Liquidation of a Company in South Africa

Contents

1. Introduction
2. Types of Liquidation
3. Grounds for Liquidation in South Africa
4. The Liquidation Process
5. The Role of the Liquidator

Introduction

In South Africa the Companies Act 71 of 2008 repealed the previous Companies Act 61 of 1973, in totality except when it came the liquidation of insolvent companies. When it comes to the liquidation of a company, it is imperative to determine its financial status. If the company is solvent, and therefore able to pay its debts once its assets have been converted into cash, liquidation proceedings should be followed in terms of the 'new' Companies Act 71 of 2008. However, if the company's liabilities exceed the value of its assets, it is deemed to be insolvent and should be liquidation in terms of the 'old' Companies Act 61 of 1973.  

For purposes of this article, we will focus exclusively on the liquidation of insolvent companies, to be liquidated in terms of the Companies Act 61 of 1973.  

Definition of Liquidation and Winding-Up

Liquidation is the legal process whereby a company is legally brought to an end, and its assets are converted into cash (liquidated), which is then distributed to satisfy its debts. 

There are two stages involved. The initial stage involves placing the company into liquidation due to insolvency, either by way of shareholder resolution, or a court order. The second stage leads to the appointment of a liquidator who is responsible for overseeing the winding-up of the company's affairs.

Overview of the South African Legal Framework

As previously stated, when it comes to insolvent companies, the Companies Act 61 of 1973 will apply, in conjunction with the Insolvency Act 24 of 1936. Relevant case law will dictate how the different sections of these acts are to be interpreted, and applied.  The Insolvency Act will only be applicable when the Companies Act does not specifically address the relevant matter.   

Types of Liquidation

Voluntary Liquidation

Voluntary liquidation occurs when the company or its shareholders decide to liquidate the company without being compelled by a court order. This occurs when the company is insolvent, and the shareholders voluntarily pass a resolution to liquidate it, with the involvement of creditors. The process is referred to as a Creditors’ Voluntary Liquidation.

Compulsory Liquidation

Compulsory liquidation, also known as court-ordered liquidation, happens when a creditor, shareholder, or other interested party applies to the High Court to liquidate the company. The court issues an order for the company to be liquidated, usually due to the company’s insolvency or when it is deemed just and equitable to do so.

Grounds for Liquidation in South Africa

The liquidation of a company can be based on several grounds. We will address the 5 main reasons for a company's liquidation. A company may be wound up by the Court if-

• the company has by special resolution resolved that it be wound up by the Court;
• the company has suspended its business for a whole year;
• seventy-five per cent of the issued share capital of the company has been lost or has become useless for the business of the company;
• the company is unable to pay its debts as described in section 345;
• it appears to the Court that it is just and equitable that the company should be wound up.

Resolution by Shareholders or Creditors

Shareholders may resolve to liquidate the company, especially in voluntary liquidation scenarios. This may be done by way of Special Resolution at a general meeting as discussed in more detail hereunder. Once the special resolution has passed it must be registered with the Companies and Intellectual Property Commission (CIPC) within 30 days before the liquidation can commence. 

Insolvency and Inability to Pay Debts

When a company is unable to pay its debts as they become due, liquidation is often sought to settle outstanding liabilities. A company deemed unable to pay its debts if:

• a creditor has served a demand for payment in excess of R100 on the company's registered office, which the company neglects to pay for three weeks thereafter; or
• after the court granted a  judgment in favour of a creditor, the sheriff returns it with an endorsement that the company's disposable property is insufficient to satisfy the judgment; or
• the disposable property found, removed and sold at the sheriff's auction, was insufficient to satisfy the judgment, or 
• it the Court is satisfied upon sufficient proof that the company is unable to pay its debts. In this regard, the contingent and prospective liabilities of the company must also be taken into account by the Court.

