KNOWING WHEN TO LIQUIDATE A COMPANY

Article by South African Liquidation Expert - Nanika Prinsloo

Liquidation can be a challenging decision if you do not have enough knowledge about the process and the benefits of it.

I can understand why: on the one hand the company is usually the source of income of the director. On the other hand, it is the very company that is bleeding you dry if there is too much debt, bad history, or SARS issues.

There may also be an emotional attachment to the business, not just a need to earn an income from it. Usually there is history to the company in that you created it so many years ago, all your blood, sweat and tears were put into it, or it was your baby that you raised and well yes, it is indeed hard to let go. To make the decision easier, my advice is to think clinically: it is a money decision, not an emotional decision. You either make money, or you do not. The business is either growing and progressing, or it is not. To own a business that is costing you more than it is making, where the debt is too high and the company cannot pay it off, it is time to let go. Trying to save a business with too much debt that it cannot pay, is like being on a li-lo in the middle of the dam: you are so busy plugging the holes that you forget it is easier to swim ashore and get help there.

To make the decision easier: my advice is to use the Companies Act and the business balance sheet as your guide.

First, do the solvency and liquidity test as per the Companies Act of 2008. The test to apply is the following:

• Determine whether the assets of the company are fairly valued. The next question is whether the value of the assets exceed the liabilities of the company, AND
• Will the company be able to pay its debts over the next year as and when they become due (not running them on account or being in arrears with them, actually being able to pay them (without borrowing money elsewhere or selling assets) as and when they become due.

Responsibility of the director

The responsibility placed on the director of a company is to liquidate the company when the answer to the above questions are positive. The Companies Act states that if one of the two questions render a positive answer, then it is the duty of the director to liquidate the company.

You basically do not have a choice in the matter, and you will be complying with the law if you liquidate the company then. It helps that the decision is taken out of your hands, so again it is a clinical situation and not an emotional one.

If the director/member does not liquidate the company when the liabilities exceed the assets (question one above) or when the company cannot pay its debt (question two above), the company is insolvent. To trade in an insolvent company constitutes reckless trading. To trade recklessly renders the director/member personally liable for the debt of the company, even though no surety was signed.

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