Section 22 determines that a director must liquidate a company when...
Under Section 22 of the Companies Act, a director may be held personally liable for a company’s debts if they traded recklessly. This means continuing to operate the company when it was insolvent. Directors are legally required to liquidate the company as soon as it becomes unable to pay its debts or when liabilities exceed assets. Failing to do so can expose directors to personal liability for the company’s debt, especially in cases of reckless trading.
Directors not personally liable for the company's debts unless...
In general, directors are not personally liable for the company’s debts unless they have signed personal sureties When a director has signed a personal surety, they are remain personally liable for the debt of the company that they signed personal surety for. Only the debt that the director signed surety for. If there are no sureties, the director is not liable for the debt of the company (except for SARS that “CAN” (not shall, will, or must) hold a director personally liable for the debt of the company, which, in our experience, does not happen often).
Directors are not automatically blacklisted after liquidation
Contrary to popular belief, liquidation does not automatically lead to blacklisting for directors. Since a company is a separate legal entity, it is the company, not the director, that holds the financial burden. Personal assets are only at risk if the director has signed sureties for company debts and fails to pay off those sureties. In such cases, the blacklisting stems from unpaid surety agreements, not the company liquidation itself.
SARS can hold a director personally liable but we don't see it often
In terms of the Tax Act, SARS can (note the word “can” hold directors personally liable for the debt of the company. It is not “shall, will” or ” must”). This distinction is important because if SARS wants to hold a director personally liable, they certainly do not do it in every single case. In our experience with the hundreds and hundreds of liquidations we have done, only 2 of our directors received notice that SARS wants to hold them personally liable. It is possible to manage SARS if this happens so it is not the end of the road and does not mean that SARS will definitely hold the director personally liable.
How do directors protect themselves
A director should know for which creditors they signed personal surety before they start with liquidation. It is very important that you know where you stand with sureties because it may also influence your decision about whether you should consider sequestration or not (individuals sequestrate and businesses liquidate). If you know you have signed surety for most of or majority of the company’s debt, it is better to consider sequestration while you are considering liquidation, so that you can restructure your position. Also, if the sureties are manageable, then it is best to make a payment arrangement for the sureties just before or soon after the liquidation of the company. That way you manage your financial affairs and remove stresses and stay in control.
What about the personal assets of directors
A company or a close corporation is a seperate legal entity from the directors or members, therefore the personal assets of them are not involved in a liquidation. In a liquidation we only work with the company’s assets and not assets that belong to the directors or members or third parties.
Conclusion
Directors are not automatically held liable for a company’s debts after business liquidation. Personal liability typically arises only if personal sureties have been signed. Directors can protect themselves by initiating the business liquidation process promptly and seeking legal advice if needed. Acting early ensures a smoother liquidation and minimizes the risk of financial repercussions for directors.
