(s) or member(s) or trustee(s) signed surety for any debt of the entity or not. If they did, then they MUST look at sequestrating themselves as well. No use liquidating the entity but you end up paying the debt in your personal capacity in any case! If surety was signed, read our articles on sequestration and make the decision timeously.
If the entity owes SARS any money and the entity is not in a position to pay the debt back, then the entity MUST be liquidated, because the liability for paying SARS debt automatically goes over to the director(s), member(s) or trustee(s) if the entity is not liquidated. With a liquidation the SARS debt dissolves and does not go over to the director(s) or member(s) or trustee(s). If there is no liquidation, then SARS will collect the outstanding debt of the entity from the relevant individual, (and collect they will!), despite the fact that such an individual did not sign surety for the debt. It is the only debt that goes over to the person of the director(s) or the member(s) or the trustee(s) without the necessity of surety. The problem with that is that it opens the door for SARS to take criminal action against the relevant director(s) or member(s) or trustee(s). SARS does not easily proceed with criminal action as they would rather have the money, but there were instances in my experience where they did decide to take criminal action and we don’t want to leave the door open for any risk of that, so it will be imperative in such an instance to liquidate the entity.
You are welcome to contact us to discuss for more information.