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What to do when a company owes you money: Involuntary Liquidation

Litigation or Liquidation? – That is the question of the predicament. File Image: IOL

Litigation or Liquidation? – That is the question of the predicament. File Image: IOL

Published Aug 2, 2022

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By Yasmina Poundja Griesel

If you find yourself in the difficult position where your debtor (being a company) owes you a sum of money which they are unable, or alternatively refusing to pay you, and it reaches a point that you need seek legal recourse, you will ultimately come to the question of what approach you should adopt in order to recover what is owed to you: Litigation or Liquidation? – That is the question of the predicament.

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Often times creditors write off their debtor’s account simply because the litigation process can be time consuming, unpredictable and in some cases, it will cost more than the value of the debt.

The liquidation process may be ideal if you are interested in recovering your money without the costs, duration and the non-guarantee of a successful outcome because it effectively forces the debtor company to come show up, failing which they face the threat of being liquidated and not being able to continue to trade.

Why is this an effective approach? Simply put, if a company cannot pay its debts when they fall due, it subjects itself to the possibility of being liquidated.

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What is the liquidation process?

By way of background, liquidating or winding-up a company is an exercise by which a company’s assets are auctioned or sold pay costs and expenses incurred in the winding up process, and where the remaining funds are used to settle its creditors (in order of preferences).

There are different legislations that pertain to winding up a company that is solvent and one that is insolvent: that is because the process relating to a solvent company is regulated by the Companies Act 71 of 2008, while the processes for an insolvent company will be regulated by the Insolvency Act 24 of 1936 and the Companies Act 61 of 1973. The latter process will apply for the purposes of recovering your money, where the debtor company is unable to pay you.

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Sections 334 and 335 of the Companies Act 61 of 1973 allows for a creditor of a company to apply to the Court for an order to liquidate a company in the circumstances where “a company is unable to pay its debts as described in section 345”, from which it follows that if you are a creditor of a company who owes you R100.00 or more, you can instruct your attorney to send you to send the debtor company a section 345 letter of demand.

It would then be in the interest of the debtor company to respond within 3 weeks, failing which you (the creditor) would be entitled to approach a court and apply for an order and the creditor company will be given an opportunity to oppose that application and possibly incur legal fees in that regard.

While this option may be a viable route for creditors, it must be kept in mind that the liquidation process, if carried through, will favour preferred creditors and that the first payments made will first cover the costs of the liquidation process. Therefore, it is advisable that you consult with an attorney before deciding on proceeding further with the liquidation process as a means to recover any monies owing and payable to you from a debtor company.

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Yasmina Poundja Griesel is a Candidate Attorney at SchoemanLaw Inc

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