Businesses go through an ebb and flow of cash flow circumstances. Some months they are liquid enough to satisfy their creditors and during others, they struggle to make all payments required. Such is the nature of business, a company may set up its financial obligations in a manner that could protect itself against foreseeable financial difficulties, but there is always a possibility that a client may not make payment in time, or some unforeseeable circumstance puts the business under financial strain. In such a circumstance a creditor to the company may decide to call up their debts owed to them putting the company in a situation where they are unable to satisfy such debt immediately. This may result in such a creditor forcing the company into involuntary liquidation.
A company is defined as insolvent where it is unable to satisfy all its creditors where either a business is to be sold as a going concern or where a creditor calls up its debt to be paid in full and the company is unable to satisfy the creditor’s request and its debts to the remainder of its creditors. This does not mean that the company is in fact trading at a loss, the company may just not be liquid enough to satisfy those debts but may hold enough assets to easily satisfy those debts. However, the sale of those assets would result in the company being unable to continue trading and become liquidated as a result thereof. Liquidation is where a company is unable to satisfy its creditors’ claims when called upon to settle debts owing to them. The company may be forced to cease to trade as its assets will be sold off to satisfy its creditors’ claims against the business. South Africa’s insolvency law is regulated by the Insolvency Act 24 of 1936, the Companies Act 71 of 2008 as well as the Constitution of South Africa Act 108 of 1996. An insolvent company becomes a liquidated one where it is no longer trading, and it is broken up to satisfy its creditors’ claims against it.
An involuntary liquidation is where a company is forced into such a process by a creditor or interested party bringing a High Court application for such liquidation. Such an application is merely a request for the company to be liquidated and does not automatically liquidate the company. The company may oppose such an application by serving a notice on the party which brought such an application and providing the court with reasons not to uphold such a request.
Should you require any assistance in bringing a liquidation or opposing one or guidance in any commercial-related matter, contact us and we will gladly assist.