IS YOUR BUSINESS BEING LIQUIDATED?

Many businesses fail and consequently have to face financial crises that few recover from and in most instances, results in business owners shutting doors for good. If your business has no assets or liabilities, the more simpler process of deregistration takes place. The liquidation process needs to be followed if your business has assets, liabilities or both.

The Liquidation of Your Business

Liquidation is the process by which your company or close corporation effectively declares itself insolvent. Your business can undergo voluntary liquidation, where you choose to voluntarily liquidate it, or when you undergo compulsory liquidation through action by your creditors.

Once your business has been placed under liquidation, it will stop all its business activities in so far as may be required for the “winding-up”, i.e. the process of selling all the assets of your business, paying off your creditors, distributing any remaining assets to the partners or shareholders and then dissolving your business. A liquidator will be appointed to perform all these tasks.

The Consequences of Liquidation

When your business gets liquidated, all contracts concluded with the business remain in effect. The liquidator has to make the decision whether or not he/she intends to abide by the contract or to terminate it, which will depend on what would be the most beneficial decision to the creditors. However, if the liquidator chooses to terminate the contract, the other contracting parties have a monetary claim against the insolvent estate as a concurrent creditor, i.e. creditors who do not hold any security.

If you are a director and/or shareholder of your business, then you should be especially cautious when your business gets liquidated, because you will still be liable for debt for which you have signed surety, i.e. taking responsibility for another’s performance of an undertaking. If a director acted negligent or fraudulent in his/her capacity as the director, he/she can also be rendered personally liable.

The liquidation of your business does not terminate employment contracts; it is up to the liquidator to decide whether to do so or not, 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. However, employment contracts are suspended upon liquidation of the employer; during this suspension period, the employee is not obliged to render any services to the employer, and he/she is not entitled to receive any payment or employment benefits that arise from the contract. An employee whose services have been terminated because of liquidation, is entitled to claim losses suffered from the employer’s liquidated estate.

Dealing with Your Taxes

SARS has a preferent claim in the business’s insolvent estate, meaning that SARS gets paid before the business’s concurrent creditors. If the business gets liquidated voluntary and there is still debt owed to SARS after the winding-up of the business, the shareholders may, in terms of the Tax Administration Act 28 of 2011, be held personally liable in certain circumstances. The Value Added Tax Act 89 of 1991 places you as a member or a director of the business, who has regularly partaken in the management of the company, in the position of a trustee of the government’s money and you will be held liable for the business’s VAT.

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 your business’s insolvent estate, or if your business is deregistered. However, SARS may issue criminal summons against business owners in this regard.

References:

  • Smesouthafrica.co.za. (2017). When you have to liquidate your biz – 5 considerations you shouldn’t overlook. [online] Available at: http://www.smesouthafrica.co.za/16586/When-you-have-to-liquidate-your-biz-5-considerations-you-shouldnt-overlook/ [Accessed 23 Jun. 2017].
  • Investopedia Staff. (2017). Winding Up. [online] Investopedia. Available at: http://www.investopedia.com/terms/w/windingup.asp [Accessed 23 Jun. 2017].

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. (E&OE)

IS IT COMPETENT FOR A BRP TO TERMINATE BUSINESS RESCUE PROCEEDINGS AND THEN NOT LIQUIDATE THE COMPANY?

Western Crown Properties 61 (Pty) Ltd / Able Walling Solutions (Pty) Ltd & Others/ 8073/16

Synopsis

The Western Cape High Court has recently had occasion to deal with the provisions of section 141(2)(a)(ii) read with section 132 (2)(b) of the Companies Act No. 71 of 2008 (the Act) relating to the termination of business rescue proceedings and despite the fact that the judgment is obiter on the relevant provisions of the Act, the impact of such judgment cannot be discounted.

Relevant Provisions

Section 141(2)(a)(ii) of the Act provides as follows:

“(2) If, at any time during business rescue proceedings, the practitioner concludes that—

(a) there is no reasonable prospect for the company to be rescued, the practitioner must—

(ii) apply to the court for an order discontinuing the business rescue proceedings and placing the company into liquidation…”

The provisions of section 141(2)(a)(ii) must however be read in conjunction with the provisions of section 132(2)(a) and 132(2)(b) of the Act and such section/s provides as follows:

“(2) Business rescue proceedings end when—

“(a) the court—

    (i) sets aside the resolution or order that began those proceedings; or

    (ii) has converted the proceedings to liquidation proceedings;

(b) the practitioner has filed with the Commission a notice of the termination of business rescue proceedings…”

Relevant facts

Western Crown sought the setting aside of the resolution taken by the directors of Able Walling placing the company in business rescue, alternatively that the business rescue proceedings be converted in liquidation proceedings. The business rescue practitioner (BRP) elected to abide by the Court’s decision, while the sole shareholder of the Company, opposed the application for reasons related to, inter alia, the locus standi of the applicant, Western Crown.

The pertinent facts referred to in the judgment of Savage, J (relating to the Courts interpretation of the provisions of section 141(2)(a)(ii) read with section 132 (2)(b) of the Act) were the actions taken by the BRP subsequent to him resolving that there was no longer a reasonable prospect of the Company being rescued and subsequently the filing by the BRP of the relevant notice to this effect with CIPC.

Despite the Western Crown’s submissions to the contrary, the Court consider the wording of the section 141(2)(a)(ii) of the Act and gave effect to the operative wording of the provisions of such section being, “at any time during business rescue proceedings”. In doing so Savage, J found, albeit on an obiter basis, that the action by the BRP of filing the relevant notice of termination of the business rescue proceedings with CIPC, that it followed that the business rescue practitioner was under no obligation to then seek the liquidation of the Company, as the business rescue proceedings had in fact already terminated by then.

Possible Effect of the Judgment

The effect of the judgment, on an ordinary interpretation thereof, appears to indicate that should business rescue proceedings be terminated by operation of a notice to such effect being filed with CIPC, in the prescribed manner, that in fact there no longer exists an obligation on the business rescue practitioner to act in terms of the section 141(2)(a)(ii) of the Act in seeking the liquidation of the Company, as the business rescue proceedings have, by operation of law, been terminated.

It therefore follows that the business rescue practitioner, who is appointed nomine officio, would no longer have the necessary locus standi to do so and as such the Company would be returned to its director/s.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. (E&OE)