Facing liquidation? Early intervention could make all the difference

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In a recent interview, PJ Veldhuizen, managing director of specialist commercial law firm Gillan & Veldhuizen Inc, highlighted that liquidations remain prevalent in the post-Covid landscape. “In January 2024 alone, there was a 34.6% increase in business liquidations compared to the previous year, with the financing, insurance and real estate sectors hit the hardest.”

The liquidation process

Depending on the severity of the liquidity problem, the business may consider various legal options but liquidation is more often than not the next step. There are two types of liquidation:

Voluntary liquidation: This is a process driven by shareholders, typically when the business is no longer sustainable and chooses to call it a day. By initiating voluntary liquidation, the company can manage the winding down of operations in a controlled manner, under the supervision of a liquidator who is responsible for selling off assets to pay outstanding debts.

Compulsory liquidation: Initiated by creditors through a court order, compulsory liquidation occurs when creditors believe the company cannot fulfil its debt obligations. Although this type of liquidation is involuntary for the business, it provides creditors with a final legal remedy to recover funds.

The Master of the High Court appoints a liquidator in this process to gather the company’s assets and manage their sale, distributing the proceeds among creditors in terms of a general order of preference set out in the legislation (firstly secured creditors, secondly preferent creditors and lastly concurrent creditors).

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Creditors’ claims procedure

When a company enters liquidation, a series of creditor meetings allows creditors to submit and prove claims for any outstanding debts.

At the first meeting, creditors formally lodge their claims and, if accepted, vote to appoint a liquidator(s) to oversee the asset sale. Creditors are required to provide proof of debt, such as invoices or loan agreements, to substantiate their claims.

At the second meeting, the liquidator(s) presents an update on the liquidation’s progress, detailing any sale of assets and any initial fund distribution. Following claim validation, creditors are prioritised, with secured creditors (those holding collateral) being paid first.

Any remaining funds are then distributed to unsecured creditors, though in many cases, the available assets may be insufficient to fully satisfy all claims, meaning unsecured creditors may recover only a portion or none of their debts.

“Directors are required to attend any creditors meetings unless excused,’ states Veldhuizen.

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Business rescue alternative

For some companies, business rescue presents a potential way forward. This process, introduced by the Companies Act in 2011, allows companies facing financial hardship to restructure under the supervision of a business rescue practitioner, aiming to restore them to solvency.

Companies that enter business rescue early in their financial difficulties have a much stronger chance of restructuring, improving creditor returns and charting a path back to stability.

“Recent data indicates that 36% of companies undergoing business rescue successfully returned to profitability by implementing well-structured rescue plans, though this remains a viable option only for those who act quickly when financial difficulties arise,” notes Veldhuizen.

As the economic landscape remains challenging, directors must consider early intervention strategies to mitigate financial distress. Consulting a licensed business rescue practitioner or insolvency expert at the first signs of difficulty can help companies explore all possible avenues before resorting to liquidation.