Following the economic impact of the restrictions surrounding COVID-19, many businesses may find themselves in a position where they need to cease trading. The question then is whether Deregistration or Liquidation is the correct route to follow.
Deregistration
When a company or close corporation is formally deregistered, it ceases to be regarded as a legal entity. It cannot sue or be sued. Debt that is due to a creditor of a deregistered entity is not extinguished, but unenforceable against the business, and any assets (including immovable property) of the deregistered entity are forfeited to the state as bona vacantia assets at the time of deregistration.
Deregistration of entities can happen in two instances. Firstly, in terms of section (3)(a)(i) of the Companies Act 71 of 2008 (the ‘Act’) the Companies and Intellectual Property Commission (CIPC) can deregister the entity when two or more successive Annual Returns are outstanding. In this instance of Annual Return non-compliance, the matter will be automatically referred by the CIPC automated system, the directors will be notified by registered or electronic mail, the pending deregistration will be advertised in the Government Gazette and thereafter the said entity will be deregistered. However, this can be problematic if there is any unmovable property registered under the name of the deregistered entity. Once deregistered, the entity has no legal standing and accordingly, there is no option but to restore the entity in order to transfer the property into an active entity or individual. This process can become costly as all the outstanding annual returns must be brought up to date, including penalties for late submission.
Secondly, an entity can be referred for deregistration upon request from the entity itself or any third party, provided that the entity has ceased trading, has no assets (or is being deregistered due to the inadequacy of its assets), and there is no reasonable probability of the entity being liquidated. This process takes a minimum of 6 months and once deregistered the entity’s name is removed from the CIPC’s database.
Liquidation
Liquidation means that the entity has ceased operations, generally as a result of financial difficulties, however, Section 80 of the Act also allows for the voluntary liquidation of a solvent business. The shareholders of the entity must adopt a special resolution which will indicate that they agree to the winding up of the entity. The entity is then required to submit security to the Master of the High Court for payment of its debt, for which payments are to be made within a 12-month period, commencing after the start of the winding up of the business. The result of winding up an entity, is that it ceases to conduct business and is removed from the CIPC’s database.
Section 81 of the Act prescribes that a company or CC itself, a business rescue practitioner or a creditor of the business can apply to the court for a business to be liquidated. This particular section of the Act provides for a variety of instances when an application can be used to wind up a business. A creditor of a debtor company, the directors of the company or the members of a CC can apply for the liquidation of a business, where the entity’s liabilities exceed its assets and there appears to be no prospect of the company paying its debts as they become due. The liquidation proceedings are to close the entity down and have a liquidator appointed to dispose of the assets of the business and utilise the proceeds to settle debts, as they become due. The company cannot continue to trade during these procedures.