Each liquidation and sequestration is different and administration periods vary greatly. The following procedures need to be followed in every estate (reference to a liquidation includes a sequestration and to a liquidator includes a trustee):
The provisional liquidation order is granted.
Requisitions are lodged by various potential liquidators, in terms whereof creditors nominated them to be appointed as such, within 48 hours of the granting of the provisional liquidation order.
The provisional appointment of the liquidators are made by The Master of the High Court. The provisional liquidators can only take charge after they have been issued with their certificate of appointment in accordance with the Master’s directives.
The Provisional Trustee must interview the insolvent to confirm that his personal details are correct and to determine exactly what the assets and liabilities are (if it was not set out in detail in the Application for Sequestration) and he must then take physical control or supervise the property and affairs of the estate until a Final Trustee is appointed.
The Provisional Trustee may not sell any assets without the authority of the Master or bring or defend legal proceedings without the authority of the Court.
The final order is granted.
The Master convenes the first meeting of creditors (except in the case of a Close Corporation where the liquidator is obligated to convene the first meeting of creditors). At this meeting of creditors the final liquidators are appointed and the creditors prove their claims.
The Master furnishes the liquidators with their final certificate of appointment.
The liquidators convene the second meeting of creditors within three (3) months of the Final Appointment.
The liquidators furnishes the creditors with a creditors report. The report will be sent by registered post, at least 10 days before the date of the Second Meeting, to all known creditors in the case of a sequestration (a person/trust). In the case of a liquidated Company or Close Corporation it will be made available on the website as soon as possible, but at the latest at the second meeting of creditors.
The second meeting of creditors takes place. Additional claims can be proven, liquidators’ report is accepted and the resolutions are adopted which gives the liquidators directions on, amongst other things, how to sell the assets in the estate. Interrogations can be held where the insolvent / trustees of a trust / directors of a company / members of a close corporation and other persons can be interrogated in order to find assets or more information that will assist the liquidator with the administration of the estate.
Preparations are made to sell the assets in the estate via auction, tender or private treaty and the assets are transferred to the respective purchasers. Outstanding debtors are collected.
After the sale of the assets and the collection of outstanding debtors, the liquidation and distribution account is drafted and submitted to the Master for any queries. Secured assets are reflected in Encumbered Asset Accounts, unsecured assets are reflected in a Free Residue Account, dividends awarded are reflected in a Distribution Account and if there is a contribution payable, it is reflected in a Contribution Account.
If the Master is satisfied with the account it can be advertised. The account will be advertised for a period of fourteen (14) calendar days in order for the public to inspect the account at the Master of the High Court or a specified Magistrate’s Court.
If no objections against the Account is received, or objections are dealt with by liquidators to the satisfaction of the Master, the Master confirms the account.
The Liquidator will proceed to pay all the dividends that were awarded to creditors and any expenses incurred during the administration of the estate by cheque or electronic fund transfer. He will also proceed to send notices to the creditors who are liable to pay contribution requesting payment of the contribution.
The liquidators provide the Master with proof that any contribution was recovered, all the funds were distributed to the creditors and that expenses were paid.
The Master releases the estate and discharges the liquidators from their duties
An uncomplicated liquidation takes on or about 10-12 months to complete. Many of the insolvent estates are more complicated and there will then be extra procedures followed. It might be necessary to draft more than one liquidation and distribution account, which will ultimately delay the finalization of the estate.
As a general rule a creditor, who wishes to share in the distribution of an insolvent estate, must prove a claim at any meeting of creditors therein to the satisfaction of the office presiding at such meeting. The only exception to this general rule is former employees of the insolvent company or person having claims for salary, wages, leave or holiday pay, payment in respect of any other form of paid absence, severance or retrenchment pay, as such claims can be accepted in terms of the Insolvency Act.
The creditor will have two opportunities to prove a claim, namely, at the first and second meetings of creditors. If the creditor did not prove a claim at either of these meetings he has a further opportunity to prove his claim at a special meeting of creditors which can be convened on his request but at his own expense.
A claim can be proved at any time before the final distribution of the estate. A creditor may delay proof of his claim whilst there exists a danger of a contribution being levied against creditors who prove claims.
The claim must be submitted by way of an affidavit, together with the documents supporting the claim, with the officer who is to preside at the meeting. A prescribed form is available under the “Documents” tab on this website.
There are two ways that you can prove your claim at these meetings of creditors:
We will not prove your claim, unless you specifically request us to do so, if there is a danger of contribution. The creditors should carefully consider his/her/its position before proving a claim against the estate due to the possibility of contribution. For more information regarding contribution you can view the “what is contribution” section on the FAQ page.
