Liquidation and sequestration … What, How, When?

The Difference between Liquidation and Sequestration
Individuals sequestrate to get rid of debt and businesses liquidate to get rid of debt. Once a person is sequestrated and a business liquidated the debt is written off and the person or the business can start with a clean slate.

Liquidation
When must a Company Liquidate?

A company must liquidate when it is unable to pay its debts, starting at R100 and more. If a creditor obtains a judgment against a company and the company still cannot pay the debt, and there is no bona fide dispute in connection with the validity of the claim, then the company is deemed insolvent and can liquidate or be liquidated. Also, if a company’s liabilities exceed its assets, then the company can be liquidated.

Liquidation can be Voluntary or Forced

A company can be voluntarily liquidated by the directors and shareholders of the company, or it can be forcefully liquidated by a creditor or creditors. A director can also forcefully apply for the liquidation of a company. When a company is voluntarily liquidated, the company can be liquidated in either the High Court with a court application, or at the Companies Offices by means of a Special Resolution that the directors and shareholders sign. If there is a conflict between directors/shareholders and there is a deadlock, one or some of them can bring a forced liquidation application to the High Court. If all directors and shareholders are not in agreement that the company must be liquidated, then the company cannot be liquidated in the Companies Offices and a liquidation application must be lodged at the High Court.

Any creditor can apply for the liquidation of the company by bringing a court application. If a company is liquidated voluntarily, we refer to it as a friendly liquidation. If it is an aggressive liquidation brought by a creditor or a director, we refer to it as a forced liquidation. A liquidation is friendly if the directors and shareholders agree to the liquidation. It is aggressive if somebody who is “unhappy” with the company brings the liquidation application against the company.

Process after Liquidation in South Africa

Once a Liquidator is appointed after Liquidation, the Liquidator will take control of the assets of the company (if any). The Liquidator will contact the creditors. Creditors can prove a claim against the insolvent estate of the company if they wish to be paid. Creditors will only get paid if they prove a claim and if there are proceeds of any assets that can be sold or cash in the bank account of the company. Proving a claim by a creditor means that the creditor must prove that it is a creditor (reason for the debt) by lodging a contract/invoice and giving a certificate of balance. Creditors who do not prove claims will not be paid even if there are monies in the insolvent estate of the company. Most creditors do not prove a claim if there are no assets that can be sold or monies as they might then be expected to contribute to the costs of winding up the insolvent estate.

The Winding-up Process

The Liquidator’s process can take 6 months to a year (or longer depending on what happens in the winding-up process).

The reasons why it can take longer is because there are time periods which the Liquidator is subject to:

– the Master must approve certain steps, and this can take time as it depends on the efficiency of the Master’s offices, or

– the company may still be trading, and the Liquidator would want to sell it as a going concern and this can take time, or

– there may be late remittance of claims by creditors, or

– it can take time to sell the assets of the company if there were assets.

What does the “Winding-up Process” mean?

The winding-up of a company means that the Liquidator must gather all information, all assets, and all creditors and deal with all of these in the manner prescribed by the Insolvency Act. In short, it means that the Liquidator will sell assets (if there are any) and divide the proceeds among the creditors who prove claims against the insolvent estate of the company. The Master of the High Court is the overseer of all Insolvency matters and the Liquidator will ultimately report to the Master about the company in a Liquidation and Distribution account. This account will explain what transpired with the assets, the monies, and the creditors.

Sequestration
How is a person Sequestrated?

A person can only be sequestrated by means of a court order. Someone (either the person self with voluntary surrender) or a creditor with what we call an aggressive sequestration application must file an application at the High Court to ask for the sequestration of the person’s estate. Once the court grants the sequestration order, all debt incurred up to the date of sequestration is written off. After four years one can apply for Rehabilitation and your credit record is cleared.

The Sequestration Process

The sequestration process is a High Court application to ask the court for an order to declare an individual insolvent. All debt incurred up to date of the court order (the sequestration order) is written off (apart from the “contribution” that the debtor paid). A curator is appointed after sequestration. The curator’s job is to wind up the insolvent estate of the debtor that was sequestrated. Winding up means that the curator must sell assets (if there are any) and pay the creditors with the proceeds.

Any amount that a creditor does not get must be written off and can never be claimed by a debtor.

In terms of the Insolvency Act, a person can only sequestrate if there is a benefit to creditors. This means either cash or assets (movable (furniture/cars) or immovable (houses/plots/flats/farms) must be given to be able to sequestrate.

Compulsory Sequestration

Applications are also made by way of a Court application; however, in this case, the Applicant will be a creditor of the debtor. If it is a creditor with whom the debtor does not have a good relationship, we refer to it as an “aggressive” sequestration (for example the bank).

Aggressive (“unfriendly”) Sequestration

Where an unfriendly creditor brings a sequestration application against a debtor, we refer to is an aggressive sequestration. It is also a forced sequestration as opposed to voluntary surrender.

The creditor who brings the application must have established a claim against the debtor; in other words, the debtor must indeed owe the creditor money. A second requirement is that there must also be a benefit to creditors. Thirdly, the debtor must have committed an act of insolvency.