Liquidation a useful tool
NOT EASY: AN ENTREPRENEUR’S NIGHTMARE
But once the process is finalised there is an opportunity to move on, free and clear of debt.
Filing for bankruptcy must be an entrepreneur’s worst nightmare because it not only represents a business’ inability to meet its financial obligations but, more painfully, it represents one’s failed attempt at entrepreneurship.
It is a hard pill to swallow, but when the business is no longer solvent entrepreneurs must make use of a tool that resolves all matters legally and fairly.
The term “bankrupt” has many connotations and applies to both businesses and individuals.
In respect to a business the term “liquidation” is preferably used in South Africa.
According to the Companies and Intellectual Property Commission (CIPC), liquidation implies that a business is unable to pay its debts and ceases to operate due to its financial problems.
Additionally the CIPC notes that liquidation may come about due to a legal court order or by request from creditors.
The company may voluntarily decide to liquidate – this is better known as voluntary winding up. This, however, is a rarity.
In any case, when financial liquidation occurs all trading immediately ceases whilst company assets are sold off in order
‘Liquidation’ is preferred to ‘bankrupt’ in business.
to repay creditors.
There are a few key points to note in regards to a financial liquidation.
No more debts. Once liquidation has been executed and the sale of assets distributed to creditors, any remaining debt will be written off, allowing you to move on to other ventures debt free. However, writing off debt is contingent on you not having given personal guarantee on any credit the business undertook. If you did, the insolvency practitioner can come after your personal assets to recoup whatever amounts are still outstanding.
No more legal action. Liquidation ends all legal action against the business, removing the burden and stress of court proceedings. Leasing agreements terminated. Leases are usually difficult to get out of, but in the event of a liquidation, all leases are terminated without penalties or further payments.
Stakeholders before shareholders. A rarity occurs in liquidation in that creditors, employees and even the tax authorities are prioritised before shareholders. That means as a shareholder you will only recoup your investment after all company financial obligations have been settled.
Nonetheless, filing for liquidation is a useful tool that can help salvage your entrepreneurial career, allowing you to start over in a different venture.
However, if throwing in the towel is not your way of doing business, then there are other options that can allow you to live to fight another day, such as business rescue, which we shall discuss next week.
Munya Duvera is CEO at Duvera Elgroup