Earlier this month, we discussed the business rescue process and the circumstances when this would be appropriate for a business in a position of financial distress. In the case of a company unable to pay its debts as they fall due in the ensuing 6-month period, liquidation is the only alternative open to that business. Insolvency in South Africa is dealt with in the Insolvency Act of 1936.
The Companies Act and the Close Corporations Act incorporate the provisions of the Insolvency Act. In a corporate insolvency, these provisions protect the rights of creditors and parties affected by the insolvency, to ensure insolvent individuals and companies do not endeavour to circumvent the insolvency process by aiming to benefit one creditor over another.
Factual vs commercial insolvency
A company is termed “factually insolvent” when liabilities exceed assets. Where a business is unable to pay its debts as they fall due, it is “commercially insolvent”. A business factually insolvent does not have to enter liquidation proceedings because of this fact alone. Provided that business is able to pay debts as they fall due, no action is required towards liquidation or business rescue. As soon as a company is unable to pay debts falling due, urgent steps are required to remedy the matter (including securing loan finance) or implement liquidation or business rescue proceedings. It must be emphasized, however, that business rescue is appropriate only if the company in question has funds available for ongoing trading and has a commercially viable business model.
Directors of a company factually insolvent potentially fall foul of the reckless trading provisions of the Companies Act and risk personal exposure for the liabilities of the company should they fail to remedy the insolvency position.
Upon commencement of liquidation proceedings, a liquidator is appointed to assume control over company assets and effect liquidation thereof. The balance of proceeds from the sale of assets over liquidation costs are applied to meet creditors’ claims in legal order of preference, as follows:
What is important to note is that unsecured creditors are the last parties to be paid in a liquidation process, and often derive very little, if anything at all, from their claim in the liquidation.
As the business commencing liquidation, one would be wise to investigate the value of your intellectual property (IP), particularly technology-based IP. Once a liquidation is finalized, any IP registered in the name of that entity will remain in its name at the CIPC and transfer thereof after liquidation is impossible. Any IP in the business should therefore be valued prior to finalizing the liquidation and appropriately dealt with before the liquidation process is finalized.
If your business has been negatively impacted by Covid-19 and the SA lockdown, resulting in unavoidable liquidation, it is important that your IP is appropriately valued in order that it may be liquidated at fair value. Reach out to our Management Consulting team for further information on our valuations process or for a confidential consultation on your liquidation process.
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