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COVID-19: Is Liquidation an Option?

During these challenging times every director of a company will be faced with inevitable financial difficulties. There will be a need to re-evaluate the company’s financial position and to make an informed decision on whether the company will endure such difficulties or not.

As a director of a company one is expected (and in fact legally obliged) to consider liquidation when the company is running at a loss and there are no reasonable prospects of the company recovering and/or paying its creditors or expenses. In this instance, the principle of the director’s fiduciary duties to the company in terms of Common Law and the Companies Act, 71 of 2008 applies.

The director is seen to be a fiduciary in relation to the company. This means a person that is held in a position of trust and is expected to act in good faith. They are also expected to exercise the highest standard of care in respect of the entity to which they owe a fiduciary duty.

When it is evident that the directors or prescribed officers (which is defined in the Companies Act ,71 of 2008) have failed in their fiduciary duties (through negligence or non- performance) towards the company, which subsequently causes loss, they may be held personally liable for such loss.

In addition to the abovementioned inherent duty as a director, when contemplating liquidation, there are a number of additional factors to consider.

One of these factors is the dire financial straits the company finds itself in and the pressure received from creditors. It is imperative to take action and put in place the necessary steps when the company is facing financial distress. It is not ideal to potentially allow creditors to take judgment, execute against assets or worse, apply for the compulsory liquidation of the company. It must be noted that a creditor, shareholder or a certain official may apply for the compulsory liquidation of a company. This will apply when the company is unable to pay its debts or when it appears to the court that it is just and equitable.

Other considerations are :-

  • The technical process to liquidate the company;
  • the company’s employees;
  • the effect on other, existing or new, entities;
  • the company’s creditors;
  • any outstanding SARS liabilities.

As a director (or member of a close corporation), you can choose to voluntarily liquidate your company. It is strongly advisable to take legal advice, particularly in relation the point raised above. The purpose of liquidation is to close the company, appoint a liquidator who will dispose of the assets of the company and distribute the proceeds to the company’s creditors.

The company will cease to trade, and the company’s employees will no longer be employed. Ideally the relevant parties need to notify the employees of the decision as soon as possible to give them enough time to seek new employment where necessary. It is prudent to engage a specialist labour attorney when addressing this element of a liquidation.

It is possible for a director or member who has opted for liquidation proceedings to register a new entity and/or continue to trade with an already registered alternative entity. It may be possible to offer alternate employment to certain employees in these entities, to reduce the negative effect of the liquidation.

In relation to the company’s creditors, the liquidator, director or member can inform creditors that the company has entered into liquidation proceedings, which proceedings will be reflected through the CIPC. Each creditor will have a reasonable chance to submit a claim to the liquidator for any sums due to them by the liquidated company.

What a director or member must be aware of is the situation wherein they signed suretyship in their personal capacity for company debts. This could have been for credit obtained on behalf of the company or the lease agreement for the company’s premises. This will affect the surety’s (director’s/member’s) personal estate because they will be responsible for settling the debt if the liquidator is unable to do so on behalf of the company.

If a company owes money to SARS it can still be liquidated according to the regulations of the Tax Administration Act 28 of 2011. The liability due to SARS will be treated differently dependant on the nature of the liability (VAT, PAYE, Income Tax, etc). If an insolvent company continues to trade whilst insolvent there is a risk that the director or member shall be personally responsible for the debts owed to SARS.

Each and every company, and the trade they are in, is unique and it is vital it consider the various factors which apply to each company. The process may appear very overwhelming, but a knowledgeable and comprehensive team of attorneys will be able to explain everything to you in detail and guide you through the entire liquidation process.

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