How to wind up a business
No one starts a business intending to dissolve it. Entrepreneurs may hope the business venture will make them rich; or a business may be a way of ensuring financial stability in retirement (through selling the business). Or it may be a family business to be passed from one generation to the next. Whatever the reason for starting a business, the reason for its dissolution (winding up) is likely to be quite different. We look at some of the reasons for dissolution and the process you must go through to legally dissolve a business.
Reasons for winding up a business
Many businesses, both here in South Africa and around the world, were forced to shut their doors during the COVID-19 pandemic. This was an unforeseen, external event beyond anyone’s control. Fortunately, pandemics are infrequent occurrences. But businesses failed not due to the pandemic in a literal sense, but because the inability to trade during lockdown led to other issues. It was these issues, which are not limited to extraordinary conditions like COVID-19, that caused the demise of many companies. What are some of the reasons, positive as well as negative, that might lead to the dissolution of a business?
- Persistent financial difficulties, such as significant losses, cash flow problems, or insurmountable debt. Sadly, many businesses, especially those forced to close during COVID-19, like restaurants, experienced financial difficulties from which they never recovered.
- If a business is unable to generate sustainable profits over an extended period, the owners may choose to close it down due to lack of profitability. This would also have applied to businesses affected by COVID-19.
- Changing market dynamics, disruptive technologies, or shifts in consumer preferences may render a business model obsolete or unviable. Remember the neighbourhood video rental shop, or music stores selling CDs? Digital technology replaced the demand for CDs and DVDs in a very short period of time.
- The owner(s) may decide to retire, pursue other ventures, or address personal circumstances. They may sell the business, but some businesses are so closely linked to the identity of the owner that a sale is not possible.
- Internal conflicts or irreconcilable differences among business partners or shareholders can lead to the decision to dissolve the business.
- Non-compliance with legal and regulatory requirements, such as tax obligations, licensing, or industry-specific regulations, may result in the business being forced to close down.
- A business may choose to dissolve if it undergoes a significant strategic shift, such as merging with another company, restructuring, or divesting from certain business segments.
- In some cases, the dissolution of a business may be part of a planned succession strategy, where the business is wound down or transferred to new owners or family members.
The dissolution process
The dissolution of a company is governed by the Companies Act, 2008 and entails a company officially and formally closing down its business affairs. When a company wishes to cease trading and obliterate its existence, it must first dissolve itself and ensure that it is deregistered. However, before a company can be dissolved, the settlement of debts and the distribution of its assets must take place in an organised manner. This process is overseen by the Master of the High Court.
Dissolution is usually the result of liquidation, but solvent companies can also decide to close, for any of the reasons given above. Let’s look at those terms before we proceed.
Liquidation vs. solvent companies
Liquidation typically occurs when a company is unable to pay its debts and is insolvent. It involves the sale of assets to repay creditors. A solvent company may choose to wind up its affairs voluntarily, typically because it has achieved its objectives or the owners no longer wish to continue operating. Liquidation may be initiated through a court process or by the creditors of the company, seeking to recover their debts. The decision to liquidate is often made by the court or external parties. By contrast, when a solvent company goes into dissolution, the decision is made by the company’s shareholders or directors, who pass a resolution to wind up the company. Liquidation involves compliance with specific legal requirements for winding up an insolvent company. It is subject to insolvency laws and regulations. Winding up of a solvent company also has legal requirements but is generally simpler and more straightforward as there is no insolvency involved.
When it comes to solvent companies, the Companies Act makes a distinction between voluntary winding up and winding up by the Court.
Voluntary winding up:
If business owners decide to dissolve the company, they must do so collectively. The company must adopt a special resolution, which may provide for the winding up either by the company or by its creditors. This resolution must be filed with the Companies and Intellectual Property Commission (CIPC or “the Commission”) with the prescribed notice (CoR 40.1) and the filing fee.
