The Legalities Of Shutting Down Your Business

The Legalities Of Shutting Down Your Business

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The main approaches of legally shutting down your business are through deregistration and liquidation.

When can your business be deregistration?

A company and close corporation may be deregistered by the Companies and Intellectual Property Commission (CIPC) in the following instances:

  1. Non-compliance with requirements: The CIPC will deregister the company if
    1. The business failed to lodge annual returns for two successive years.
    2. The CIPC believes that the business has been inactive for a period of seven years.
  2. Voluntary deregistration when trading has ceased: The business itself may request deregistration if it can show that it has ceased to carry on business and has no assets or, because of the inadequacy of its assets, there is no reasonable probability of the business being liquidated. According to the South African Revenue Services (SARS), this effectively means that the company or close corporation is not doing any business nor has any assets or liabilities.

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If a business wishes to apply for voluntary deregistration, it is required to write a letter to the CIPC confirming that it is not carrying on business or is dormant and has no assets, or because of the inadequacy of its assets, that there is no reasonable probability of the close corporation being liquidated. This letter must be signed by each active member of the business.

The finalisation of deregistration is dependent on the statutory advertisement process which is three months. After completion of the deregistration process, the final deregistration notice will be posted.

When can your business be liquidated?

Liquidation is the process by which a company or close corporation effectively declares itself insolvent as it is unable to pay its debts. A business can undergo voluntary liquidation, where the owners of the business choose to voluntarily liquidate, or compulsory liquidation through actionby creditors.

Once the business has been placed under liquidation, either voluntarily or by creditors’ court application, the business will cease to carry on its business activities except in so far as may be required for the winding-up. A liquidator is furthermore appointed to sell all the assets, pay off creditors, divide any residue amongst the former shareholders, and then close the business.

The main legal consequences of ceasing to trade are contractual, shareholder, employee and tax obligations. Let’s consider the consequences of contractual obligations during deregistration and liquidation.

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Contractual Obligation

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1The effects of deregistration:

The effect of deregistration is that the business is dissolved, consequently being deprived of its legal existence, and upon such deregistration all its property passes automatically into the ownership of the state as bona vacantia (ownerless goods). All rights and obligations that once vested in the entity are brought to an end, meaning that contacts are terminated, and any debt due is rendered unenforceable against the business.

In the event of voluntary deregistration, the company will have no contractual liabilities and no outstanding debts, as voluntary deregistration is only possible if the business has no assets or liabilities.

If the business is deregistered due to non-compliance and has outstanding debts, the only available option for a creditor is to apply to the CIPC for the restoration of the registration of the company. The CIPC requirements for restoration, however, are very onerous rendering a successful outcome to the application unlikely.

2The impact of liquidation:

When a business is liquidated, all contracts concluded with the business remain in effect. The liquidator is then tasked with making a decision, within a reasonable period of time, whether or not he or she intends to abide by the contract or terminate it, depending on what would be most beneficial to the creditors.

Should the liquidator elect to terminate the contract, the other contracting party has a monetary claim against the insolvent estate as a concurrent creditor (creditors who do not hold any security).

Monisha Prem
Monisha is a corporate advisor, admitted attorney at M. Prem Inc, and author with over 14 years deal-making experience. Monisha litigated for several years before joining an investment banking firm specialising in mergers and acquisitions. Monisha has owned and operated several businesses, is passionate about business development, commercial and corporate law.