Can You Liquidate a Company That Owes SARS Money?
Yes. A company can be liquidated if it owes SARS money.
In fact, outstanding SARS debt is one of the common reasons directors begin considering liquidation. A company may have fallen behind with VAT, PAYE, income tax or other tax obligations while also struggling to pay suppliers, employees, landlords or other creditors. The important question is not simply whether the company owes SARS.
The real question is whether the business can realistically recover and settle its debts, or whether it has reached the point where it can no longer meet its financial obligations. If the company is no longer financially viable, liquidation can provide a formal process for dealing with SARS together with the company's other creditors.
Does SARS Debt Prevent a Company From Being Liquidated?
No. Owing money to SARS does not prevent a company from entering liquidation.
SARS itself confirms that liquidation may take place where a company or close corporation is unable to pay its debts. Liquidation may be initiated voluntarily or, in certain circumstances, by a creditor. This means that a company does not first have to settle its SARS account before it can be liquidated. Once the liquidation process begins, the company's tax affairs form part of the administration of the insolvent estate. This is an important distinction because directors sometimes believe that SARS debt must somehow be resolved separately before they can deal with the company's insolvency.
That is not necessarily the case.
What Happens to SARS Debt During Liquidation?
Once a liquidator is appointed, the liquidator takes responsibility for dealing with the company's tax affairs as its representative taxpayer. This includes notifying SARS of the liquidation, engaging with SARS, attending to outstanding tax returns and dealing with outstanding tax liabilities as part of the winding-up process.
SARS confirms that liabilities relating to periods before liquidation are included as claims in the Liquidation and Distribution Account. In practical terms, SARS becomes one of the creditors whose claim must be dealt with through the formal liquidation process.
The director does not simply decide which creditors will be paid and which will not. The administration of the company moves into the formal insolvency process under the control of the appointed liquidator.
What If the Company Has Outstanding SARS Returns?
Outstanding returns do not simply disappear when the company enters liquidation.
SARS states that the company's statutory tax obligations continue and that the liquidator, acting as representative taxpayer, is responsible for submitting outstanding returns for the applicable tax types.
This is one reason why the SARS position should be identified as early as possible.
A company may owe VAT, PAYE or income tax, have outstanding returns, or have assessments and penalties that need to be investigated.
The fact that these issues exist does not automatically prevent liquidation. They do, however, need to be dealt with correctly as part of the winding-up process.
Should I Negotiate With SARS Instead of Liquidating the Company?
That depends on whether the business itself remains viable.
If the company has a temporary cash-flow problem but is fundamentally profitable, it may make more sense to investigate a payment arrangement, compromise or another appropriate SARS debt solution before considering liquidation. SARS currently provides mechanisms for qualifying taxpayers to request instalment arrangements and, in appropriate circumstances, compromises of tax debt.
This is why liquidation should not automatically be the first response simply because a company owes SARS money.
However, the position is different when the company cannot pay SARS and cannot meet its other financial obligations. If the business continually falls further behind, uses new income to pay old debt and has no realistic prospect of returning to a sustainable financial position, another payment arrangement may simply postpone the underlying problem. This is where the distinction between temporary cash-flow pressure and genuine insolvency becomes important.
Can SARS Liquidate a Company for Unpaid Tax?
Yes. SARS can itself take enforcement action against a taxpayer for outstanding tax debt, including seeking the liquidation of a company in appropriate circumstances. SARS lists liquidation among the enforcement measures available where tax debt remains unpaid and has previously successfully pursued liquidation proceedings against a company for unpaid tax. For directors, this creates an important practical consideration.
If the company is already insolvent and liquidation is inevitable, it may be preferable to investigate the company's position and take appropriate advice rather than simply waiting for SARS or another creditor to commence proceedings. The earlier the company's affairs are assessed, the more opportunity there is to understand the available options and prepare properly for the process.
Can I Simply Deregister the Company Instead?
SARS describes deregistration as appropriate where a company is no longer conducting business and has no assets or liabilities. Liquidation, by contrast, is the process used to wind up a company that cannot pay its debts.
A company with unresolved SARS debt and other creditors should therefore not simply be treated as though it were a dormant company with nothing outstanding. Where liabilities remain, the company's financial position needs to be properly assessed to determine the appropriate closure process.
Will SARS Debt Automatically Become the Director's Personal Debt?
Not simply because the company is liquidated. A company is a separate legal entity, and company tax debt does not automatically become the personal debt of a director merely because the business cannot pay SARS.
However, there are circumstances in which personal liability can arise. These need to be considered separately based on the director's conduct, any personal sureties or guarantees, and the particular statutory provisions involved.
We deal with this issue separately because company insolvency and director liability are not the same question.
When Should a Company Owing SARS Consider Liquidation?
Liquidation should be considered where the problem is no longer simply the SARS account. The company may owe SARS together with suppliers, landlords, employees, banks and other creditors. Its expenses may consistently exceed its income, legal action may already have started, or there may be no realistic prospect of trading out of the financial difficulty.
At that stage, the objective should be to establish whether the company remains viable or whether its insolvency needs to be formally resolved. A proper assessment should consider the company's SARS position, other creditors, assets, employees, leases, personal sureties and any legal action already underway.
The fact that the company owes SARS does not prevent liquidation. It may instead be one of the clearest indications that the company's overall financial position needs to be assessed before the situation deteriorates further.
Contact Solvendi for a confidential assessment of your company's financial position and a clear explanation of the options available.
Disclaimer: This article is intended for general informational purposes only and should not be regarded as legal advice. The appropriate solution will depend on the company's particular financial position, tax affairs and liabilities. Professional advice should be obtained regarding your individual circumstances.
Contact us to discuss your current situation and receive a free detailed assessment of how the process works and what your costs will be. We have legal experts with 20 years experience that can guide you through the process. Our main aim is to be as informative as possible. Let's Chat.
If you require advice with regards to Sequestration, Business Liquidations, Insolvency, Bankruptcy or Credit Rehabilitation kindly contact SOLVENDI as follows:
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Head Office: 010 880 7589
Email: consultations@solvendi.co.za
Website: www.solvendi.co.za
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