Introduction
Liquidation is the process of winding up a company. This is done through the disposal of a company’s assets and use the proceeds to pay off its creditors. If there is any residue, which is usually not the case, such residue 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 if 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 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, recover them and takes control.
- Receipt of claims from creditors.
- Examination of creditors’ claims for purposes of accepting or rejecting them.
- Preparation of 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 with the approval of creditors and such approval having 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 in order 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.
- In fact, 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 give away prices, until there is nothing. Like 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 of the 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 offence 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 simple neglect.
- 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.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice. It is general and not specific to any entity or people.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/