The company must then set security with the Master of the High Court for the payment of the company’s debts within no more than 12 months after the start of the winding up. Alternatively, it must obtain the consent of the Master to dispense with security, which may only be done if the company has submitted the following:
- An affidavit by a Director stating that the company has no debts
- A certificate by the company’s auditor, stating that to the best of their knowledge and belief and according to the financial records, the company appears to have no debts
The effect of voluntary winding up is that that company remains a juristic person, but must stop trading, except to wind up its affairs.
Winding up by the court
Winding up by the court is initiated by an application to the court by the company. The application is made on affidavit under oath in the court having jurisdiction in the area where the company has its registered address. A company may apply for winding up on the following grounds:
- The company has resolved by special resolution to be wound up by the court
- The company wants to have its voluntary winding up continued by the court
Creditors may apply for winding up on the following grounds:
- The company’s business rescue proceedings have ended through the practitioner filing a termination notice or if a plan was rejected and no further action was taken
- It is otherwise just and equitable
The company, a Director and a shareholder may apply on the following grounds:
- The directors are deadlocked in the management of the company, and the shareholders are unable to break the deadlock and irreparable injury to the company is resulting, or may result, from the deadlock
- The company’s business cannot be conducted to the advantage of shareholders generally, as a result of the deadlock
- The shareholders are deadlocked in voting power, and have failed for a period that includes at least two consecutive annual general meeting dates to elect successors to directors whose terms have expired
- It is otherwise just and equitable for the company to be wound up
Shareholders may apply, with leave of the court, for an order to wind up the company on the grounds that:
- The directors, prescribed officers or other persons in control of the company are acting in a manner that is fraudulent or otherwise illegal
- The company’s assets are being misapplied or wasted
The Commission may apply to the court for an order to wind up the company on the grounds that:
- The company, its directors or prescribed officers or other persons in control of the company are acting or have acted in a manner that is fraudulent or otherwise illegal
- The Commission has issued a compliance notice in respect of that conduct, and the company has failed to comply with that compliance notice
- Within the previous five years, enforcement procedures in terms of the Companies Act or the Close Corporations Act, 1984 (Act No. 69 of 1984) were taken against the company for the same conduct, resulting in an administrative fine, or conviction for an offence
Once an order is granted, the Master will appoint a liquidator. The liquidator will then attend to the administration of the estate, which includes the process of liquidating the assets of the company and distributing the proceeds to the relevant stakeholders.
When the company has been wound up and a court order of final liquidation made, the commencement of the winding-up is backdated to the date of application to the court. Where liquidation commences by way of resolution, winding-up starts when the resolution is registered with the CIPC. The Master must promptly file a certificate stating that the company has been wound up, together with a copy of the court order. Once the CIPC receives the certificate, the CIPC must:
- Record the dissolution of the company in the prescribed manner
- Remove the company’s name from the companies register
Voiding a dissolution
A company or close corporation is dissolved as of the date its name is removed from the companies or close corporation register. The removal of a company or close corporation’s name does not affect the liability of any former director or shareholder or any other person in respect of any act or omission that took place before the close corporation was removed from the register. At any time after a company or close corporation has been dissolved, the liquidator or other person with an interest may apply to a court for an order declaring the dissolution to have been void. If the court declares the dissolution to have been void, any proceedings may be taken against the company or close corporation as might have been taken if the company close corporation had not been dissolved. The legal personality is only terminated once the entity is “dissolved”.
Help with your business
If you need to dissolve your business, it’s a good idea to consult a legal professional. SD Law can help you through the dissolution process. We can also help with ongoing aspects of running your business, such as due diligence, choosing a legal structure, and incorporation. Contact Simon on 086 099 5146 or email email@example.com to arrange a preliminary discussion.
- Which legal structure is right for your business start-up?
- Incorporation – what are the benefits?
- Due diligence – why it matters
- Insolvency and bankruptcy law
The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.