3 June 2009 by

To liquidate or not to liquidate? - this is the question

In times of economic crises, the tendency is to panic and look for a 'quick fix' and the easy way out of financial difficulties. Liquidation is viewed as one of those 'quick fixes' and attorneys are consulted on an urgent basis to bring about a winding up of a company to put the company and its directors 'out of their misery'.

Company directors should consider the consequences of an instruction to wind up a company before deciding on this course of action.

The winding up of a company is governed by, among others, the Insolvency Act 24 of 1936 and the Companies Act 61 of 1973 (as amended). Certain provisions of the Insolvency Act and Companies Act will impact on the winding up of a company and should be considered before directors decide to launch a winding up application.

The following provisions of the Companies Act should be considered:

  1. Section 424 provides that if the "business of the company was or is being carried on recklessly or with intent to defraud creditors of the company... or for any fraudulent purpose" the directors of the company can be held personally liable for its debts. Accordingly, directors of a company should consider the manner in which the business has been operated prior to winding up, ensuring that they will not fall foul of the provisions of Section 424 and expose themselves to personal liability for the debts of the company, which debts may be extensive.

    In many instances, shareholders of large private and/or public companies appoint non-executive directors to the board. Despite their non-executive capacity and even though they may not be actively involved in the business of the company in an executive capacity, those directors may be regarded as having appropriate knowledge of the manner in which the business has been operated and so expose themselves to personal liability for the debts of the company.
  1. One of the business tools liquidators use is an enquiry into the financial affairs of a company after it has been wound up. These financial enquiries are held in terms of Sections 417 and 418 of the Companies Act and directors are invariably subpoenaed to give evidence. Directors of a company should consider Section 415 of the Companies Act before proceeding with a winding up. A director subpoenaed to give evidence at the financial enquiry is bound by Section 415, which provides that: "no person interrogated under subsection (1) shall be entitled at such interrogation to refuse to answer any question upon the ground that the answer would tend to incriminate him or her...". Directors will only be able to object to questions on limited grounds such as that the questions are unrelated to the company affairs.

With these provisions in mind, while liquidation is a viable option in certain circumstances, it is a course of action that should only be taken once the consequences have been fully considered.

Burton Meyer
Director, Dispute Resolution: Litigation and Arbitration

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