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Shareholder liability for debts of a company by Alden Klaasen

Shareholders in a private company are not normally liable for the debts of the company, but there are instances where they may be, upon deregistration or liquidation of the company.

Deregistration

In terms of section 82 of the Companies Act No. 71 of 2008 (“the Companies Act”), the grounds for deregistration of a company by the Companies and Intellectual Property Commission (“the Commission”) and the removal of the company from the companies register can be summarised as follows:

  • When the affairs of a company have been completely wound up and a certificate to this effect has been issued.
  • Where the company has transferred its registration to a foreign jurisdiction.
  • Where the company has failed to file an annual return for two or more years in succession; and on demand by the Commission, has failed to give satisfactory reasons for the failure to file the required annual returns; or to show satisfactory cause for the company to remain registered.
  • Where the company appears to have been inactive for at least seven years, and no person has demonstrated a reasonable interest in, or reason for, its continued existence.
  • Where the Commission has received a request for deregistration and has determined that the company 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 company being liquidated.

The effects of deregistration of a company are far-reaching and are set out in section 83 of the Companies Act:

  1. A company is dissolved as of the date its name is removed from the companies register unless the reason for the removal is that the company’s registration has been transferred to a foreign jurisdiction, as contemplated in section 82 (5).
  2. The removal of a company’s name from the companies register does not affect the liability of any former director or shareholder of the company or any other person in respect of any act or omission that took place before the company was removed from the register. [own emphasis]
  3. Any liability contemplated in subsection (2) continues and may be enforced as if the company had not been removed from the register. [own emphasis]

The effect of deregistration is to render the debt of the company unenforceable, but this does not extend to any ancillary agreements in the form of guarantees, security or warranties. Therefore, in the case of shareholders and directors alike, the liability for debt incurred in their personal capacity, e.g. as surety, would be enforceable, unless the suretyship agreement provides otherwise.

Liquidation

The liquidation (winding-up) of a company can be involuntary, or a voluntary liquidation by a solvent company. For the purposes of this article we focus on voluntary liquidation in terms of the Companies Act section 80:

Voluntary winding-up of solvent company:

  1. A solvent company may be wound up voluntarily if the company has adopted a special resolution to do so, which may provide for the winding-up to be by the company, or by its creditors.
  2. A resolution providing for the voluntary winding-up of a company must be filed, together with the prescribed notice and filing fee.

The liquidator of the company exercises an election whether to terminate or maintain the contractual obligations of the company, the guiding criterion being the best interests of the creditors. This election will directly affect shareholders and directors: where a liquidator terminates a contract a shareholder or director may be held liable in their personal capacity where they have offered guarantees, security or warranties in their personal capacity.

Shareholders in particular must also take note of the tax implications of voluntary liquidation under the Tax Administration Act 28 of 2011, in terms of section 181:

Liability of shareholders for tax debts

  1. This section applies where a company is wound up other than by means of an involuntary liquidation without having satisfied its outstanding tax debt, including its liability as a responsible third party, withholding agent, or a representative taxpayer, employer or vendor.
  2. The persons who are shareholders of the company within one year prior to its winding up are jointly and severally liable to pay the tax debt to the extent that:
    1. they receive assets of the company in their capacity as shareholders within one year prior to its winding-up; and
    2. the tax debt existed at the time of the receipt of the assets or would have existed had the company complied with its obligations under a tax Act. [own emphasis]
  3. The liability of the shareholders is secondary to the liability of the company.
  4. Persons who are liable for the tax debt of a company under this section may avail themselves of any rights against SARS as would have been available to the company.
  5. This section does not apply:
    1. in respect of a “listed company” within the meaning of the Income Tax Act; or
    2. in respect of a shareholder of a company referred to in paragraph (a).

A shareholder can therefore be held liable for ordinary debts of the company in terms of a suretyship or other agreement and can also be held personally liable for the unpaid tax debt of the company, despite the fact that the shareholder was not necessarily privy to the inner-workings and day-to-day management of the company.