A common concern for company directors is whether they will be personally liable for a company’s debt after business liquidation Questions often arise like: Will they be blacklisted? Will their personal assets be at risk? Here, we clarify these misconceptions and explain the circumstances under which directors could face personal liability after a liquidation in South Africa
Directors' Liability Under the Companies Act
Under Section 22 of the Companies Act, a director may be held personally liable for a company’s debts if they traded recklessly. This means continuing to operate the company when it was insolvent. Directors are legally required to liquidate the company as soon as it becomes unable to pay its debts or when liabilities exceed assets. Failing to do so can expose directors to personal liability for the company’s debt, especially in cases of reckless trading.
Personal Liability and Suretyship
In general, directors are not personally responsible for the company’s debts unless they have signed personal sureties When a director has signed a personal surety, they are obligated to repay the company’s debts if the company is unable to. Without such a surety, a director’s personal assets remain protected during the company liquidation process.
Blacklisting and Personal Assets
Contrary to popular belief, liquidation does not automatically lead to blacklisting for directors. Since a company is a separate legal entity, it is the company, not the director, that holds the financial burden. Personal assets are only at risk if the director has signed sureties for company debts and fails to pay off those sureties. In such cases, the blacklisting stems from unpaid surety agreements, not the company liquidation itself.
SARS Debt and Director Liability
In terms of the Tax Act, SARS can (note the word “can” hold directors personally liable for the debt of the company. It is not “shall, will” or ” must”). This distinction is important because if SARS wants to hold a director personally liable, they certainly do not do it in every single case. In our experience with the hundreds and hundreds of liquidations we have done, only 2 of our directors received notice that SARS wants to hold them personally liable. It is possible to manage SARS if this happens so it is not the end of the road and does not mean that SARS will definitely hold the director personally liable.
Customs and Excise Taxes
In terms of the Customs and Excise Act the manager of the premises is personally liable for these taxes, therefore liquidation does not write of customs and excise taxes.
Liquidate Sooner Rather Than Later
The best way to avoid the risk of personal liability as a director is to act promptly. Liquidating a company in South Africa early, before the company becomes insolvent, can protect directors from the legal and financial risks associated with reckless trading.
Conclusion
Directors are not automatically held liable for a company’s debts after business liquidation. Personal liability typically arises only if personal sureties have been signed. Directors can protect themselves by initiating the business liquidation process promptly and seeking legal advice if needed. Acting early ensures a smoother liquidation and minimizes the risk of financial repercussions for directors.