My Company Keeps Making Losses – When Should I Consider Company Liquidation?

A company making a loss does not necessarily need to be liquidated. Businesses go through difficult periods. A large customer may pay late, an unexpected expense may arise, or the business may simply experience several difficult months where expenses exceed income. The more important question is whether the company is experiencing a temporary financial problem or has reached the point where it is commercially or factually insolvent. Understanding the difference can help directors recognise when financial pressure has become more serious and when liquidation should be considered.

Commercial Insolvency vs Factual Insolvency

There are two important ways of looking at whether a company is insolvent.

Factual insolvency generally means that the company's liabilities are greater than the value of its assets. For example, if a company owns assets worth R2 million but owes creditors R3 million, it may be factually insolvent.

Commercial insolvency is different. A company is commercially insolvent when it cannot pay its debts as they become due in the ordinary course of business. This means that a company may own property, machinery, vehicles or other valuable assets and still be commercially insolvent because it does not have enough available cash to pay its monthly obligations. For example, a company may own a property worth several million rand but have insufficient money available to pay salaries, SARS, rent and suppliers at the end of the month.

This distinction is important because directors often believe that having assets means the company cannot be insolvent. Unfortunately, assets do not necessarily solve an immediate cash-flow problem. It also works the other way. A company whose liabilities exceed the current value of its assets does not necessarily have to close immediately if it continues to meet its obligations and has a realistic and sustainable plan to return to profitability. The important question is therefore not simply whether the company made a loss this month. It is whether the business can realistically recover.

When Does a Cash-Flow Problem Become More Serious?

One missed payment does not mean that a company should immediately be liquidated. The concern starts when missed payments become a pattern. Warning signs can include falling behind with SARS, paying salaries late, not paying rent, defaulting on supplier arrangements, borrowing money to pay existing debt, continually relying on the director's personal money, losing banking facilities, breaking payment arrangements or receiving summonses and judgements.

At this point, the director should no longer only be asking: "How do we get through this month?".

The more important question becomes: "Does this company have a realistic way of returning to a position where it can pay its debts?".

The type of creditor that is not being paid also matters.

SARS Arrears Can Become a Serious Problem

SARS should be treated as an important creditor when assessing whether a company can continue trading. PAYE, VAT and income tax arrears can increase through interest and penalties. Outstanding returns can also make it increasingly difficult to determine exactly what the company owes. More importantly, SARS has significant collection powers.

Depending on the circumstances, SARS can pursue collection, obtain civil judgements, attach assets and require a third party holding money belonging to the company to pay that money directly to SARS. This can include the company's bank. A business may therefore still have customers, employees and work coming in, but suddenly find itself unable to operate because money in its bank account is no longer available to pay its normal operating expenses.

There are also circumstances where persons involved in the financial management of a company can become personally liable for certain company tax debts. Ignoring SARS arrears while continuing to trade can therefore create a much bigger problem later.

Employees, Salaries and Provident Fund Contributions

Difficulty paying employees is another important warning sign. There is a difference between paying salaries a few days late because a customer has unexpectedly delayed payment and reaching a position where the business routinely cannot meet its payroll.

Pension and provident fund contributions require particular attention. These obligations should not simply be treated in the same way as an overdue supplier account. Failure to deal correctly with required contributions can have consequences beyond the company itself, and certain persons involved in the company's financial management may potentially face personal liability.

If a company regularly has to choose between paying employees, employee-related obligations, SARS, rent or suppliers, the financial problem may have moved beyond an ordinary cash-flow shortage.

Rent Arrears and the Landlord's Tacit Hypothec

Rent arrears can also become much more serious than simply owing the landlord money. Where rent remains unpaid, the landlord may cancel the lease and take legal action to recover the outstanding amount. A landlord may also have rights under what is known as a landlord's tacit hypothec over movable assets situated at the leased premises. This can become particularly important where the business relies on machinery, equipment, stock, furniture or other movable assets to operate.

If these assets are attached, the problem is no longer only the rental arrears. The company may lose access to the very equipment or stock it needs to continue operating and generating income. This can place further pressure on an already struggling business and make financial recovery even more difficult. Directors should therefore be careful about removing assets from leased premises once substantial rental arrears exist or the landlord has started taking legal action.

Banks, Finance Agreements and Personal Surety

A company is a separate legal entity from its directors. This means that company debt does not automatically become the director's personal debt. However, directors frequently sign personal surety for overdrafts, business loans, vehicle finance, equipment finance, commercial leases and supplier accounts.

