13 October 2021 by Business Rescue, Restructuring & Insolvency Newsletter

It could take a long time for a liquidator to pay your claim

Imagine you receive that dreaded telephone call or email: your biggest customer is insolvent and has just gone into liquidation. The customer owes your company millions of rands, which the financial manager promised would be paid “during the next pay run, later this month”. Now that the customer is in liquidation, and once a liquidator has been appointed, your company has to submit a claim to the liquidator. How long will it take for the liquidator to pay your claim? The short answer is “it depends”.

The liquidation process can take years before payments are made to creditors. The amount eventually paid to a creditor will depend on a number of factors, such as: whether or not the creditor’s claim is secured; the value of assets of the insolvent company in relation to its total liabilities; and the number of creditors the insolvent company owes money to.

In most instances, banks’ claims are secured by mortgage bonds or other forms of security – hence the banks are likely to be paid the full value, or close to the full value, of their claims. The remaining creditors are likely to be paid a portion of their claims, usually referred to as a “dividend” expressed as “cents in the rand”. The higher the liabilities of the insolvent company, the lower the cents in the rand. The liquidator has the task of determining these cents in the rand.

The liquidator’s primary function is to take possession of the insolvent company’s assets, sell them and pay creditors in accordance with their ranking. However, before the liquidator pays creditors, the liquidator must prepare a liquidation and distribution account (often referred to as the “L&D”). Three key milestones must be reached after the liquidator has prepared the L&D, before the liquidator can pay creditors.

Firstly, the liquidator must submit the L&D to the Master of the High Court. Theoretically, the liquidator must submit the L&D within six months of the liquidator’s appointment. In reality, it may be longer than six months before the liquidator even starts preparing the L&D. The liquidator may submit the first, second, third (or more) L&Ds to the Master before submitting the final L&D. There may be more assets which the liquidator is collecting or there may be more creditors submitting claims to the liquidator – hence the submission of more than one L&D.

Secondly, the Master must examine and approve the final L&D. When doing so, the Master must check if the L&D is legally compliant and if its entries correspond with, among other things, the creditors’ claims. Once the Master has approved it, the L&D must lie for inspection at the Master’s office and a local Magistrate’s Court, for 14 days. This is to allow creditors to check the L&D and its entries in relation to their claims. There may be, as there often are, objections against the L&D. The Master must deal with all these objections and in some instances, these objections may lead to litigation before the L&D is finalised.

Thirdly, and once all objections have been dealt with, the Master may confirm the L&D. It is only on confirmation of the L&D that the liquidator may start paying creditors. The long-standing principle, as emphasised in Educated Risk Investment v The Master (18358/2020) [2021] ZAJHC (29 September 2021), is that once the liquidator starts paying creditors in terms of a confirmed L&D, that L&D is final and may not be reopened.

Before pursuing liquidation as an option, creditors would be best advised to consider how long it will take to recover the amount owing by the debtor and the actual amount which they may receive when the liquidator starts paying. It could be a long time before the liquidator pays.

download PDF

The information and material published on this website is provided for general purposes only and does not constitute legal advice.

We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter.

We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages.

Please refer to the full terms and conditions on the website.

Copyright © 2021 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us cliffedekkerhofmeyr@cdhlegal.com

You may also be interested in