Liquidation and its advantages to creditors

Introduction

Liquidation is the process of winding up a company.

It involves disposing of its assets and using the proceeds to pay off its creditors. If there is any residue, which is usually not the case, it is then distributed to the company’s shareholders.

In Zimbabwe liquidation is done in terms of the Insolvency Act (Chapter 6:07), hereinafter called “the Insolvency Act”.

Voluntary versus involuntary liquidation

Liquidation can be voluntary or involuntary as explained below.

Voluntary liquidation

The voluntary liquidation of an insolvent company is done in terms of section 9 of the Insolvency Act. A company is insolvent if it fails to pay its creditors or its liabilities exceed its assets.

In the case of voluntary liquidation, the members or shareholders of a company pass a resolution to liquidate the company voluntarily.

Involuntary liquidation

In the case of involuntary liquidation, which is done in terms of section 6 of the Insolvency Act, a creditor who has a liquidated claim may apply to the Court for the liquidation of the insolvent company.

Liquidation process

The following are some of the key issues dealt with during the liquidation process:

The liquidator investigates the company’s assets, recovers them and takes control

Receipt of claims from creditors.

Examination of creditors’ claims for purposes of accepting or rejecting them

Prepare the liquidation and distribution account

Approval by creditors of the liquidation and distribution account

Authorised disposal of the assets

Payment of creditors’ claims

Advantages of liquidation

Some of the main advantages of liquidation are explained below:

Liquidation results in an orderly winding up or closure of the business. The liquidation will be done in terms of the law and creditors treated in terms of the law, particularly in terms of their ranking.

If an insolvent company is not liquidated, particularly voluntarily, the company’s creditors will continue to sue the company and cause the company’s assets to be sold until all valuable assets are lost.

In terms of section 20 of the Insolvency Act, liquidation has the effect of staying all civil proceedings by or against the company. This allows creditors to be dealt with at the same time, in a transparent way.

Where there is no legal protection and each creditor sues as it sees fit, it will be a wildlife affair where the fittest will benefit the most.

The liquidator disposes of a company’s assets after getting approval from creditors and such approval has been secured through a creditors’ meeting.

The liquidation is handled by qualified professionals who are registered and are in good standing.

The liquidator is an independent and neutral person whose main duty is to realise the most from the company assets to pay the company creditors as much as possible.

If voluntary liquidation is not embarked on, an aggrieved creditor can mount a court application for involuntary liquidation.

If a company is not wound up through liquidation, its aggrieved creditors will sue it and cause its assets to be sold, at times at giveaway prices, until there is nothing. As I explained above, it will be a wildlife affair.

Disadvantages of liquidation

By its nature, liquidation results in the closure of the company. The company’s undertaker will have done his or her job.

Where a company’s liabilities exceed its assets, some creditors may not be paid in full or at all.

Employees will be made redundant.

Consequences of not liquidating the company

Some of the consequences of not liquidating an insolvent company, particularly through voluntary liquidation are as follows:

Insolvent trading of a company is an offense in terms of section 118 of the Insolvency Act.

There is no legal protection from creditors. As a result, some creditors will take legal action and cause the company’s assets to be sold.

The directors can resign.

The company can simply be abandoned until all the valuable assets are sold or lost to creditors or simply neglected

The company will be wound up in a disorderly manner

Conclusion

There can be advantages to creditors if a company is liquidated. If an insolvent company is not liquidated it will be at the mercy of its creditors who may cause its assets to be sold.

-herald