The Distinguishing between Liquidations and Sequestrations

The last few years, we have read and heard many times about businesses going into liquidation. As a country that is trying to build entrepreneurs and small businesses, it is important that we educate ourselves so that we don’t have many of the businesses going into liquidation.

It is a process whereby a company established in terms of the Companies Act or close corporations Act experiences financial difficulties which results in the company’s liabilities exceeding its assets. A company is placed under liquidation through a special resolution by the directors or court application by one or more of its creditors. As soon as the company is placed under liquidation, the assets in the estate vests with the Master of the High Court until a liquidator is appointed to take over the liquidated company and to look after the interest of creditors involved.

The employees of the liquidated company also form part of creditors and they have a preferment claim against the liquidated company. The liquidator will then release the assets and distribute the proceeds amongst various creditors in order of their ranking.

The ranking of creditors is as follows:

Secured creditors: creditors who rely on the security of the assets, for example, a mortgage bond registered in favor of a bank.

Preferment creditors: the employees of the liquidated company and SARS.

Unsecured creditors:  creditors who have no security on their debt to the liquidated company. An example here is personal loans. As an employee, it is important that you know your rights and where and when you can claim. The Liquidators will communicate with all creditors in the process.

SEQUESTRATIONS

The difference between liquidations and sequestrations is that liquidations have to do with companies whereas sequestrations have to do with individuals. It is a process where a person’s liabilities exceed their assets. The person can either be sequestrated voluntarily by applying to the High Court through his legal representative. This is mostly done by celebrities. Some of the most known celebrities have been Toni Braxton, 50 cents and even Donald Trump. Also, one or more of the creditors can apply to court for his sequestration.

As soon as the sequestration is final, a court order will be issued and his assets will vest with the Master, who will then appoint a trustee. The trustee will then release the assets of the insolvent and distribute the proceeds amongst the creditors. The creditors in insolvency are ranked the same as in liquidations. It is always possible to bounce back from sequestration but one will always have to declare that they have once been insolvent. It is important to keep your individual or business finances in order so that you avoid sequestration or liquidation.