For every business success there are also those stories of failure and there are a few other places that this reality is as stark as in South Africa’s startup landscape where the failure rates is high as 80% within the first two years, with the rate increasing in the third and fourth year, leading to some businesses being forced to liquidate.
Many of these businesses that fail face financial crisises that few recover from and in most instances results in business owners having to shut their businesses down.
Last week, SME South Africa looked at deregistration as one option business owners have when they have to close down their business and this week we look at what you should know when liquidation is your option.
Unlike the more simpler process of deregistration, which takes place if it has no assets or liabilities, the liquidation route is followed if your business has assets, liabilities or both.
Admitted attorney and associate at legal firm M Prem Inc, Lesya Pansegrouw, breaks down what it means for you when liquidating your business and why you shouldn’t take the tax implications lightly.
1. WHEN YOU HAVE TO LIQUIDATE
This is a process by which a company or close corporation effectively declares itself insolvent, says Pansegrouw.
Your business can undergo voluntary liquidation, where you choose to voluntarily liquidate, or you could undergo compulsory liquidation through action by creditors.
What happens next?
Once the business has been placed under liquidation, either voluntarily or by creditors’ court application, your business will stop all its business activities except in so far as may be required for the winding-up, Pansegrouw says.
A liquidator will also be appointed to sell all the assets, pay off creditors, divide any residue amongst the former shareholders and then simply close the business down.
2. SORT OUT YOUR CONTRACTS WITH THE LIQUIDATOR
When a business is liquidated, all contracts concluded with the business remain in effect. The liquidator is then tasked with making a decision, within a reasonable period of time, whether or not he or she intends to abide by the contract or terminate it, depending on what would be most beneficial to the creditors.
Pansegrouw says, however, that should the liquidator elect to terminate the contract, the other contracting party has a monetary claim against the insolvent estate as a concurrent creditor (creditors who do not hold any security).
3. REMEMBER DIRECTOR AND SHAREHOLDER LIABILITY
Directors and shareholders should be especially cautious when the business undergoes liquidation because they will still be liable for debt for which they have signed surety.
Pansegrouw says in the event that a director acted grossly negligent or fraudulent in his capacity as director, it is also possible for the corporate veil to be lifted by a court, rendering the director personally liable.
4. WHAT THIS PROCESS MEANS FOR YOUR EMPLOYEES
According to Pansegrouw, the business’s liquidation does not terminate employment contracts. It is up to the liquidator to decide whether to do so, and this decision must be in line with the Labour Relations Act 66 of 1995, Basic Conditions of Employment Act 75 of 1997, and the Insolvency Act 24 of 1936.
She says however, that employment contracts are suspended upon liquidation of the employer. During the suspension period, the employee is not obliged to render any services to the employer, and is not entitled to receive any pay or employment benefits arising from the contract.
An employee whose services have been terminated due to liquidation is entitled to claim loss suffered as a result of the termination, and severance benefits as if they were dismissed for operational reasons, from the employer’s liquidated estate. The employees rank second to creditors who hold security, even above SARS.
5. HANDLE YOUR TAXES ADEQUATELY
SARS has a preferent claim in the business’s insolvent estate, meaning that SARS gets paid before the business’s concurrent creditors, Pansegrouw says.
If the business has undergone voluntary liquidation and there is still debt owing to SARS after the winding-up of the business, she says the shareholders may, in terms of the Tax Administration Act 28 of 2011, be held personally liable in certain circumstances.
Something to note about VAT
Pansegrouw says the Value Added Tax Act 89 of 1991 places you as member or director of a business who has regularly partaken in the management of the company in the position of a trustee of the government’s money and are therefore liable for the business’s VAT in person.
Other taxes are deemed to be civil debt, and money owed to SARS simply gets written off if SARS does not get a dividend from the business’s insolvent estate or if the business is deregistered, she explains but adds however, that SARS may issue criminal summons against business owners in this regard.