There are three essential elements to prove a successful claim:
Until the creditor has proven his claim he has no locus standing to challenge the trustee’s/ liquidator’s administration of the estate.
The creditor has no right to a dividend until the liquidator/trustees account is confirmed by the Master.
There are three types of creditors. Secured, Preferent and Concurrent creditors.
In terms of The Insolvency Act various particular claims enjoy a preference, which preference ranks in priority to that under any general notarial bond. These are Funeral and death-bed expenses and Payment of salary and wages of insolvent’s former employees.
The Insolvency Act and other statutes or enactment having the force of law may assign a preference to a particular claim or a right akin to a preference. These are the Workmen’s Compensation Commissioner and SARS (in terms of the Insolvency Act) and Municipalities (in terms of Section 118 of the Municipal Systems Act, Act 32 of 2000.
Concurrent claim – A claim which is neither secured nor preferent in terms of the Insolvency Act.
Employees are considered to be Preferent creditors. The employee’s preferent claim is limited to R32, 000 (made up as follows):
The balance of the employee’s claim is a concurrent claim.
All creditors are not equal when it comes to the distribution of dividends in the Insolvent estate.
The secured creditors will be paid first out of the proceeds from the sale of the property over which they hold security. If the secured creditor’s claim is paid in full, the remaining dividend will be brought over to the free residue account.
The free residue account is made up of all the proceeds from the sale of the unencumbered assets (no security was held over it) and the free residue from the encumbered assets. If all the costs of sequestration/liquidation are paid out of the free residue account, then the surplus free residue will be applied in the following order:
Concurrent creditors (trade creditors/ creditors who hold no security for their claims and the concurrent portion of employees claims.)
Any free residue of an insolvent estate shall first be applied to pay the funeral and deathbed expenses of a deceased insolvent where after it will be used to pay the Costs of Sequestration which are:
The costs of sequestration are different for secured creditors when it comes to encumbered assets. The following costs will be considered cost to which security are subjected:
In certain instances, the secured creditor who proved his claim against the estate can be held liable for all costs of sequestration/liquidation.
There is a contribution payable in an estate where there are not enough (or any) assets that were not financed (assets reflected in the Free Residue Account as mentioned above) to cover the administration expenses of the estate. This shortfall amount is payable in the form of a contribution by proved creditors in proportion to the amount of their proved claims.
Concurrent Creditors are always liable to pay contribution.
Secured Creditors are always liable to pay contribution, BUT ONLY on the concurrent portion of their claim in the event where they did not rely solely on their security (mortgage bond). In other words, a Secured Creditor has a secured claim based on the security, and a concurrent claim for the balance of their claim where the value of the asset was not enough to pay their claim in full. It is on this concurrent portion that he is always liable.
Where a Secured Creditor relied on his security and the concurrent portion of his claim was not proved, he is only liable to pay contribution in the event that no concurrent creditors proved any claims and where the Applicant for the Sequestration is not liable or unable to pay his share of the contribution.
Preferent Creditors are liable to pay contribution in proportion to their claims only after all concurrent creditors have paid their contribution and there is still a deficiency and in the event where no Concurrent Creditors proved any claims.
The Creditor who applied for your sequestration is liable for the payment of a proportionate share of the contribution, even if he did not prove a claim. Only in the event where the Application Creditor is a Secured or Preferent Creditor will he only be liable if no concurrent creditors proved any claims.
The creditors will receive their dividend (if any) when the Master confirms the liquidation and distribution account in terms whereof a dividend is awarded to the specified creditor.
The liquidation and distribution account must be submitted within six months from the date of final appointment. The liquidators can apply to the Master to postpone this period if they have valid reasons. It can take anything from a year, or possibly longer (or shorter) before any dividends are paid.
In terms of Section 128 (1)(b) of the Companies Act, Act 71 of 2008 Business Rescue means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for:
Alternatively, if the continuation of the business is not possible, the business rescue objective strives to achieve a better return for the company’s creditors or shareholders than if the company had to enter into liquidation.
