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Different Types of Liquidation

Introduction in regards to the different Types of Liquidation

Liquidation (or "winding up") is a process by which a company's existence is brought to an end.

First, a liquidator is appointed, either by the Creditors or The Master of the High Court. The Liquidator represents the interests of all creditors.

The liquidator supervises the liquidation, which involves collecting and realising the company's assets (turning them into cash), discharging the company's liabilities, and distributing any fund

in accordance with the Insolvency Act 24 of 1936

After these steps have been carried out, the company is formally dissolved.

What are the different types of liquidation?

The law classifies liquidations into three types:

Voluntary (which is by a Directors or Members' resolution or Ex Parte Court Application).

Compulsory (by a court order). When a Creditor bring a Court Application to Liquidate the Business.

Liquidations are also classified according to whether the company is solvent or insolvent.

Solvent and Insolvent liquidations

If the company is insolvent, this means it is unable to pay its debts as they fall due. In this situation there is potential conflict between creditors (those to whom money is owed), as there will be insufficient assets for all creditors to be paid in full.

The law attempts to maintain an equality between creditors, so the assets are distributed proportionately according to the size of each creditor's claim. However, the law gives priority to secured creditors (those with a charge over some of the company's property as security for the debt). In addition, a number of rules exist to prevent one or more creditors from gaining an unfair advantage.

Voluntary (which is by a Directors or Members' resolution or Ex Parte Court Application).

Voluntary liquidation refers to the process whereby the Directors, Members or Shareholders Apply for the Liquidation of the Business. The Creditors or the Master of the High Court Appoint a Liquidator,

A voluntary liquidation may also by commenced by the board of directors if an event specified in the company's constitution has occurred.

Voluntary liquidation may be in one of two forms, depending on whether or not the company is solvent. If the company is solvent the shareholders can supervise the liquidation.

However, if the company is insolvent, the creditors may take control of the liquidation process by applying to the court. The court will require proof of solvency or insolvency to determine this matter.

Compulsory liquidation (by Court Order)

Compulsory liquidation

Compulsory liquidation of a company requires obtaining a court order. This process starts with an application to the court alleging that one or more of the required grounds exist. The application may be brought by the a Creditor or or a majority of its directors.

Applications by creditors are by far the most important and common.

Applications may be brought on a number of grounds, the most important being that the company is unable to pay its debts. There are a number of factors that the court will take into account when deciding whether or not to make a compulsory liquidation order. The court has a discretion as to whether or not to make the order.

The procedure for liquidation

Broadly speaking, the liquidation process is as follows:

  • A liquidator is appointed, either by the Creditors nominating a Liquidator or the discredtion of the Master of the High Court

  • The liquidator collects the assets of the company , sells the Assets and distrbute payment to the Creditoes who proved a Claim on a First Meeting or Second Meeting of Creditors.

  • The company is then formally dissolved.

What are the consequences of liquidating a company?

The main consequences of the company being liquidated are as follows:

  • The company no longer has the power to dispose of its property.

  • The company may carry on business only for the limited purpose of completing the liquidation process.

  • The powers of the company directors come to an end when a liquidator is appointed.

  • A liquidation order operates as a notice of dismissal to all of the company's employees. Note, however, that if an employee is on a fixed-term contract and is required under this contract to be given a period of notice, then a liquidation order will breach this and the employee will be entitled to damages.

  • When an application is made for a court-ordered liquidation, the court may stay or restrain any proceedings against the company as the court sees fit. When a liquidator is appointed, no person can begin or continue legal proceedings against the company or in relation to its property, unless the liquidator agrees or the court permits it.

Order of distributing the company's assets

There is a hierarchy that determines the order in which a company's assets must be distributed in a liquidation. This is strictly enforced by the Courts. Any secured creditors have the first right to the assets and are usually paid out before there is a distribution. After this is paid out, any remaining debts are paid in the following order of priority:

  1. the costs, charges and expenses involved in the liquidation

  2. all wages and salaries payable to employees, including holiday pay

  3. unsecured creditors

  4. any interest that is attached to any debt (but only if the debt became due before the liquidation process began)

  5. any debt owed to shareholders of the company, such as dividends or profits

Cautionary notes

  • The compulsory liquidation process cannot be used if there is a genuine dispute about the amount of debt owed by the company, because in this type of situation the company cannot be said to have "neglected" to pay

Contact us before it is to late

Liquidation Experts

0127555 225 or 082 304 7925

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