A Practical Guide for Business Owners and Leaders
In the dynamic world of business, financial stability can sometimes be precarious. Economic downturns, mismanagement, market disruption, or unforeseen circumstances can bring even the most promising companies face-to-face with insolvency and, ultimately, liquidation. This article aims to provide a comprehensive understanding of liquidation, practical strategies to help businesses avoid it, and guidance on navigating the complexities of insolvency should it occur.
Liquidation is a real risk for every South African company. According to Stats SA, South Africa has seen a total of 623 liquidations for the period of January 2025 to May 2025. According to the group, in 2024, a total of 1551 companies were liquidated, and in 2023, a total of 1657 companies met their ends due to liquidation. These figures, at least at face value, underpin the risk that everyday businesses have. The purpose of this article is to shed some light on the shadow of insolvency and to assist businesses to better understand liquidation.
What is liquidation?
Liquidation is the legal process of bringing a limited company or a close corporation to an end. A liquidator is appointed to take control of the insolvent company, with the mission of distributing the insolvent company’s assets among its creditors. Once liquidation is initiated, the company ceases trading, and its assets are marshalled and sold off, often at a discount, to pay off creditors. Any remaining funds, after paying debts and administrative costs, are returned to shareholders, and the company is removed from the Register of Companies. The process signals the formal closure of a company.
There are two main types of liquidation: voluntary and compulsory.
- Voluntary Liquidation: Initiated by the company’s shareholders, usually when the company cannot pay its debts (insolvent liquidation) or, less commonly, when a solvent company wishes to close its operations (members’ voluntary liquidation).
- Compulsory Liquidation: Forced by the courts, often following a creditor’s petition due to unpaid debts or other legal claims.
Why Do Companies Face Liquidation?
Companies may be pushed toward liquidation for a variety of reasons, which includes
- Poor cash flow management: Cash flow is an essential component for the financial health of every company. A company with a larger asset register may still “go under” if there is insufficient cash flow to pay overheads and creditors.
- Over-leveraging and high debt levels: Companies can minimise tax by leveraging the company’s debts. This is called the tax shield; however, the company can still become overleveraged. Over-leveraging creates financial distress in companies in that it limits cash flow and degrades the value of the company, amongst other things. Too much debt is a bad thing.
- Falling demand or market shifts: In an increasingly evolving society, companies encounter market shifts and decreases in demand at an ever-increasing rate. This creates an “evolve or die” mentality towards the delivery of goods and services in many sectors, and companies must traverse these carefully.
- Operational inefficiencies: Operational inefficiencies can have an adverse effect on a company’s wellbeing. Operational inefficiencies, in a nutshell, occur where input costs are high in the production of goods or services compared to the output of the company.
- Growing legal actions or disputes against the company: Legal disputes against a company go hand in hand with the company’s ability to repay its creditors and to honour contracts with other persons and entities. Legal disputes are often only the consequence of other monetary and/or procedural problems and are often a good indicator of a company’s increasing risk of insolvency.
- Economic crises or unexpected disasters: These factors are predominantly external in nature. Good examples hereof are COVID-19 or the ensuing tariff war. Nonetheless, it is important for the company to have contingent processes in place to best absorb external conundrums when they occur.
- While some factors are external and beyond immediate control, many causes of liquidation can be anticipated or mitigated with proactive management.
How to Avoid Liquidation: Proactive Strategies
Prevention is often the best cure. Here are several key strategies businesses can employ to reduce the risk of liquidation:
1. Robust Financial Management
Effective cash flow management is critical. Maintain clear records, regularly review budgets and forecasts, and ensure prompt invoicing and debt collection. Identifying cash flow bottlenecks early allows for swift action, such as renegotiating payment terms with creditors or seeking short-term financing.
2. Monitor and Manage Debt
Avoid excessive borrowing. Establish clear policies for taking on new debts and ensure repayment plans are realistic. Where necessary, negotiate with lenders for better rates or restructuring to ease repayment burdens.
3. Diversify Revenue Streams
Relying on a small number of clients or a single market can expose a business to significant risk. Diversify your products, services, or client base to create multiple revenue streams. This can help buffer the company against market fluctuations or the loss of a major client. Furthermore, keep up to date with the latest innovations in the company’s relevant market, thereby ensuring that the company remains competitive in an ever-changing world.
