The application for liquidation and sequestration processes are often confused. Many people think that they are the same. However, there is a big difference between the two.

What is Liquidation?

A simple way to describe liquidation is that liquidation is the winding up of a firm by selling off its free (un-pledged) assets to convert them into cash to pay the firm's unsecured creditors.

Before a liquidation application can be issued in court, a founding affidavit needs to be drafted. This affidavit will include all the details of the Applicant and / or Respondent.

The Applicant is the person who wants to liquidate the company and the Respondent is the company. In the case where the Applicant is the company, there will be no Respondent. The affidavit will also include any details of the company, employees and creditors.

A bond of security also needs to be signed for the purpose of the Master of the High Court.

Once the application is issued, the only people who receive this notice is the South African Revenue Services (SARS), the Master of the High Court, employees of the company and any trade unions.

As soon as this is done, a Master’s certificate is obtained verifying the application, and a provisional liquidation order is granted. A return date is then set, and all creditors are notified of the provisional liquidation through registered post and by placing the provisional order in two local newspapers.

Should the Applicant’s attorneys receive no notice of intention to defend the matter, a final liquidation order is granted. The order together with the application is sent to the Master of the High Court and a liquidator will be appointed.

What is Sequestration?

Sequestration is the preferred option for the individual who has exhausted all other options of resolution, and is now in a position where even if all their assets are sold, they would be left with such a high shortfall that it would be unreasonable to expect them to recover from this loss. A sequestration involves a little more administration work before a court date can be obtained.

Before the Notice of Motion and Founding Affidavit are drafted, a valuer needs to be appointed in order to value the Applicant or Respondent’s estate. This needs to be done in order to ascertain whether the debtor is indeed over-indebted, and whether he / she has enough assets to provide a benefit for all creditors involved.

In the matter of a voluntary sequestration, the Applicant will be the party whose estate is to be sequestrated. The valuer needs to value the property of the Applicant on a forced sale scale. This will be calculated by subtracting 20% of the actual value of the property.

As soon as the valuer has made an estimate for the Applicant / Respondent’s estate, a Statement of Debtor’s Affairs needs to be handed in to the Master of the High Court for inspection by all creditors. This needs to be done no less than 14 or more than 30 days before the court date. A Notice of Surrender needs to be sent through registered post to all creditors to inform them that the Statement of Debtor’s Affairs is available for inspection.

The Notice of Surrender needs to be posted in two local newspapers and the Government Gazette no less than 14, or more than 30 days before the court date.

Once all of the above-mentioned requirement has been adhered to, the notice of surrender can be annexed to the Founding Affidavit and can be heard by the court, no Bond of Security is needed at this point. Sequestration can only be heard by the High Court, whereas a liquidation can be heard either by a Magistrate’s Court or by the High Court, depending on the merits of the case.