LIQUIDATION – Schnetler's Inc

Is your business being liquidated?

SRA — Tue, 12 Nov 2019 05:23:01 +0000

Many businesses fail and consequently have to face financial crises that few recover from and in most instances, results in business owners shutting doors for good. If your business has no assets or liabilities, the simpler process of deregistration takes place. The liquidation process needs to be followed if your business has assets, liabilities or both.

The liquidation of your business

Liquidation is the process by which your company or close corporation effectively declares itself insolvent. Your business can undergo voluntary liquidation, where you choose to voluntarily liquidate it, or when you undergo compulsory liquidation through action by your creditors.

Once your business has been placed under liquidation, it will stop all of its business activities in so far as may be required for the “winding-up”, i.e. the process of selling all the assets of your business, paying off your creditors, distributing any remaining assets to the partners or shareholders and then dissolving your business. A liquidator will be appointed to perform all these tasks.

The consequences of liquidation

When your business gets liquidated, all contracts concluded with the business remain in effect. The liquidator has to make the decision whether or not he/she intends to abide by the contract or to terminate it, which will depend on what would be the most beneficial decision to the creditors. However, if the liquidator chooses to terminate the contract, the other contracting parties have a monetary claim against the insolvent estate as a concurrent creditor, i.e. creditors who do not hold any security.

If you are a director and/or shareholder of your business, then you should be especially cautious when your business gets liquidated, since you will still be liable for debt for which you have signed surety, i.e. taking responsibility for another’s performance of an undertaking. If a director acted negligent or fraudulent in his/her capacity as the director, he/she can also be rendered personally liable.

The liquidation of your business does not terminate employment contracts; it is up to the liquidator to decide whether to do so or not, and this decision must be in line with the Labour Relations Act 66 of 1995, Basic Conditions of Employment Act 75 of 1997, and the Insolvency Act 24 of 1936. However, employment contracts are suspended upon liquidation of the employer; during this suspension period, the employee is not obliged to render any services to the employer, and he/she is not entitled to receive any payment or employment benefits that arise from the contract. An employee whose services have been terminated because of liquidation, is entitled to claim losses suffered from the employer’s liquidated estate.

Dealing with your taxes

SARS has a preferent claim in the business’s insolvent estate, meaning that SARS will be paid before the business’s concurrent creditors. If the business is liquidated voluntarily and there is still debt owed to SARS after the winding-up of the business, the shareholders may, in terms of the Tax Administration Act 28 of 2011, be held personally liable in certain circumstances. The Value Added Tax Act 89 of 1991 places you as a member or a director of the business, who has regularly partaken in the management of the company, in the position of a trustee of the government’s money and you will be held liable for the business’s VAT.

Other taxes are deemed to be civil debt, and money owed to SARS simply gets written off if SARS does not get a dividend from your business’s insolvent estate, or if your business is deregistered. However, SARS may issue criminal summons against business owners in this regard.

References:

co.za. (2017).When you have to liquidate your biz – 5 considerations you shouldn’t overlook. [online] Available at: http://www.smesouthafrica.co.za/16586/When-you-have-to-liquidate-your-biz-5-considerations-you-shouldnt-overlook/ [Accessed 23 Jun. 2017].
Investopedia Staff. (2017). Winding Up. [online] Investopedia. Available at: http://www.investopedia.com/terms/w/windingup.asp [Accessed 23 Jun. 2017].

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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BUSINESS RESCUE PROCEEDINGS – PROBLEMS, HEADACHES AND ANOMALIES

SRA — Mon, 15 Jun 2015 06:57:15 +0000

The 2008 Companies Act has been criticised, in many respects and in many quarters. A great many of the provisions found therein are difficult to understand, and some of them are downright bizarre.

Take, for example, the business rescue dispensation created by Chapter 6 of the 2008 Companies Act. Business rescue is, of course, a well-intentioned and potentially promising alternative to the liquidation of companies. The liquidation process results in the destruction of the company, loss of jobs, the sale of assets frequently at a fraction of their market value. It is a lose-lose situation. The underlying aim of business rescue is to provide an alternative mechanism by which the company can be restored to commercial viability, which should ultimately better serve the interests of creditors, employees and other stakeholders.

To achieve this, Chapter 6 of the Companies Act provides that a company may be placed in business rescue by resolution of its board of directors, or by order of court. A business rescue practitioner (hereinafter referred to as “the BRP”) is appointed, who has wide-ranging powers of investigation and control and who, ultimately, prepares a business rescue plan. That plan is required, by Section 150 of the 2008 Companies Act, to list the assets and liabilities of the company, probable dividend if the company was to be liquidated, a list of shareholders, and business plan proposals which set out the steps to be taken to restore the company to the position where it can continue trading or (if that cannot be achieved) to wind up the affairs of the company in such a manner that creditors will receive a more favourable dividend than would have become payable, on liquidation.

