Liquidation v Judicial Management – How and Why?

Liquidation

Liquidation is the process by which a company is brought to an end, and its assets are redistributed. It is also referred to as winding up or dissolution. A company may be liquidated either voluntarily or by court order.[1]

• Compulsory Liquidation

Compulsory liquidation occurs when a company is ordered to be wound up by the court. This can be initiated by the company itself, a creditor, a shareholder, or the Registrar of Companies along with the Minister of Trade and Industry.[2] Section 369 of the Companies Act outlines instances where the court may order a company to be wound up, including:

• • A special resolution passed by the company for liquidation.
  • Inability to pay debts.
  • Persistent or serious non-compliance with the Act.
  • Failure to comply with Section 19(1).
  • An external company being dissolved in its country of incorporation or ceasing operations.
  • If the court deems it just and equitable to wind up the company.[3]

A winding-up order benefits all creditors and shareholders as though they had jointly petitioned for it. Once a final winding-up order is issued, the Master of the High Court must appoint a liquidator under Section 382 of the Companies Act. The liquidator has the authority to:

• • Execute documents in the company’s name.
  • File claims in estates of debtors and receive payments.
  • Issue and endorse financial instruments under specified conditions.
  • Convene general meetings of stakeholders.
  • Take protective measures for company assets, akin to an insolvent estate trustee.[4]

Once all affairs are concluded, the court orders the company’s dissolution upon application by the Master of the High Court.[5]

• Voluntary Liquidation

A company may be liquidated voluntarily if:[6]

• • A condition in its constitution requiring dissolution is met.
  • A special resolution is passed to wind up the company.

A resolution to wind up must be advertised in the Gazette and notified to the Master, Registrar, and Registrar of Deeds (if the company holds immovable property or mineral interests in Botswana) within 14 days.[7]

Before initiating voluntary liquidation, directors may provide security for debt payments within 12 months, as per Section 409(1). If such security is given, it is termed a ‘members’ voluntary liquidation’; otherwise, it is a ‘creditors’ voluntary liquidation.’[8]

In a members’ voluntary liquidation, the company appoints a liquidator.[9] In a creditors’ voluntary liquidation, a creditors’ meeting is convened and advertised at least seven days prior. Creditors appoint a liquidator to wind up affairs and distribute assets.[10]

Judicial Case Management

Judicial case management applies when a company cannot pay its debts due to mismanagement. Instead of liquidation, the court appoints a judicial manager to oversee operations under its supervision, aiming to restore business viability.

A company may be placed under judicial management if:

• A liquidation application is submitted, but the court sees a chance for recovery and defers liquidation.[11]
• A member or creditor applies, and the court deems judicial management beneficial for the company’s interests.[12]

The judicial manager, appointed similarly to a liquidator under Section 474 of the Companies Act, has the following responsibilities[13]:

1. Recover and manage all company assets.
2. Conduct management efficiently for the benefit of stakeholders, per court orders.
3. Comply with judicial management directives.
4. Submit a copy of the Master’s appointment letter to the Registrar within 14 days.
5. Provide the Registrar with an annual return per Section 217.

The court may cancel a judicial management order if its purpose has been achieved or if continuation is deemed undesirable. Once cancelled, the judicial manager ceases control over the company.[14]

Conclusion

The choice between liquidation and judicial case management depends on the financial status and prospects of the company. Compulsory liquidation is necessary when a company is unable to meet its obligations and no viable recovery plan exists. Voluntary liquidation is suitable when the company and its stakeholders agree to dissolve the business in an orderly manner. Judicial management is preferred when there is a reasonable chance of restoring the company to financial stability. Businesses should carefully assess their situation and seek legal guidance to determine the most appropriate course of action.

Would you like to listen to a short podcast about this article?

Play Here

[1] Section 364 of the Companies Act

[2] Section 370 of the Companies Act

[3] Section 369 of the Companies Act

[4] Section 382 of the Companies Act

[5] Section 399 of the Companies Act

[6] Section 405 (1)of the Companies Act

[7] Section 406(1) of the Companies Act

[8] Section 309 (1) of the Companies Act

[9] Section 411 of the Companies Act

[10] Section 415 (1) of the Companies Act

[11] Section 471 (1) of the Companies Act

[12] Section 471 (2) of the Companies Act

[13] Section 474 of the Companies Act

[14] Section 477 (a) of the Companies Act