Debunking Top 5 Myths about Voluntary Liquidation in South Africa

Business Liquidation is often associated with failure and overwhelming business debts. It may be true in some cases, but that is not the whole picture. Liquidation can actually be a strategic and responsible step when a company is no longer able to meet its financial obligations. Or perhaps the company owners just want to close the business and book a nice vacation to Hawaii. Whatever the reasons, voluntary liquidation can offer a swift exit. Let's debunk the top 5 myths about voluntary liquidation so entrepreneurs in South Africa can make an informed decision.

Let's Debunk Top 5 Myths about Voluntary Liquidation in South Africa!

Myth 1: Liquidation means Business Failure

This is an understandable myth, as many businesses in South Africa consider liquidation during a financial crisis. 'Business failure' is a commonly attached stigma to liquidation. However, let's flip the coin and see the other side. Liquidation is actually a sign of responsible leadership.

When a company is unable to trade solvently, namely, in a way that shows you have enough money to pay all debts and meet financial obligations, directors are legally obligated to take action to protect creditors and other stakeholders. Instead of clinging to an unsustainable operation, voluntary liquidation allows the business to close down in a structured and legal manner. From this point onward, directors can go on to start new ventures once the burden of insolvency is lifted.

Not to mention, facing the liquidation process gives them invaluable experience they can use to build stronger businesses in the future.

Myth 2: Directors will be Blacklisted

While not as common, another myth is that directors of a liquidated company will automatically be blacklisted or barred from holding directorships in the future. This is not the case in South Africa, unless misconduct such as fraud or reckless trading is proven.

Voluntary Liquidation is a legal process that winds up an insolvent company in an orderly fashion. If the directors comply with the legal procedure and cooperate with the appointed liquidator, their personal reputations and future business opportunities remain intact.

Myth 3: Personal Assets Will Be Seized

Another not-so-common, yet occasionally expressed fear. In standard situations, the governing laws treat a company as a separate legal entity. In the process, the liquidator realises the company's assets to pay creditors. However, directors' personal assets remain safe.

The exception to this rule is where the directors have signed personal sureties, acknowledgement of debts or have engaged in unlawful behaviour,. Those particular entities stand to lose personal assets as creditors / SARS have a legal right to pursue the directors personally for debts owing.

The voluntary liquidation process helps prevent the escalation of debts. It suspends tax numbers and also future automatic tax assessment and also writes off all debt where the sale of business assets resulted in not enough proceeds to cover the outstanding debts owed.

Seeking professional guidance early can help directors understand which assets may be at risk and how to minimise personal exposures.

Myth 4: You will Ruin your Staff

The belief that employees will resent management for liquidation is understandable, however, often inaccurate. When a company is visibly struggling, staff are usually aware of the financial distress long before liquidation occurs.

Voluntary liquidation offers more transparency and dignity than suddenly closing a business with no explanation. Employees can claim from the Liquidation & Distribution fund as they become preferential creditors during the company's liquidation. This at least gives the employees a chance to recover something they otherwise would never have received if the company had continued trading recklessly.

Employees are also entitled to claim UIF when a company liquidates and as long as UIF contributions were submitted to SARS by the company when it was trading.

Myth 5: Voluntary Liquidation is a Complicated Process

Given that a business has a clean trading record, the process is rather straightforward in South Africa. Once directors sign the necessary resolutions, the company can be placed into liquidation quickly. The process begins the moment you obtain a Provisional Order from the court.

The liquidator then takes over the administration and communication with creditors, relieving directors of operational stress. Now, it is a relatively simple process, but quite a lengthy one. The full winding-up process can take 12- 18 months if uncomplicated.

Conclusion

Voluntary Liquidation process for businesses in South Africa sometimes faces the myths and stigma that create unnecessary anxiety for business owners. It also results in the unnecessary spreading of myths and untruths

In reality, however, liquidation is a legal tool that protects directors, creditors, and employees when a company can no longer operate profitably. By understanding what voluntary liquidation truly involves, directors can approach the process confidently. With the right legal team, directors can make informed decisions that safeguard their future.

How can we help you?

If you require legal assistance to initiate the liquidation process, our expert team of lawyers at Solvendi is here for you. For more information regarding business liquidation, kindly check out our website or contact us today!

Disclaimer: This article is intended for general informational purposes only and should not be interpreted as legal advice. Any actions taken based on the information provided are done so at your own discretion. Solvendi cannot be held liable for any outcomes resulting from such actions. We encourage you to consult with us directly before making decisions solely based on the content of this article.

Would you like to discuss the effects of liquidation with regards to your specific company? 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:

National: 087 220 0710

Head Office: 010 880 7589

Email: consultations@solvendi.co.za 

Website: www.solvendi.co.za