Liquidations in Lesotho

Lesotho has faced extraordinary and unprecedented times due to the COVID-19 pandemic.  The lock down has contributed to businesses seizing to operate or trade. These lingering economic effects will be felt for years to come.  Companies around the world have thus opted for the liquidation process due to insolvency. Insolvency essentially means that a business reaches a point where it is not able to make necessary payments when they are due. Choosing liquidation converts the business assets to cash, which is then used to make these payments.

So what are liquidations exactly?

Liquidation is a process used by financially distressed companies in order to close a business and sell its assets in order to pay its debts for the benefit of its creditors. A liquidation in Lesotho however, is initiated by way of an application to the High Court (Commercial Division) of Lesotho which will be brought by either the Registrar of Companies, the company itself (acting through its board of directors), a shareholder, any director or creditor of the company. A company will be regarded as insolvent if the company is unable to pay its debts or if 75% of the issued share capital has been lost. After an order is granted by the High Court, the court plays no further role in the liquidation process and the Master of the High Court takes over the process.

Section 125 of the Companies Act of 2011 sets out the procedure to be followed. The company through its board of directors should pass an ordinary resolution for an application to be brought to court. In terms of section 125(4) of the Act, the liquidation process commences on the date on which the court makes an order to place the company in liquidation and the duration thereof depends on the magnitude of the company and the extent of the creditors.  This process usually takes about a year to complete.

It must be noted that Lesotho does not have financial distress procedures, such as business rescue practices in place, it does however, have a judicial management system.  In terms of section 156 of the Companies Act, if it appears to the court that by reason of mismanagement it is desirable to issue such an order the court will place the company under judicial management. There must also be prospects of success in so far as the company can trade out of its difficulties.

After the liquidation order is granted, the appointed liquidator will take custody and control over the company’s assets. It is important to note that the directors of the company will remain in office but cease to maintain the powers, functions, or duties that they would ordinarily have to manage the company other than those powers, functions or duties required, or permitted to be exercised, in terms of the liquidation provisions of the Companies Act.

Directors and officers will be held personally liable for fraudulent transactions up to the value of the transaction or up to the damages suffered by the company as a result of the fraudulent transaction. A director or officer will be civilly liable through a civil action to the court. If a director received any advantage from a transaction that he or she concluded on behalf of the company at a time when he or she was a director of the company, an application can be brought to court by shareholders, the liquidator or any other person who suffered loss, to cancel any such transaction. Although the Companies Act does not make provision for the consequences relating to the cancellation of the transactions, a civil action would have to be instituted against the director.

Furthermore, where the director did not fulfil his fiduciary duty, he may also be held personally liable. In terms of section 63(3) of the Companies Act, the directors, including former directors, may be individually liable to the company, its shareholders, and any other person, for any loss suffered by the company.

The directors must, however, deliver the books, records, and documents of the company to the liquidator within a reasonable time. If the books, records, and documents are not delivered within a reasonable time, the liquidator can bring an application to court to compel compliance.

Formal claim forms are to be presented to the Master of the High Court at least 24 hours before the first meeting of creditors, at which meeting the claims are adjudicated. Creditors may vote at the creditors’ meetings and may make proposals at meetings of creditors and shareholders. The creditors may make proposals in respect of the distribution of the proceeds of the estate.

The Companies Act makes provision for criminal offences and penalties. Where a director makes false or misleading statements or fraudulently conceals or destroys any property of the company, he commits an offence and may be subject to a fine of M500 000.00 or to imprisonment for 20 years, or both.  Where a director intends to defraud or deceive another person, he or she commits an offence and is liable on conviction to a fine of M20 000.00 or to imprisonment for a term of 3 years, or both.

The liquidator may decide to either terminate or maintain certain contracts as it is within the liquidator’s discretion. The liquidator may also elect to proceed, settle, or withdraw any pending litigation or arbitration proceedings that were initiated at the instance of the company. The same applies to pending proceedings brought against the company.

In terms of section 140 and 141 of the Companies Act certain transactions concluded prior to the commencement of liquidation may be set aside. This arises when the transaction was entered into a year prior to liquidation, when the company received no consideration or benefit for such transaction, when the company was unable to pay its debts, when the transaction was entered into and when an obligation was incurred knowing that the company was unable to perform the obligation or if the company became unable to pay its debts as a result of the transaction.

The liquidation proceedings will have been completed when the liquidator files a final account with the Registrar of Companies. The court can also decide to terminate liquidation proceedings following an application made to court by a prospective buyer of the company in which a dividend is paid to creditors (if it is accepted by creditors).

Our corporate commercial team has assisted clients with lodging applications for liquidations in Lesotho.  Please contact us if you need legal advice on whether your company will benefit from being placed in liquidation.

 

This article was written by Albertus Kleingeld and Zurayda Mayet.