Liquidation is a legal process in which a liquidator is appointed to ‘wind up’ the affairs of a company or close corporation. At the end of the process, the company ceases to exist. Liquidation does not mean that the creditors of the company will get paid. The purpose of liquidation is to ensure that all the company’s affairs have been dealt with properly.
Ensuring all company contracts (including employee contracts) are completed transferred or otherwise brought to an end
Ceasing the company’s business
Settling any legal disputes
Selling any assets
Collection of money owed to the company
Distributing any funds to creditors and returning share capital to the shareholders (any surplus after repayment of all debts and share capital can be distributed to shareholders)
When to voluntarily liquidate a close corporation or company
A person or business entity whose liabilities exceed their assets is usually described as being insolvent. However, the legal test for insolvency is whether the debtor is able to pay its debts as and when they are due.
A company and close corporation are legal entities separate from their shareholders/directors or members. This means that, in the event of a liquidation, unless the shareholders/directors or members have put up personal security or signed personal surety ships, they will not be personally liable for the debts of the business.
The usual route for liquidation is by way of a court application, but this can be timely and expensive. In the case of 75% of the shareholders of a company, or all the members of a close corporation, agreeing that the business should be liquidated, there is the option of a creditors’ voluntary liquidation. This route allows for a quicker, less costly and less messy means of voluntarily liquidating a company or close corporation.