How Voluntary Liquidations Work In South Africa
Voluntary liquidation is easier than voluntary sequestration in the sense that the business doesn’t need assets, whereas the individual must have property or sufficient cash to pay at least ten cents to the rand for the benefit of creditors. In addition, once the business liabilities exceed its assets, by law the business must cease trading and must apply for business rescue assistance, or voluntarily liquidate. The business owner’s assets are not attached unless the director has signed surety for any of the debts, or if it is shown in court that the director has managed the finances of the business irresponsibly.
The process is started by the ceasing of trade. The directors or members must decide on the date when the business will stop trading. From this moment on, the business should not make any further debt payments because these will benefit one creditor above the other. In addition, any income generated after the date will be to the benefit of the creditors, as the income goes into the insolvent estate. The business owners thus have no access to the income.
However, to ensure that employees are not negatively affected by the sequestration – or at least affected as little as possible – the business owners can register another business entity before the date on which the business stops trading. They can transfer the basic assets to the other entity (not encumbered by debt) for the purpose of trading, and transfer all the employees – or at least some of them – to the new business entity. This will ensure that the business can trade as usual while the old entity is liquidated. Keeping within the boundaries of the law is essential during this process and we recommend consulting with attorneys working with voluntary liquidations to ensure that you do everything by the book.
An affidavit is drawn up by the attorneys; it must be signed by one of the authorised directors, members, or trustees, who will apply for the business liquidation. It details the debt and provides a history of what has led to the debt. The application is submitted to the High Court and the business owners receive a case number, which also stipulates the court date for the provisional application.
The liquidation application is made ex parte by you as the applicant, for immediate relief. The court grants the provisional order and then the creditors are notified of the court date and liquidation application. Only SARS receives notification before the court date. The creditors get an opportunity to object and if no objections are received, the final voluntary liquidation order is set at the next court date. If there are objections, these must first be dealt with before the order can be granted.
Note that once the provisional liquidation order is given, your creditors cannot take any further legal action against your business. The provisional liquidator is appointed once the provisional order is granted. Once the final liquidation order is granted, the liquidator assesses the value of the business entity’s assets, calls meetings with the affected parties, sells the assets, and distributes the benefits to the creditors. The business is then officially bankrupt and liquidated.
We recommend speaking to our attorneys about the advantages and disadvantages of voluntary liquidations and the correct steps to take in the process.