Category Archives: Liquidation

Labour Law, Liquidation

DIFFERENCES BETWEEN LIQUIDATION AND SEQUESTRATION PROCESS

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A1BThe application for liquidation and sequestration processes are often confused. Many people think that the processes are the same. However, there is a big difference between these two processes.

A simple way to describe liquidation is that liquidation is the winding up of a firm by selling off its free (un-pledged) assets to convert them into cash to pay the firm’s unsecured creditors. Before a liquidation application can be issued in court, a founding affidavit needs to be drafted. This affidavit will include all the details of the Applicant and / or Respondent. The Applicant is the person who wants to liquidate the company and the Respondent is the company. In the case where the Applicant is the company, there will be no Respondent. The affidavit will also include any details of the company, employees and creditors. A bond of security also needs to be signed for the purpose of the Master of the High Court.

Once the application is issued, the only people who receive this notice is the South African Revenue Services (SARS), the Master of the High Court, employees of the company and any trade unions. As soon as this is done, a Master’s certificate is obtained verifying the application, and a provisional liquidation order is granted.  A return date is then set, and all creditors are notified of the provisional liquidation through registered post and by placing the provisional order in two local newspapers. Should the Applicant’s attorneys receive no notice of intention to defend the matter, a final liquidation order is granted. The order together with the application is sent to the Master of the High Court and a liquidator will be appointed.

Sequestration is the preferred option for the individual who has exhausted all other options of resolution, and is now in a position where even if all their assets are sold, they would be left with such a high shortfall that it would be unreasonable to expect them to recover from this loss. A sequestration involves a little more administration work before a court date can be obtained. Before the Notice of Motion and Founding Affidavit are drafted, a valuer needs to be appointed in order to value the Applicant or Respondent’s estate. This needs to be done in order to ascertain whether the debtor is indeed over-indebted, and whether he / she has enough assets to provide a benefit for all creditors involved.

 In the matter of a voluntary sequestration, the Applicant will be the party whose estate is to be sequestrated. The valuer needs to value the property of the Applicant on a forced sale scale. This will be calculated by subtracting 20% of the actual value of the property.

As soon as the valuer has made an estimate for the Applicant / Respondent’s estate, a Statement of Debtor’s Affairs needs to be handed in to the Master of the High Court for inspection by all creditors. This needs to be done no less than 14 or more than 30 days before the court date. A Notice of Surrender needs to be sent through registered post to all creditors to inform them that the Statement of Debtor’s Affairs is available for inspection.

The Notice of Surrender needs to be posted in two local newspapers and the Government Gazette no less than 14, or more than 30 days before the court date. Once all of the above-mentioned requirement has been adhered to, the notice of surrender can be annexed to the Founding Affidavit and can be heard by the court, no Bond of Security is needed at this point. A sequestration can only be heard by the High Court, whereas a liquidation can be heard either by a Magistrate’s Court or by the High Court, depending on the merits of the case.

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)

Liquidation

COMPANY LIQUIDATION STRATEGIES

A creditor who’s claim against a company has not been paid on due date is, as a matter of law, entitled to apply for the liquidation of the company.  If the court is satisfied that the company is unable to pay the debt, a liquidation order will normally be granted, with the often distressing consequence that jobs are lost, assets are sold at far below their value and a business which, if given a respite, would have regained its financial health, ceases to exist.

The new Companies Act, No 71 of 2008, has introduced the concept of business rescue, which is intended to assist financially distressed companies in restructuring their business in a manner that maximises the likelihood of the company continuing in existence on a solvent basis.  Business rescue certainly has its place in the South African economic environment, and its growth and wider application should be encouraged.  There are, however, a number of drawbacks.  The business rescue practitioner has to be paid, and his fee is frequently substantial.  Furthermore, the business rescue plan has to be approved by 75% of the creditors voting interests, and by 50% of the independent creditors (i.e. creditors who are not directors, shareholders or members of the same company group).  If the business rescue plan is not approved, liquidation of the company will be the almost inevitable result.

Item 9 of Schedule 5 to the 2008 Companies Act provides that the liquidation of companies continues to be governed by the applicable provisions of the previous Companies Act, No 61 of 1973 (“the 1973 Companies Act”).  Which brings me to Section 347(1) of the 1973 Companies Act, dealing with the powers of the court hearing a liquidation application.  It provides as follows:  “The court may grant or dismiss any application under s 346, or adjourn the hearing thereof, conditionally or unconditionally, or make any interim order or other order it may deem just …”.

The power which the court has to adjourn the application, or make “any other order it may deem just” is a power infrequently exercised and one which has received insufficient attention by the courts.  That power should, for example, be exercised in conjunction with the power granted a court in terms of Section 354(1) of the 1973 Companies Act, which states that the court may at any time after commencement of a winding up, on the application of a liquidator, creditor or member “and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed or set aside, make an order staying or setting aside the proceedings …”.

In Klass v Contract Interiors 2010 (5) SA 40 (W), the court held that the power vested in the court by Section 354 is an unfettered discretionary power.  The court may, in deciding whether a winding up is to stayed, have regard to the wishes of the majority of creditors, and to considerations of commercial morality.  This approach echoes the reasoning adopted in Calgary & Edmonton Land Co Ltd (1975) 1 All ER 1046 (CH).  It is also consistent with a line of cases which state that, in liquidation and sequestration applications, a court may postpone the granting of a liquidation or sequestration order to enable a debtor to pay the claim of the applicant creditor, where it appears that the debtor has realistic prospects of doing so (Rosenbach & Co (Pty) Ltd v Singh’s Bazaars (Pty) Ltd 1962 (4) SA 593 (D);  Payslip Investment Holdings CC v Y2K Tech Ltd 2001 (4) SA 781 (C) at 787-789).

A company faced with a liquidation application may therefore, if it is able to show that it will be able to pay the debt within a realistic time, succeed in averting the liquidation application.  A couple of self-evident and practical points need to be made, in this regard.  Firstly, a company running into cash flow problems must keep its creditors fully informed.  If it becomes clear that debts are not going to be paid on due date, the company should timeously ask the creditors for extensions of time, make realistic proposals as to the payment of any arrear amounts and, most importantly, ensure that it treats all its creditors equally, as regards payments of debts.  A creditor that finds out that its claim has been unpaid, while those of other creditors met, is likely to speedily resort to liquidation or other litigation proceedings.

By managing its creditors in this manner, a company will, if in due course one of the creditors loses patience and brings liquidation proceedings, be able to successfully resist liquidation by invoking Section 354 and the proviso to Section 347(1).

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.

Liquidation

BUSINESS RESCUE PROCEEDINGS – PROBLEMS, HEADACHES AND ANOMALIES

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.

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.

Liquidation

THE LIQUIDATION OF A COMPANY OR CLOSE CORPORATION

A1_BLiquidation 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

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.