Liquidation, winding up of business: This must be the one topic that every overindebted business owner is enquiring about. Once a business experiences financial difficulties, this is the quickest and most efficient way to get rid of the debt and the business obligations in one sweep.
Many company owners are struggling with the question of legally closing a business by way of liquidation, winding up of the business, or Deregistration? Whether it’s due to retirement of financial difficulties.
There are several ways to close a business. However, there’s just as many pitfalls to navigate when deciding upon winding up of the company or deregistration. In this article, our aim is to provide you with basic information pertaining to Liquidation and deregistration and the pitfalls you might encounter.
How can a Company be closed legally?
When a company closes, it indicates it is no longer in operation owing to:
• Deregistration
• Liquidation
What exactly is business/company deregistration?
When a firm/company deregisters with the Companies and Intellectual Property Commission (CIPC), it means it is no longer registered and has no legal standing because it is no longer doing business or has assets or liabilities.
How will deregistration of a business/company affect the directors and Shareholders of a Company?
When a company deregisters and there’s any outstanding debt in the company the directors and shareholders become liable for these debt in their personal capacity, due to the deregistration of the company.
If there are no outstanding debts or liabilities, it is safe to deregister the company via the CIPC platform. Should there be any liabilities and the company be in financial distress, the best scenario would be to voluntary liquidate the business.
What is liquidation, winding up of a business?
When a business goes through voluntary or compulsory liquidation, also known as winding up the business, it is declared insolvent. If there are any assets, it will be sold to ensure that the liability of the business is settled.
What would the reason for liquidating, winding up, or declaring bankruptcy of a company be?
• When a business/company is unable to pay its debts.
• As a result of a legal court process.
• By application of creditors.
• Voluntary, i.e., applied for by members of a Close Corporation (CC); or
• When the business owner decides to do something different, or
• Even retires for a well-earned rest.
Are the directors and shareholders liable for the debt in the company with a Company Liquidation?
Directors and shareholders are only liable for debt incurred where they signed surety in for in their personal capacity.
What kind of liabilities in a company require suretyship from the director/s and shareholders of a company?
Here’s a few examples:
Lease agreements:
Normally the directors and / or shareholders will sign suretyship in their personal capacity for a lease agreement. It is standard practice when leasing a property and sometimes even equipment.
It would be best to provide the business debt specialist doing the business debt assessment with copies of all lease agreements entered into, to read through the contract to ascertain if suretyship.
Bank Loans / Overdrafts / Credit Cards
Banks normally include documentation which the directors sign when opening a business bank account, applying for loans, overdrafts, and credit cards.
All South African banks or business loan providers requires directors and shareholders to sign surety in their personal capacity. Even if you weren't aware of it. It forms part of the standard agreement, and it will be there.
Service Provider Accounts
Dependant on the service provider it is not always standard practice to have directors sign suretyship. Therefore, it is advisable to furnish the business debt consultant with the signed agreements from service providers if possible.
What if I don’t have the signed agreements anymore or lost it?
If any creditor wants to continue with the collection process against a director and / or shareholder of a company for company debt, they will need to provide proof of suretyship to continue in this endeavour.
If suretyship cannot be proven the debts will be written off and the creditor will not be able to hold any director / shareholder liable for the business debt incurred. This however is only appliable with the Company Liquidation.
No assets - Is liquidation, winding up of the business possible?
Yes, the business can still be liquidated even if there’s not assets left in the company.
Don't want to liquidate the business but cannot service my monthly obligations.
In terms of the
Section 22 of the Companies Act of South Africa it is illegal to keep doing business if the company is incapable of servicing its monthly obligations.
The legal term is reckless trading, and it is a criminal offence. Therefore, the directors and shareholders of such a company can be criminally charged and even face jailtime.
What is the Reckless Trading?
When a business continues to trade despite being overindebted and are unable to service their monthly obligations. Liabilities exceed assets and as a result, the business is trading whilst being bankrupt.
What is the best solution to a company struggling financially?
As traumatic as it may be, it is much better to cut your losses and file for bankruptcy. Liquidate the business and rid yourself of the debt in the company and the possible prosecution for reckless trading.
What about the agreements where suretyship was signed?There're several ways of dealing with it. One such solution is
Voluntary Sequestration. However, it will depend on the directors' financial situation and whether it is a viable option. If not, there are alternative, less drastic measures.
Other alternatives include but it not limited to negotiating payment terms for the outstanding balance of the debt once the liquidation of the business have been finalised.
For more information on Company Liquidation please contact our office and one of our Professional Business Debt Consultants will assist you with information pertaining to Liquidation, its pros and cons and how you can benefit from it.
