Written by: Lydia le Roux – 9 June 2015
It is a dilemma you as creditor sit with on many an occasion: a company owes you an amount of money and refuses and/or neglects to pay you. What do you do? To institute legal proceedings by way of issuing a summons might be a lengthy and costly affair with no guarantee of success in the end. By approaching your legal advisor to assist you to commence with liquidation proceedings against such company in default, you may circumvent the costs and time involved in the process of issuing a summons. A company who wishes not to be liquidated and who wants to continue with business will quickly come to the proverbial party when faced with possible liquidation.
The question then beckons: in which circumstances may a creditor liquidate a company? Section 344 of the Companies Act, Act 61 of 1973 (“the Act”) (this section of the Companies Act, 1973 is still in force) provides therefore that an application can be made to court for the winding up of a company in the following circumstances:
“344. Circumstances in which company may be wound up by Court
A company may be wound up by the Court if –
(f) the company is unable to pay its debts as described in section 345;
Section 344(f) is relevant here. A company is regarded as having not been able to pay its debts in the following circumstances (as provided for in section 345):
“345. When company deemed unable to pay its debts
(1) A company or body corporate shall be deemed to be unable to pay its debts if –
(a) a creditor, by cession or otherwise, to whom the company is indebted in a sum not less than one hundred rand then due –
and the company or body corporate has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; or
(b) any process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned by the sheriff or the messenger with an endorsement that he has not found sufficient disposable property to satisfy the judgment, decree or order or that any disposable property found did not upon sale satisfy such process; or
(c) it is proved to the satisfaction of the Court that the company is unable to pay its debts.
(2) In determining for the purpose of subsection (1) whether a company is unable to pay its debts, the Court shall also take into account the contingent and prospective liabilities of the company.”
It then follows that you as a creditor should have a claim of at least R100.00) against the debtor company. On request, your attorney or legal advisor will direct a letter in terms of section 345 of the Act to the debtor company demanding payment of the outstanding amount within 3 weeks from date of receipt of such letter of demand.
A prudent company will not hesitate to pay its debts on receipt of such letter. But, in the event that no payment was received in the allocated time, you will have to instruct you attorney to commence with a process to liquidate the debtor company. This would take the form of an application to court on affidavit by a duly authorized representative from your offices. Such application will be served on the debtor company by the messenger of the court which has jurisdiction to adjudicate the matter. If no opposition to the application is received and, in the event that the court is satisfied that it is just and equitable to liquidate the debtor company, the court will direct that the affairs of the company be wound up.
The consequences of liquidation are:
• the directors of the debtor company will cease to be directors of that specific company;
• a liquidator is appointed to take control of the debtor company’s assets and attend to winding up of such company. Consequently the transfer or encumbrance of any property will be void;
• the transfer of any shares in such a company will be void;
• all civil proceedings by or against the company concerned shall be suspended; and
• any attachment or execution put in force against the estate or assets of the company after the commencement of the winding-up shall be void.
A further benefit of liquidation is that the debtor company may not favour one creditor above another by, for example, paying one of its creditors and not the others. An impartial, independent liquidator will be appointed to reasonably distribute the proceeds realised from the insolvent company.
You do, however, have to take note that, in the event that your company is not a preferred or secured creditor (for example the South Africa Revenue Services or a bank who holds a mortgage over property owned by the debtor company), your company will have to “share in the spoils” as it were. As soon as all of the assets are realised and the preferred and secured creditors have been paid in full, the available funds, if any, will then be distributed amongst the unsecured (concurrent) creditors in equal shares.
It is evident that a debtor company would at all costs try and avoid being liquidated. For this reason I am of the belief that it would be more beneficial, in certain cases, to consider this route rather than to send out letters of demand and issue summons against such company.
Any questions relating to this subject or any other subject relating to a commercial matter, may be referred to Lydia le Roux by sending an e-mail to email@example.com or by calling her on (012) 307 3270.