In terms of Section 128 (1)(f) of the Companies Act, financially distressed means that:
When there are signs that a company is financially distressed, within the meaning of the Act as set above. The directors have to determine whether or not the company should continue operation or whether such operations would be reckless as contemplated in Section 22 of the Companies Act. Once the board of directors have established the company is financially distressed, they need to determine whether or not there is a reasonable possibility of rescuing the company. If they find that there is a reasonable possibility of rescuing the company, they can resolve that the company voluntarily begin business rescue proceedings and place the company under supervision. The Resolution as signed by the directors must be filed with the Companies and Intellectual Property Commission (herein after referred to as CIPC) and has no force or effect until it has been filed as such. Business Rescue proceedings commence on the date that the Resolutions are filed with CIPC.
A Resolution that a company voluntarily begins business rescue proceedings may not be adopted by the directors, if liquidation proceedings have been initiated by or against the company.
There are two main ways in which a company can be placed in Business Rescue namely:
Yes, an effected person may apply to court for an Order setting aside:
In terms of Section 132 (1) of the Companies Act, business rescue proceedings begin when
This is the plan developed and enacted during the Business Rescue procedure. It details how the Business Rescue Practitioner plans to rescue the financially distressed company, after consulting the creditors and other Affected Persons.
Section 150 of the Act provides a framework for what the Business Rescue plan should contain. The plan must detail how the Practitioner intends rescuing the company and contain everything that is necessary to convince creditors to approve the plan. The Business Rescue plan must contain, inter alia, the following:
Assumptions and conditions
A vote supported by the holders of more than 75 per cent of the creditors’ voting interests, as well as at least 50 per cent of the independent creditors’ voting interests will indicate a preliminary approval of the proposed Business Rescue plan [section 152(2)].
A Business Rescue Practitioner is a person appointed, or two or more persons jointly appointed, to oversee a company during Business Rescue.
Once a company commences Business Rescue proceedings voluntarily in terms of section 129 of the Act, the board must appoint a Business Rescue Practitioner within five business days after filing the relevant resolution with CIPC. Within two business days after the appointment, a notice of in respect of same must be filed with CIPC and each Affected Persons must be notified within five business days thereafter [section 129(4) of the Act].
If the court makes an order for Business Rescue proceedings to commence in terms of section 131(4)(a) of the Act, it “may” appoint an interim Business Rescue Practitioner nominated by the applicant. This appointment will, however, be subject to approval by the majority in value of the independent creditors at the first meeting of creditors.
Yes, in terms of section 139 of the Act, he/she can be removed either:
During Business Rescue, the directors continue to act, exercising management functions, but are subject to the Business Rescue Practitioner’s authority and direction. The directors are expected to attend to the Business Rescue Practitioner’s requests at all times and provide any reasonable requested information [section 142].
Any action by a director which would require the Business Rescue Practitioner’s approval and has not been obtained is void [section 137(4)].
In terms of section 137, the directors of the company:
Section 136 of the Act safeguards the interests of employees during Business Rescue. It provides that employees of the company will remain employed by the company on the same terms and conditions on which they were employed prior to the commencement of Business Rescue. The only valid changes to an employee’s employment contract are changes in the ordinary course of attrition, or if the employee and the company in accordance with applicable labour laws, agree to different terms and conditions of employment.
As ‘Affected Persons’ employees are involved and may actively participate in the proceedings and have the same rights and right to information as creditors.
An employee is considered a preferred unsecured creditor. Accordingly, any remuneration that becomes due and payable by a company to an employee during Business Rescue, will be regarded as “post-commencement finance” and will be paid in the order of preference as set out in Section 135(3)(a) of the Act.
Should retrenchments be unavoidable, then same will be subject to section 189 and 189A of the Labour Relations Act 66 of 1995 and other applicable related legislation.
As indicated above, the purpose of Business Rescue is to rehabilitate the financially distressed company and to rescue it by means of a plan that will help the company to turn its financial distressed position around and trade on a solvent basis again, with a better return for creditors than liquidation.
With liquidation on the other hand, the objective is to dispose of the assets of the company and apply the proceeds thereof to pay the creditors of the company in terms of a legal order of preference.
Business Rescue provides for the company’s debt to be managed and contracts to be restructured in order for the company to continue operating on a solvent basis, rather than selling off all of the company’s assets and the company being shut down as in the case of liquidation. Should Business Rescue be unsuccessful, the Business Rescue Practitioner may apply to court to have the company liquidated. The Business Rescue process is therefore a last resort to try and turn a company around before it has to close its doors for liquidation.
Not all companies are fit for business rescue. Depending on the particular circumstances of a company, liquidation will in fact be more beneficial to the shareholders and creditors. Sometimes the sale of the business to a purchaser would be faster and less expensive. Even a negotiation with creditors in terms of Section 155 of the Companies Act can in certain instances would be more suitable than business rescue.