If the company is eventually unable to settle these debts, liquidation does not necessarily make the personal surety disappear. Where the creditor suffers a shortfall, it may pursue the director personally in terms of the surety. This is why a proper assessment should look at both the company's debts and the director's personal exposure.

What If the Company Owns Property?

Property registered in the company's name forms part of the company's assets and must be considered when assessing its overall financial position. But owning valuable property does not necessarily mean that the company is commercially solvent.

A company could own a property worth several million rand and still be unable to pay its current debts. If a property belongs personally to the director rather than to the company, it does not become a company asset simply because the company is liquidated. The risk to that property may arise where the director has signed personal surety and company creditors subsequently pursue the director for unpaid shortfalls. The size of those potential shortfalls therefore matters when deciding whether the director's personal financial position also needs attention.

Judgements and Attachments Affect the Company's Ability to Trade

Once creditors start taking legal action, financial pressure can escalate quickly. A creditor who obtains judgement may proceed with execution against company assets. Vehicles, machinery, equipment, stock and other assets may become vulnerable to attachment. Money belonging to the company can also become subject to collection or attachment processes in appropriate circumstances.

This creates an important practical problem.

The underlying business may still have customers and future orders, but if its operating funds, vehicles, machinery or stock are attached, the company may lose the ability to generate the income it needs to recover. An enforcement action by one creditor can therefore affect the company's ability to pay everyone else. Directors should not assess whether a company can survive purely by looking at future orders or expected income. They also need to consider whether the business still has access to the money and assets required to complete that work.

When Trying to Save the Company Starts Creating More Risk

Most directors do not simply walk away from a business when it starts struggling. They cut expenses, negotiate with creditors, put money into the business and try to give it time to recover. Sometimes that works.

However, it is important to remember again that the company and the director are separate legal entities. One of the clearest warning signs occurs when the company can no longer obtain finance in its own name because of its existing debt or financial position, and the director begins borrowing personally to keep the business operating. This may include taking personal loans, using personal credit cards or borrowing against personal assets to pay company expenses. At this point, the director may simply be transferring the company's financial problems into their own personal estate. If the company cannot obtain funding based on its own financial position and can only continue operating because the director is personally borrowing money to keep it alive, liquidation should be seriously considered.

Otherwise, the director may eventually be left with two problems: a company that still needs to be liquidated and substantial personal debt incurred trying to save it.

There are other risks associated with continuing to trade for too long. These can include taking deposits from customers when the company may no longer be able to complete the work, continually entering payment arrangements that cannot realistically be maintained, or taking on new debt without a reasonable prospect of being able to repay it.

Directors should also be careful about moving company assets, improperly favouring certain creditors or removing assets where creditors have already taken steps to secure them.

In serious circumstances, continuing to trade recklessly or fraudulently can potentially result in personal liability.

So When Should Liquidation Be Considered?

Liquidation should not be the automatic response to a difficult month or even a temporary period of losses. The real question is whether there is a realistic and sustainable route back to solvency. If the company can reduce expenses, collect outstanding debtors, negotiate realistic arrangements with creditors and return to positive cash flow, liquidation may not be necessary.

But consider the position where several problems are happening at the same time: SARS arrears are increasing. Employees cannot be paid on time. Provident fund contributions are falling behind. Rent is overdue. Suppliers have stopped providing credit. Payment arrangements are being broken. Creditors have started legal action. Assets are being attached. The company's bank account is under pressure. The bank will no longer provide additional finance. The director is borrowing personally simply to keep the doors open.

At that point, continuing to trade may no longer be solving the problem. It may simply be making the eventual problem bigger. Obtaining advice earlier gives directors an opportunity to understand their options before creditors, SARS or legal proceedings begin determining what happens next.

Consider the Company and Your Personal Exposure

A proper insolvency assessment should look at the complete position. This includes what the company owns, what it owes, which creditors hold security, whether SARS and employee obligations are up to date, whether the landlord has started enforcement action, whether judgements or attachments already exist and which debts are supported by personal surety.

The purpose is to establish two things separately: Can the company realistically recover?

And: If it cannot, what does that mean for the director personally?

Understanding both positions before taking further action can prevent a struggling company from becoming a personal financial crisis for the director as well.

If your company is struggling to meet its obligations and you are uncertain whether the business can recover, complete our confidential company assessment. We will review the company's financial position, creditors, assets, SARS exposure and any personal sureties before explaining the available options.

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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