Introduction
I have explained in my previous articles that liquidation involves the winding up of a company. In other words after the liquidation the business ceases to exist. In this article I deal with costs of liquidation and application of free liquidation funds or residue to pay costs and creditors.
Free residue
According to section 2 of the Insolvency Act (Chapter 6:07), “the Insolvency Act”, free residue in relation to an insolvent estate, means that portion of the estate (funds) which is not subject to any claim by a secured creditor.
Costs of liquidation
According to section 88 of the Insolvency Act the following constitute costs of liquidation:
- Sheriff’s costs incurred since liquidation.
- Fees payable to the Master.
- Legal costs for the application for liquidation.
- Costs for the preparation of a debtor’s statement of affairs.
- Remuneration of the liquidator.
- Any expenses incurred in carrying out the provisions of the Insolvency Act.
- The salary, wages or fees of any person who was employed or appointed by the liquidator in connection with the administration of the estate.
- Such costs incurred in the administration of a deceased estate as allowed by the Master of the High Court.
- All other costs of the administration and the liquidation of the estate of the debtor.
Application or payment from free residue or liquidation funds
This is regulated by section 89 of the Insolvency Act. There is a particular order which the free residue is applied as explained below. In summary, the free residue is used to pay the following:
- Costs of liquidation.
- Secured creditors, and if applicable interest thereon.
- Preferrent creditors, and if applicable interest thereon.
- Concurrent creditors, and if applicable interest thereon.
Liquidation costs
The costs of liquidation, already explained above, are first paid from the residue in terms of section 89(1) of the Insolvency Act.
Employee costs
In terms of section 89(2) the residue is then applied to pay salaries and wages, up to three months, or subject to set limits, leave or holiday, any severance or retrenchment pay, any contributions that were payable by the debtor or company.
No payment to director or member
In terms of section 89(8) a director of a liquidated company or member of a private business corporation, employed by the company, is not entitled to payment.
Interest on the above payments
According to section 89(11) interest is then payable on the costs above, section 89(1)-(9), at the rate of interest prescribed in terms of the Prescribed Rate of Interest Act (Chapter 8:10).
Taxes due
In terms of section 89(12) the residue is then applied to pay taxes due, which may include prior year taxes, capital gains tax, VAT and Income Tax.
Holders of bonds over movable assets
According to section 89(15) holders of general bonds over movable assets are then paid together with simple interest since the date of liquidation.
Concurrent creditors
According to section 89(16) the free residue or liquidation funds is then applied to pay concurrent claims of creditors proved against the estate in proportion to the amount of each claim. What this implies is that if total residue available is a certain percentage or fraction of the concurrent claims, then the amount paid to each concurrent creditors shall be that percentage or fraction of each claim, not the full claim.
Simple interest on current creditors
According to section 89(17) simple interest is then paid on concurrent claims, at the prescribed interest rate, unless the amount of the claim bears interest at a higher rate due to a lawful stipulation agreed upon in writing.
Payments to employees
According to section 89(19) an employee of the debtor or company being liquidated is entitled to payment in terms of section 89(2)(a) even though he or she has not proved a claim against the estate.
Conclusion
The free residue or liquidation funds are paid in certain order to discharge the liquidation obligations of the debtor or company being liquidated.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource Management Unit. He was recently appointed to sit on the Council of Estate Administrators in Zimbabwe. He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@hofisilaw.com or gohofisi@gmail.com. Visit www//:hofisilaw.com for more articles.
