Many people who have to liquidate their businesses worry whether creditors can chase after them after the liquidation of their companies. It prevents a lot of people liquidating their companies because they do not know what will happen to creditors after the liquidation of their companies. They worry especially about SARS.
So can creditors chase after me after the liquidation of my company? The short answer is no, but there is also a longer answer which is what this article will discuss.
Can I be personally held liable for the debt of my company after liquidation?
No, you cannot be held liable for the debt of your company after liquidation. A company is a separate entity from you the director as a person. If the company has debt, it belongs to the company and not to the directors. Or shall we rather say, the mere fact that you are the director of a company does not make you automatically liable for the debt of the company. The same applies to a Close Corporation. The member is not automatically liable for the debt of the CC, for the same reason: the CC is a separate legal entity that is liable for its own debt.
There are 2 circumstances where a director or a member can be held liable for the debt of the business.
1, Where the director signed surety for the debt of the company, creditors can (and will) chase after you for the debt of the company
Signing surety for the debt of the company means that you assume personal liability for the company if the company cannot pay its debt. After liquidation, the creditor that you signed surety for will simply call up the surety and you will be held liable for the debt of the company. If for example there are 10 creditors that the company owes money to, and the director signed surety for only 2 of those creditors, the 2 creditors will call up the sureties and hold the director personally liable based on the sureties. The other 8 creditors cannot hold the director personally liable for the debt of the company after liquidation and they will have to see what they can get from the insolvent estate of the liquidated company. The same applies to a close corporation.
2. Reckless trading
A director can also be held personally liable for the debt of a company after liquidation if the director traded recklessly. Reckless trading is quite hard to prove and the creditor who avers that the director traded recklessly, must prove it. That is not so easy to do, as reckless trading was not defined in the Companies Act. The creditor will also need access to the financial books of the company and it is not going to be easy to get access to these books.
Reckless trading does not necessarily mean that the director traded because he tried to save the business and I do not often see these types of cases.
SARS and the Tax Regulations Act
After liquidation, a director can, in terms of the Tax Regulations Act, be held liable for the debt of the company by SARS. However, in the last ten years during which this writer has focused on insolvencies. SARS has never held any of our clients personally liable for the debt of the liquidated company. Not a single one of the hundreds of businesses that we have successfully liquidated.
SARS must, like any other creditor, prove a claim against the insolvent estate of the company and they never do, but they close their file. If they do not prove a claim against the insolvent company after liquidation, it is my opinion that they also cannot hold the director personally liable after that because they must take legal action (by proving a claim) against the insolvent estate of the liquidated company first before they can hold the director personally liable. In my opinion, at this stage (2019) chances are slim that SARS’ behavior towards insolvent estates will change soon: meaning that they close their file as soon as there is a liquidation. If this changes, I will be one of the first to let you know.
How to avoid creditors chasing after you after liquidation
Companies liquidate and individuals sequestrate. If a director did sign surety for the debt of a company that cannot be repaid by the director, the director should sequestrate as soon after liquidation as possible. Once sequestrated, all creditors that the director signed surety for cannot claim any monies from the director but must deal with the curator who is appointed to wind up the insolvent estate after sequestration. If the director did not sign surety for the debt of the company, it is not necessary to sequestrate. The same applies to close corporations. If the director does not want to sequestrate and there are a lot of or high sureties, then we can also do a restructuring of assets so that we can protect them and creditors cannot get to it.
Surety and acknowledgment of debt
Avoid signing surety for any of the debt of the company if you can. I know this is very difficult, but it is worth a try not to sign. The banks will demand surety but smaller creditors may be negotiable.
Never ever, and I mean Never. Ever. Ever. Sign an acknowledgment of debt for the debt in your personal capacity of the company. An old trick of creditors is to threaten the director to such an extent that the director simply signs any document put in front of him/her just to get the pressure of. It is at this stage, where it becomes necessary for creditors to demand that the director must sign an acknowledgment of debt of the company, that the company must liquidate and rather start over. If you did not sign surety for the debt of the company, you are not personally liable for the debt of the company. The same applies to close corporations. As soon as you sign the acknowledgment of debt, not only do you assume personal liability for the debt (which you were not because you did not sign surety) but you also “renew” the debt, meaning a new prescription period starts to run. It is just best to avoid putting hand to paper for any debt in any way where you are personally assuming liability for the debt of the company, especially where you did not sign surety as yet. Surety is one thing: sometimes it is a necessary evil, but an acknowledgment of debt is always a choice and never necessary. Please just never sign such documents.
It is possible that creditors can chase after you after liquidation, but they can only do so if you signed surety for the debt of the company or the close corporation. SARS can, in theory, chase after the director for the debt of the company, but they don’t.