Liquidation? Deregistration? Business Rescue?
Global and domestic economic crises, pandemics, disruptive technology, or sheer bad luck… whatever the reason behind your decision to close your business, there are legal and accounting compliance considerations.
The Companies Act stipulates the procedure to be followed when winding up a company, either voluntarily or through a court order (i.e. involuntary liquidation). Click here for Liquidation Guide
What is liquidation?
Liquidation implies that the business is not able to pay its debts and that the business will cease to operate.
- A solvent company or close corporation (CC) may be wound up voluntarily by members or by a creditor by the adoption of a Special resolution by the company or close corporation. The resolution must be filed with the CIPC using the CoR40.1
- Before the resolution is adopted, the company or CC must set security with the Master of the High Court for the payment of the company’s debts, unless consent to dispense with security is granted by the Master.
- A company or CC remains a juristic person and retains all its powers as such, while it is being wound up voluntarily. From the beginning of the company close corporation’s winding-up, it must stop carrying on its business except for those activities required for the benefit of the winding up process. Legal personality is only terminated once the entity is “dissolved”.
- Liquidation of the company results in the establishment of a “concursus creditorum” (coming together of creditors) and the company’s assets are frozen.
- Civil proceedings are stayed (paused) and the attachment or execution of judgments after commencement of proceedings are void.
What is deregistration?
Deregistration dissolves a company or CC as of the date its name is removed from the companies' or close corporation register.
Important: The removal of a company or close corporation’s name from the CIPC register does not affect the liability of any former director or shareholder (for close corporation its members) or any other person in respect of any act or omission that took place before the close corporation was removed from the register.
Liquidation and deregistration are not the same thing.
What is business rescue?
Business rescue offers an alternative to the liquidation or winding-up of a company. It is an opportunity to reorganise and restructure. However, it does not apply to unincorporated associations or entities such as sole traders, partnerships, business trusts or co-operatives.
Business rescue aims to facilitate the rehabilitation (rescue) of a company that is "financially distressed" by providing for:
- the temporary supervision of the company and management of its affairs, business and property by a business rescue practitioner,
- a temporary moratorium ("stay") on the rights of claimants against the company or in respect of property in its possession
- and the development and implementation (if approved) of a business rescue plan to rescue the company by restructuring its business, property, debt, affairs, other liabilities and equity”
The intention is to restructure a company in such a way that either maximises the likelihood of the company becoming solvent, or that results in a better return for the creditors of the company than would ordinarily result from liquidation.
When is business rescue an option?
- If a company is financially distressed, in other words if it is reasonably unlikely that:
- the company will be able to pay all its debts as they become due within six months, (commercial insolvency); or
- the company will become insolvent within the immediately ensuing six months, (factual insolvency)
- There is a reasonable chance of recovery.
(The reasonable man test is that if an ordinary person in the street were to look at the situation, would that person think it likely or unlikely. Companies frequently place themselves under business rescue only to discover that the company is, in fact, insolvent and should rather have liquidated.)
Not all companies are suitable for business rescue. There may be the possibility that liquidation will be more advantageous to creditors and shareholders or a compromise agreement with creditors may be preferable.
It is important to note that when a company begins to experience financial difficulties, the directors must determine whether the company should continue trading or whether such trading would be reckless as contemplated in section 22 of the Companies Act.
A company should commence business rescue proceedings at the first signs of it being financially distressed. If the board of directors choose not to place a financially distressed company under business rescue, the shareholders, creditors, registered trade unions and any employees may apply to place the company under business rescue.
What is a business rescue practitioner?
A business practitioner must be a member in good standing of a legal, accounting or business management profession, and should have a strong financial background, no conflicts of interest with the business, accredited and licenced by the commission.
What is the role of the practitioner?
The practitioner is required to reduce the debt burden to enable the company to continue trading. They are required to investigate the company’s affairs, business, property, and financial situation, and to consider whether there is any reasonable prospect of rescuing the company.
A business rescue plan must be drawn up by the practitioner which is then put to a vote by the creditors.
If the plan is accepted, the business rescue practitioner must implement the plan in an attempt to save the company.
What happens to the directors during business rescue?
They remain the directors. However, their powers and duties are restricted in that the business rescue practitioner has overall control over the company in substitution for the board and the company’s pre-existing management.
Voluntary Business Rescue Proceedings:
The company must file Form CoR123.1 (http://www.cipc.co.za/files/9214/0108/5631/CoR123_1.pdf ) with the Companies and Intellectual Property Commission (“CIPC”) and this must be accompanied by the resolution of the board of directors of the company (in which it resolves to commence business rescue proceedings, together with a statement setting out the facts upon which the resolution was founded.
In terms of section 129(3) & (4) of the Companies Act 71 of 2008, once a company has commenced business rescue proceedings, the company must:
- Publish notice of the resolution within five business days of filing the Form CoR123.1 with CIPC, together with a sworn statement as to the reasons why the company is financially distressed. This notice should be to all affected persons and include the prospects of rescuing the company.
- Appoint a business rescue practitioner.
- File a notice of the appointment of the business rescue practitioner, within two business days, with CIPC.
- Publish a notice of the appointment of the business rescue practitioner, within five business days after the notice is filed.
Does the wind up of my business mean there are no taxes due?
Yes, with one exception - The only SARS debt that is not written off in a liquidation is any tax that is owing under the Customs and Excise Act, because, in terms of this Act, the manager of the business is personally liable to pay these taxes. All other taxes, which include VAT, PAYE and Income Tax are written off in a liquidation.
* SARS cannot collect these taxes unless the directors/ members signed a personal Acknowledgement of Debt.
What about my employees?
Liquidation does not terminate employment contracts.
If you have not terminated their employment contracts as per Section 189 of the Labour Relations Act (Click here to Retrenchment what you need to know), the Liquidator must, after his/her appointment decide whether to do so.
The employees, however, rank second only to creditors who hold security (bondholders, etc) in terms of claiming salaries, benefits and any other monies owed to them.