Liquidate? A quick guide to our thoughts.
To Liquidate is not necessarily a negative experience if it is handled by professionals like us who know how to take you through the process so that you stay on your feet.
Liquidation is a great tool in the arsenal of surviving mechanisms that any business owner can use when the time is right.
On the contrary, it is a great strategic move to use when the core of the business is good and profitable, but the business is burdened by too much debt that eats up the cash flow.
When you decide to liquidate it can be a positive experience
Liquidation is a very important step to take when a business cannot pay its debt, or if the liabilities exceed the assets (in other words, if the business is in a state of insolvency). The Companies Act and the Close Corporation Acts place an obligation on a business owner to liquidate the business if it is in a state of insolvency. If the business is not liquidated, the member of the Close Corporation or the director of the Company can (not shall, but can) be held liable for the debt of the business. This is because the Companies Act and the Close Corporation Acts states that the member/director is obliged to liquidate the entity and if he/she doesn’t, the penalty is that the director/member can be held personally liable.
Once the entity is liquidated, the debt is written off and the member/director cannot be held personally liable any longer.
Wrong advice on liquidation consequences
There are a number of people out there who advise their clients that they will be held liable regardless a liquidation if the business owes SARS monies. This is not correct. A director/member cannot be held personally liable for the debt of the business if the business is liquidated because the debt is written off in the liquidation and no debt remains to be transferred to the directors or members.
When can a director/member be held personally liable for the debt of a business
The only times that the director or member can be held personally liable for the debt of the business (inclusive of SARS debt) are in the following circumstances:
- When the director/member has signed surety for the debt of the Company/Close Corporation. The suretyship will be called up after the liquidation. It is advisable to make payment arrangements with creditors for any of the debt that you have signed surety for. If you can’t afford to make the payment arrangements, we must look at the personal sequestration of the director/member as well.
- If the member/director takes too long to liquidate the entity – A creditor may issue summons against the member/director personally based on reckless trading if the director/member does not timeously liquidate the entity. Once the summons is issued before liquidation, the liquidation will not let the action against the director/member in his/her personal capacity fall away and it still has to be dealt with. The member/director needs to defend this action because it is not so easy to prove reckless trading. Read our article on Reckless Trading of a Company to learn more why it is not the end the world if a summons is issued for reckless trading.
- If the debt is a debt owing to SARS under the Customs and Excise Act, the liquidation will not write the debt off. This is the only SARS debt that is not written off in a liquidation. It is the manager of the premises and not the director/member that is held personally liable for the debt. (All other SARS debt is written off in a liquidation).
Liquidate sooner rather than later
That is why it is so important to liquidate a Close Corporation or a Company sooner, rather than later. If you wait too long, the creditors may take the chance to issue summons against you in your personal capacity based on reckless trading, even if you did not sign surety for the debt, not because they will necessarily be successful in their claims, but because they can. It will cause you unnecessary stress and legal costs that you can do without.
All advice that any auditor or attorney gives that differ from the above wholly incorrect.
A director or a member cannot be held personally liable for the debt of a Company or a Close Corporation other than the circumstances described above. Once there is a liquidation, the debt is written off and unless one of the 3 circumstances above exists, the director/member cannot be held personally liable for the debt of the business, unless the law of the RSA or legal practice changes.
The writer of this article focuses on insolvencies and advises hundreds of clients on insolvencies every week. Also read our article on “Why owing SARS is not a crime” to learn more.