Just and Equitable Grounds

When applying for a liquidation order on just and equitable grounds, the courts in South Africa have a wide discretion to determine whether liquidation is appropriate based on the unique circumstances of each case, such as:

• Shareholders in Deadlock - The courts may grant a liquidation order if it is deemed just and equitable, such as in cases of deadlock between shareholders.
• Loss of Substratum -  This occurs when a company's reason for existence ceases (e.g., its core project collapses or it loses a critical contract), shareholders may apply for liquidation on just and equitable grounds.
• Oppression or Mismanagement - If minority shareholders or other stakeholders can prove the directors or majority shareholders are conducting the company's affairs in a manner that is oppressive, unfairly prejudicial, or discriminatory.
• Abuse of Company Structure - A company may be used as a vehicle for fraudulent or improper purposes, such as hiding personal assets or evading legal obligations. 
• Loss of Confidence in Management - When there is a loss of confidence in the company’s management or board of directors due to misconduct, fraud, or gross mismanagement, shareholders may petition for liquidation. 

The Liquidation Process

Voluntary Liquidation Process

Passing the Special Resolution

Shareholders must pass a special resolution to voluntarily liquidate the company. This is done by calling a general meeting by giving stakeholders at least twenty-one clear days' notice of the meeting. The notice must also specifying the intention to propose the special resolution, the reasons for it, the terms and effect.

On the day of the meeting, at least twenty five percent of the shareholders entitled to vote must be present in person or by proxy. The special resolution can only be passed with seventy five percent of those present vote in favour of it, either on a show of hands or by a poll.  A special resolution may also be passed without the required notice if all the shareholders give their written consent, on the prescribed form.

Lodging the Resolution

The resolution must be  lodged with the CIPC within one month from its passing, together with either a copy of the notice convening the general meeting, or a copy of the consent  by all shareholders, for registration. The liquidation will be be of no force or effect until the Special Resolution has been registered, authorising the winding-up.

Appointment of a Liquidator

Once the resolution is registered at CIPC, the Master of the High Court is notified of the voluntary liquidation. The Master may then proceed to appoint a provisional liquidator to take control of the company’s affairs.

Compulsory Liquidation Process

Application to the High Court

The following parties may apply to the Court for the winding-up of a company:

• by the company;
• by one or more of its creditors (including contingent or prospective creditors);
• by one or more of its shareholders, irrespective of whether his name has been entered in the register of shareholders or not;
• in the case of any company being wound up voluntarily, by the Master or any creditor or member of that company.

Court Hearing

The Court may grant or dismiss the application, or adjourn the hearing to a future date for additional information to be submitted by way of supplementary affidavit. However, the Court may not refuse to liquidate the company because it has no assets.

Whenever the court is satisfied that an application for the winding-up of a company is an abuse of the court's procedure or is malicious or vexatious, the court may allow the company forthwith to prove any damages which it may have sustained by reason of the application and award it such compensation as the court may deem fit.

Appointment of a Liquidator

A provisional liquidator is appointed, followed by a final liquidator once the liquidation process progresses.

The Role of the Liquidator

The liquidator is an officer appointed to oversee the liquidation process and has the following duties:

Realization of Assets

Selling the company's assets to pay off debts.

Distribution to Creditors

Paying creditors according to their claims and legal priority.

Reporting to the Master of the High Court

Providing detailed reports and accounts on the liquidation process.

Contact us at info@gmilaw.co.za for more information and professional assistance to avoid the costly pitfalls of liquidation proceedings and the winding up of your company

_{Copyright © 2024 Rohan Lamprecht. Disclaimer: The information in this article is of a general nature for educational purposes only, relevant to the publishing date. Any opinions expressed are solely those of the author and do not necessarily reflect the views or opinions of Grobler Malope Inc. The content is not intended to constitute professional or legal advice, and you are encouraged to call and consult with our attorneys to discuss your specific situation before making any decisions. Grobler Malope Inc - 087 057 1790 - info@gmilaw.co.za}