Liquidation is a fantastic tool to use to restructure one’s business. Liquidation can shift you out of a problem into a profitable position because it gets rid of problems which immobilise the business – and most times the owner as well.
But what is the effect of liquidation on directors, is a question that is an important one to ask when liquidation is considered.
If the directors did not sign personal surety for the debt of the company, there is no personal liability for the director and the director will walk away after liquidation.
If the directors did sign personal surety for the debt of the company, the ones who signed surety are personally liable for the debt of the company. After liquidation, creditors that one signed surety for, will call up the sureties and hold the directors personally liable.
One should determine how much of the debt of the business the director did sign surety. If a director signed surety for little debt, then it is worth it to liquidate a small debt can be managed and paid off. If the director signed surety for a lot of the debt of the company, then one should re-consider liquidation and rather look at sequestration of the directors. It is no use to liquidate a company where the outstanding debt is R1million but the directors also signed surety for R1million. The debt will simply shift to the directors in their personal capacities because of the sureties, so the liquidation will not solve the issue.
In such a case the directors must either sequestrate themselves personally as well (or instead of liquidating the company) and if the directors do not want to sequestrate, they should consult with the writer of this article so that she can assist with protecting such directors’ assets from attachment by the creditors of the company that they signed surety for.
Credit Bureax and blacklisting
One is not blacklisted anywhere because one was the director of a company and the company liquidated. You can own 50 companies that are liquidated (because of a free economy and how the Company Act works) and 50 more successful companies and you will not be blacklisted because 50 of your companies were blacklisted.
You could, however, be blacklisted in your individual capacity because of any sureties that you may have signed, but that is a different matter altogether. In such a case you are blacklisted because of the surety and not because of the liquidation.
One effect of liquidation that can be a problem is if the company owns property and there is a bond on the property. The bank will be a secured creditor which means that the property will be sold, and the bank will be paid first from the proceeds. Worse, 99.9% of the time the director would have signed surety for the bond, which will mean that the director will be held personally liable for any shortfalls on the property after it was sold on an auction.
Directors’ loan accounts
Another effect of liquidation is that any loan account (monies that the director owes the company) is an asset of the company and the liquidator will call up this loan account and ask the director to pay the monies to the insolvent estate after liquidation. Usually, loan accounts exist because directors do not draw salaries to avoid paying income taxes but instead take loans from the company. All fine and well to save on taxes, but in a liquidation the savings on taxes bites the director because suddenly a big loan account exists that will be called up by the liquidator. There are ways to fix this problem depending on how the monies of the director were handled during the existence of the company. Contact the writer of this article to assist you with the liquidation of your company so that we can assist with fixing the problem of the loan account (if circumstances allow for it).
If a company trades while it is insolvent (when its liabilities exceed its assets), then the directors can be held personally liable for the debt of the company even if they did not sign surety for the debt of the company. The onus is on the creditor who issues the summons to prove that there was reckless trading. Reckless trading was not as such defined in the act. In the writer’s experience this is not a popular method of holding directors personally liable, as the action may be defended by the director and, as stated, the onus is on the creditor to prove the reckless trading.
We mitigate the effects of liquidation
With our unique approach to liquidation and because our focus is on the directors and keeping them on their feet, we can assist you with making a smooth transition and restructuring of your business so that you can almost seamlessly continue with business and with life. We know how to protect you and your assets, and we will point out risks so that we can try and cover you as far as is possible.