Navigating the Liquidation Process: Part 1 – Methods of Liquidation

Liquidation is a critical process for entities facing financial distress. While only legal entities such as companies and close corporations can undergo liquidation, other entities like individuals, trusts, and partnerships must opt for sequestration. This is the first article in a series that will provide deeper insights into the liquidation process. This article specifically focuses on the different types of liquidation.

Types of Legal Entities and Applicable Laws

In South African law, the primary legal entities eligible for liquidation are companies and close corporations. The Close Corporations Act of 1984 and the Companies Act of 1973 outline the procedures for liquidation. The Companies Act of 2008 further governs members' voluntary liquidations and the liquidation of solvent companies by court order. Although the 2008 Act has phased out the registration of new close corporations, existing ones can continue to operate and can convert to companies under the new Act if desired. Provisions for the liquidation of close corporations under the 1984 Act remain in effect.

Liquidation by Court Order

There are two primary methods for liquidating a company: by court order and by special resolution. Liquidation by court order requires an application to the High Court (for companies) or a Magistrate's Court (for close corporations). This method is typically used in compulsory liquidations, initiated by creditors when a company cannot pay its debts. While a company can theoretically apply for its own liquidation, this is rare. Instead, creditors usually drive the process. Section 81(1) of the Companies Act of 2008 also allows for the liquidation of a solvent company by court order, which can be initiated by the company, a creditor, or a business rescue practitioner.

Liquidation by Special Resolution

Liquidation by special resolution is a less costly and quicker method that does not involve court proceedings. A special resolution requires a 75% majority vote from shareholders. There are two types of voluntary liquidations:

1. Members' Voluntary Liquidation:
• Initiated by a special resolution from shareholders, indicating that the company is solvent.
• The resolution must be lodged with the Master, who will issue a certificate of solvency if the company has no outstanding debts or has provided security for any outstanding debts.
2. Creditors' Voluntary Liquidation:
• Also initiated by a special resolution from shareholders, but for an insolvent company.
• The Master appoints a provisional liquidator upon registration of the resolution and convenes a meeting of creditors to elect a final liquidator. The process mirrors that of a court-ordered liquidation but is driven by a shareholder resolution.

Conclusion

Understanding the intricacies of liquidation is essential for businesses and legal practitioners. This article offers a brief overview, but stay tuned as Legal Link dives deeper into each aspect of the liquidation process in our upcoming articles.