LIQUIDATIONS - DIRECTORS LIABILITY:

With the poor economic climate, weakening Rand and constant load shedding, companies are continuing to enter liquidations at an alarming rate. Occasionally in the wake thereof, directors, being unaware of their responsibilities, face personal liability.

A company is a separate legal entity and as such the directors enjoy limited liability protection, meaning they are not personally liable for the company’s debts and obligations. Therefore, when a company is placed under liquidation, the personal estate of the directors is not at risk. The creditors’ claims are against the company only and are limited to a share of what is available in the liquidation for distribution.

There are, however, instances where the personal liability of directors comes into play. In terms of the Companies Act, a business which trades insolvently must liquidate and depending on each case and its own set of facts, failing to do so can lead to reckless trading. When a company trades recklessly, directors can be held personally liable. Most business owners, however, will first attempt to save their business and will not simply close its doors when it is struggling financially. Often in this regard, the line in the sand is drawn based on “when does one stop throwing money into a bottomless pit,” but just as important should be the consideration of the risks involved with trading recklessly.

Another instance is where fraud is involved. Directors acting with the intent to defraud creditors or shareholders can be sure to face personal liability and even criminal charges.

SARS, through the Tax Administration Act, has a bit more reach than the ordinary creditor as it can in addition to directors, pursue financial officers and third parties in their personal capacity as well. Such instances include the following:

• Where the fraudulent or negligent acts of a person who controls or is regularly involved in the management of the overall financial affairs, results in the non-payment of taxes. The Act provides further that it is not necessary for a Court to find a person guilty in this regard, but merely that a SARS official must be satisfied that the person was fraudulent or negligent. Also, important to note, is that liability is extended beyond directors and a person’s intent.
• Where shareholders receive company assets within 1 year before the company is placed under liquidation and where the tax debt existed at the time of receipt of such assets. Shareholders will be jointly and severally liable to pay the tax debt to the extent of the value of such assets.
• Where any person knowingly assists in the dissipation of a taxpayer’s assets to avoid same from forming part of the liquidation, joint and several liability can be imposed.

Even though companies are separate legal entities, there are instances where the law can look beyond the same and hold directors personally liable. Directors need to tread carefully when a company is facing or is already in financial distress. Consideration must be given to the risk of personal liability and as such, legal advice is to be sought.

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