Knowing when to liquidate your company is challenging. On the one hand, the company usually gives you an income, on the other, it is the very company that gives you your income that is bleeding you dry because there is too much debt, or there is bad history, or there are SARS issues or such.
It can put one in a frozen state because one cannot move forward yet one is slowly moving backward.
There is also the emotional attachment to the business, not just the need to earn an income from it. Usually, there is history to the company in that you created it so many years ago, or it was your baby that you raised and well yes, it is indeed hard to let it go.
To make the decision easier and to shift from your heart to your head, my advice is to use the Companies Act of 2008 as your guide in the decision-making process. It is critical that the business owner whose business is not doing to well, or who must put in his/her own personal funds into the business stay afloat, immediately or as soon as it is possible, shift into a clinical state to make easier and quicker decisions.
Solvency test to know when to liquidate your company
How do you use the Companies Act to make a clinical decision about your company that is not doing too well? How do you know when to liquidate your company by using the Companies Act?
First, do the solvency and liquidity test as per the Companies Act 2008.
The test to apply is the following:
- Determine whether the assets of the company are fairly valued. Next question is whether the value of the assets exceed the liabilities of the company, AND
- Will the company be able to pay its debts over the next year as they become due. (Not running on account or being in arrears with them).
If the answer to the above questions is yes, the liabilities exceed the value of the assets of the company and if it appears that the company cannot pay its debt over the next 12 months, then the company should be liquidated.
Responsibility of a director of a company
The responsibility placed on the director of a company to liquidate the company when the answer to the above questions are positive is another guide to know when to liquidate the company. The Companies Act of 2008 states that once the above two answers are positive, then the company it is the duty of the director to liquidate the company. Therefore, by liquidating the company the directors are complying with the law. Basically, the decision is taken out of your hands and by following the Companies Act, you make a clinical decision and if you make a clinical decision, you make faster and better decisions.