4. Cost Control and Efficiency
Regularly review operational expenditures and identify areas for efficiency gains. Eliminate unnecessary spending and invest in technology or processes that improve productivity.
5. Strategic Planning and Risk Assessment
Develop a long-term business plan that addresses potential risks. Conduct regular SWOT (Strengths, Weaknesses, Opportunities, Threats) analyses and scenario planning to be better prepared for unexpected developments.
6. Seek Professional Advice Early
Engage with accountants, financial advisors, or legal professionals at the first sign of trouble. Early consultation can provide fresh perspectives and open the door to restructuring, refinancing, or turnaround strategies.
Recognising the Warning Signs of Insolvency
Early detection of financial distress is crucial. Key indicators include:
- Consistent inability to pay suppliers or staff on time
- Overdue taxes or mounting legal actions
- Maxed-out credit lines and increasing reliance on short-term financing
- Declining sales or gross profits
- Worsening creditor relations and pressure from debt collectors
If any of these signs appear, immediate action is required to assess the severity and develop a plan.
Navigating Insolvency: What Steps to Take
If your company is facing insolvency—where liabilities exceed assets or you cannot pay debts as they fall due—it’s vital to act quickly and responsibly.
1. Always seek professional help and proper legal and financial advice
Often, an unhealthy business can be treated with minimal changes in order for it to avoid being liquidated. When signs of strife in the business appear, it is imperative to approach a legal professional, a financial advisor or an accountant. As a precaution, it is advisable for any business to have an existing and continuing professional relationship with legal and financial professionals. Professionals who know the ins and outs of the business.
2. Assess the Situation Objectively
Gather accurate, up-to-date information on your company’s financial position. Prepare cash flow projections, and review contracts, outstanding invoices, and obligations.
3. Open Communication with Stakeholders
Maintaining transparent dialogue with creditors, employees, customers, and investors, honesty helps to build trust and may buy your business valuable time to find a solution or negotiate terms.
4. Explore Restructuring Options
Consider formal and informal restructuring options, such as:
- Creditor arrangements or repayment plans
- Seeking additional investment or asset sales
- Operational restructuring to streamline or pivot the business
- Enter into company voluntary arrangements (CVAs) with creditors, which provide breathing space from creditors and a chance to implement turnaround plans.
- Where the company is truly in trouble, the company can consider entering into business rescue. This is a process where companies come under the control of a business rescue practitioner who, in their official capacity, proposes a business rescue plan to the creditors, who can accept.
5. Seek Professional Insolvency Advice
Consult an insolvency legal practitioner. They can provide legal guidance, help assess the viability of recovery, and recommend the best course of action.
6. Protect Directors and Officers
Directors have a duty to act in the best interests of creditors when insolvency is looming. Avoid incurring further debt, and ensure no assets are improperly transferred or sold at undervalue. Failing to do so may result in personal liability.
7. Consider Formal Insolvency Procedures
If survival is not possible, formal procedures such as administration, liquidation, or receivership may be necessary. The appointed professional will handle asset sales, creditor claims, and final company closure.
What Happens During Liquidation?
Once liquidation is initiated:
- All trading ceases immediately.
- A liquidator is appointed to take control of the company.
- Assets are valued and sold.
- Proceeds are distributed according to a legal hierarchy—secured creditors, employees, unsecured creditors, and, if anything remains, shareholders.
- The company is formally dissolved at the end of the process.
It’s important to note that, in most cases, not all creditors will be paid in full, and shareholders often receive nothing.
Conclusion
Liquidation can be daunting, but it is not always the end of the road for those involved. With robust management, early intervention, and open communication, many companies can avoid the fate of insolvency. If it becomes unavoidable, approaching the process with transparency, professionalism, and the right guidance can help mitigate losses and pave the way for new beginnings. Ultimately, understanding the causes, warning signs, and remedies of insolvency equips business leaders to better safeguard the longevity and vitality of their enterprises.
For more information on liquidation and insolvency, feel free to contact us on our website (compionvanzyl.com) or pop us an email at info@compionvanzyl.com.
