Liquidation in SA – 5 Important factors to consider

Let’s get one thing straight, being in the process of liquidation is a position that no business wants to land themselves up in.

We go into business for success and personal achievement, and heaps of money of course! However, there is always a risk when you go on your own and running a business has its pros and cons - as with everything in life. But there are many reasons why businesses can still do their damndest to stay on top and eventually end up being one of the individuals who have a business failure story to tell. Sad but true.

South Africa’s citizens are always looking for ways to grow start-up businesses. Being a third world country, opportunities are few. But that doesn’t change the fact that they’re all still learning and striving to reach the success that they imagine for themselves, despite failure rates of up to 80% for this type of venture in the first 2 years of trading. That is an extremely daunting statistic, but South African’s aren’t afraid of a challenge!

Upon facing this unfortunate and unforeseen failure, businesses undergo a major financial crisis and turn to alternatives such as liquidation and insolvency. When businesses come with assets and liabilities, they are required to go through a process of liquidation, quite the opposite of the regular deregistration process for businesses without shame.

It’s a struggle and the cycle continues, so we thought we’d put together a few important factors to consider when liquidation is the only option.

Factor 1: Forced to liquidate

This process is when a closed corporation has exhausted all other options and finds itself in a position where they’re having to declare insolvency.

There are two ways you’ll become liquidated, either voluntarily or by court order through your creditors. Either way, the next part of the process is that your business will cease to trade, apart from a few days of winding down the books and stock and whatever else might be required in that final step before shutdown.

An official liquidator is appointed to sell whatever assets your business has that can be sold. They’re also required to settle your debts with any creditors and whatever is left basically gets divided amongst any shareholders of the business.

Factor 2: Get your contracts in order

Upon being liquidated there are a few things that still need to be sorted when it comes to the contractual part of the business, as the contracts concluded with the business remain in effect. The liquidator has the obligation to reach a decision within the specified time as to whether or not they will abide by it, or terminate the contract altogether. This decision is influenced by the level of benefit for the creditors.

If termination of the contract is decided, then the other party to the contract has a monetary claim against the estate as a concurrent creditor.

Factor 3: Director and shareholder responsibility

There is such a thing are, surety when it comes to business. An important thing to bear in mind is that should a business go bang, the Directors and Shareholders can’t run and hide behind the whiteboard in the boardroom, they need to face the consequence of financial obligation with creditors due to the surety they signed.

Let’s say one of the Directors has acted in a fraudulent manner (not a good idea by the way), and it can be proven, then by order of the court, the judge can hold the director personally liable for surety and the shareholders are exempt from the obligation.

Factor 4: How your employees are affected

Employment contracts remain. This decision, however, is up to the Liquidator as to whether or not he will allow them to continue. It is, of course, necessary and in his best interest, that bases his decision line with the Labour Relations Act 66 of 1995, Basic Conditions of Employment Act 75 of 1997, and the Insolvency Act 24 of 1936.

That said, during the process of liquidation, employee contracts are suspended. Employees are not obliged to perform any work activity for the (now ex) employer, nor are they to receive any remuneration or perks as stated in the contract.

So, what can your employee do in this case? They can go ahead and claim for loss suffered as a result of the termination. They will be able to claim severance pay as if they were let go for operational reasons arising from the employer’s liquidated estate.

Factor 5: Take care of your taxes

If the business is liquidated, voluntarily, and there is still an outstanding amount owed to the South African Revenue Service (SARS), then shareholders could, in terms of the Tax Administration Act 28 of 2011, be held personally liable depending on the circumstance.

When it comes to the Value Added Tax Act 89 of 1991, you’ll be positioned as a member of a business and manager of the company and will therefore be liable for the business’s VAT.

The civil debt will be written off if there is no money over from the insolvent estate, however, is it important to note that SARS can issue criminal summons against the business owners if they so wish to.