LIQUIDATION INSIGHTS - DORMANT BUSINESS AND PERSONAL LIABILITY

The effects of our poor past- and current economic climate are still taking a toll on businesses, with many having to close their doors.

Often, such a business simply remains dormant, with the owner hoping to bring it someday back to its feet or perhaps having no intention of doing so at all.

A debt due to a creditor of a business that has been deregistered with the Companies and Intellectual Property Commission (CIPC), is not extinguished but is rendered unenforceable against the business.

In the case of a Close Corporation (CC) that has been deregistered while having outstanding liabilities, the members of the CC will become jointly and severally liable for such liabilities in terms of the Close Corporations Act. Creditors wanting to recover their monies, including SARS, will be forced to pursue the members in their personal capacity.

With deregistered private companies, the personal liability of the directors or shareholders is not automatic. Creditors will have to prove fraud or negligence in order to pursue this avenue. However, SARS, through Tax Administration Act, can recover a company’s tax debt from the directors or shareholders in certain circumstances, including the following -

• Where the fraudulent or negligent acts of a person who controls or is regularly involved in managing overall financial affairs result in the non-payment of taxes. In this regard, it is merely required that a senior SARS official needs to be satisfied that there was negligence or fraud;
• Where shareholders receive company assets within 1 year before the company is placed under liquidation;
• Where any person knowingly assists in the dissipation of a taxpayer’s assets to obstruct the collection of a tax debt; or
• In terms of section 155 of the Tax Administration Act – SARS often incorrectly interprets this section as imposing personal liability on a representative taxpayer for the taxpayer’s debt, if, while such debt remains unpaid, the taxpayer disposes of funds which could legally have been used towards the tax debt. Such an open and broad interpretation by SARS can quickly lead to severe prejudice against even the most good-faith business owners.

Depending on the circumstances of each case, where a business is dormant, liquidation is an effective way to bring finality and in doing so, to manage the risk of personal liability.

Regardless of whether the intent is to wait, liquidate or revive a dormant business, it is essential to ensure that it remains registered or is reregistered with CIPC.

Know your risks and make an informed decision. For any enquiries or a free consultation, contact Wynand at wynand@trmlaw.co.za.

Intellectual property disclaimer:
The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.