When to Liquidate a Company and When to Deregister a Company
When considering how to close a company, the decision often comes down to two options: deregistration or liquidation. Both processes serve different purposes, and understanding the difference between them can help you make the right choice for your business. This article explains each process and when to choose one over the other.
Do You Liquidate or Do You Deregister
Liquidation is for companies that either has NO debt or for companies that has debt. If a company that has no debt is liquidated, it blocks all future issues that may unknowingly exist at the time of deregistration or that the directors did not know about. It is a safe option to completely remove a company out of the system with no comebacks in the future. If the company has debt at the time of liquidation, the debt will be written off for the company and the company can restructure itself or the directors can walk away without paying the company debt (if they did not sign personal surety for the debt).
Deregistration is the process of removing a company from the Companies and Intellectual Property Commission (CIPC) register. It is generally used for companies that are dormant, meaning they have no assets or liabilities (meaning no debt). In South Africa, companies must file their yearly turnovers with the CIPC. This is referred to as the “annual returns” and must not be confused with the tax returns that must be filed with SARS). If the yearly annual returns are not filed at CIPC and the CIPC fees not paid, then chte company may be deregistered by the CIPC, even if they are still trading. Any company that is deregistered due to non-payment of annual returns can be restored again at the CIPC.
Types of Deregistration
Voluntary Deregistration by Directors
- Voluntary Deregistration by Directors: Directors may opt for deregistration when the company is dormant, has no liabilities, and has settled all SARS debts. A voluntary liquidation process is recommended when there is a risk of outstanding debt, especially with SARS.
CIPC Deregistration
The CIPC may deregister a company if annual returns are not filed for more than two years. A company that is deregistered by the CIPC can be reinstated under certain conditions.
Restoration After Deregistration and Before Liquidation
A company deregistered by the CIPC can be restored if it is still trading, has debt, or owns immovable property. However, if liquidation is necessary, the company must be restored first before starting the business liquidation process.
Personal Liability of Directors After Deregistration
If a company is deregistered with outstanding debts, directors automatically become personally liable for those debts. To avoid this, it may be better to pursue a voluntary liquidation where debts can be legally written off.
Liquidation
Liquidation is the formal process of winding up a company’s affairs, involving the sale of assets (if any) and distributing the proceeds to creditors by a liquidator. This is often the chosen route for companies with unpaid debts. Liquidation writes off the debts of the company that the directors did not sign surety for.
When to Choose Liquidation Over Deregistration
It is advisable to choose liquidation when there is uncertainty about the company’s debt situation. If there is a potential SARS debt or unpaid taxes, voluntary liquidation is a safer option. Liquidation with SARS debt allows for debt to be written off, protecting directors from personal liability.
Differences Between Deregistration and Liquidation
- Creditor Involvement: Liquidation provides a formal process for creditors to claim debts, whereas deregistration assumes no debts exist.
- Debt Relief: Liquidation offers debt write-off, and directors are only liable if they signed surety. Deregistration, however, makes directors liable for any outstanding debt, regardless of surety.
Conclusion
Choosing between deregistration and liquidation depends on the company’s financial status. If there are outstanding debts or potential issues with SARS, liquidating a company is usually the better option. Deregistration is suitable for companies with no debt or ongoing financial obligations. Always ensure compliance with SARS before opting for deregistration.