In the course of the business rescue investigation, however, the BRP is vested with various powers which are, to say the least, perplexing. One of these is found in Section 136(2)(a) which empowers the BRP to either partially or conditionally suspend, for the duration of the business rescue proceedings, any obligation of the company under business rescue (hereinafter referred to as “the BR company”) that arises under an agreement to which the BR company was a party, prior to the commencement of the business rescue proceedings, and which would otherwise become due during those proceedings.

The question is – how does that draconian power fit in with the well-known contractual principle of reciprocity? Reciprocity means that, if two parties conclude a contract in which both of them have rights and obligations, Party A cannot enforce any of its rights without, at the same time, tendering to comply with its obligations.

So where does Section 136(2)(a) leave a creditor who concluded a contract with a BR company, prior to commencement of business rescue, under which both parties have outstanding rights and obligations? Is the BRP able to suspend, for the duration of the business rescue proceedings, the obligations of the BR company but, at the same time, require the creditor to carry out the creditor’s obligations, without receiving any counter-performance from the BR company?

Take, for example, a distributorship agreement under which the manufacturer of products has, prior to BRP, appointed the BR company as a sole distributor in South Africa, on condition that the BR company markets and advertises the product in question, thereby ensuring that it acquires a reputation and market share. May the BRP simply suspend those marketing and advertising obligations, but still insist that the BR company carry on acting as exclusive distributor? Can the BRP of a franchise company under business rescue decide to suspend the obligation to pay royalties to the franchisor, but insist that the franchisee nevertheless be entitled to carry on the franchise operation? Many other examples will illustrate why, in a commercial setting, it would be grossly unfair to expect a party to continue performing under a contract, although the obligations of the other party are suspended.

The courts have to thus far not had occasion to pronounce upon the meaning and effect of Section 136(2)(a), or how it will impact on contracts which create reciprocal obligations. All that one can safely say is that, in the meantime, creditors with ongoing contractual obligations with companies in business rescue are left in a state of uncertainty and vulnerability, and exposed to a mechanism which is certainly open to abuse and exploitation by companies who have been placed in business rescue.

Clarification from the courts, or an amendment to Section 136 of the 2008 Companies Act, is urgently required.

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THE LIQUIDATION OF A COMPANY OR CLOSE CORPORATION

SRA — Wed, 16 Apr 2014 08:42:49 +0000

Liquidation is more commonly known as “bankruptcy” of a business. In layman’s terms this terminology refers to the fact that a business is in such a bad financial state that the creditors cannot be paid.

Liquidation refers to the bankruptcy of a company, close corporation or some other legal entity. In the legal process of liquidation the company is placed in the control of a liquidator. It is the duty of the liquidator to realize the company’s assets for the sole purpose to divide the proceeds fairly amongst the creditors. The liquidator must dissolve the legal entity in an orderly fashion.

According to the Insolvency and the Company Law Acts the “members” of the legal entity may apply for the liquidation thereof. Such members include directors, creditors, shareholders, employees or even investors.

An liquidation application for a company may only be brought at the High Court. In the event of a close corporation the Magistrate’s Court does have the necessary jurisdiction to grant the final liquidation of such corporation. The liquidation order will normally be granted by the Court if the Applicant successfully made out a clear case that the company or close corporation is unable to pay its debts and that it is fair and equitable that the company/corporation be wound up.

What is the procedure that needs to be followed when applying for the liquidation of a company or close corporation? The attorney firstly has a consultation with the Applicant and during such consultation will the attorney advise whether liquidation is indeed the best option in the given circumstances. From the commencement of the process it approximately takes about between four to six weeks before the application is heard in court, unless the application is brought on an urgent basis. The Applicant does not appear in Court; only the legal representatives appear on the Applicant’s behalf. After the provisional order is granted and a return day for the final order is established, the Master of the High Court will appoint a liquidator. The liquidator will then take charge of the legal entity’s affairs. Once a liquidator is appointed the Applicant’s legal representative will set up a meeting with him/her during which the attorney negotiates on behalf of the Applicant with the appointed liquidator. After the provisional order is granted the attorney for the Applicant has to attend to certain legally prescribed formalities before the appearance in Court on the return day. The time frame between the first day of the application and the return day is more or less three weeks.

After the final order is granted the liquidator will realize the legal entity’s assets which fall in the insolvent estate. The liquidator distributes a dividend amongst the creditors.

Written by: Annerine du Plessis

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