Most business advice out there is on how to start and grow a business. And although this is crucial for obvious reasons, it’s also good to understand how to dissolve your business, should the need ever arise. Sad but true, not all businesses will last. In fact, between 70% to 80% of small to medium sized start-up businesses will dissolve within the first three years, for whatever reason.
Here are a few key points to consider, should you ever need to dissolve a business quickly and effectively:
Know your options
There are two ways to dissolve a business. Closing or dissolving a business means that your business is ceasing to operate due to either:
- deregistration; or
Deregistration vs Liquidation
When a business deregisters with the Companies and Intellectual Property Commission (“the CIPC“), it implies that the business is no longer registered and has no legal standing since it’s not doing any business, nor has any assets or liabilities. In essence, the entity concerned is removed from the CIPC database and ceases to exist once the CIPC application process has been finalised.
On the other hand, when a business undergoes a voluntary or compulsory liquidation (also known as “winding-up”) it involves the process of selling all the assets, paying off creditors, issuing any remaining assets to the main or parent company, and then simply closing the business. Liquidation or the “winding- up” of a business may happen in various ways, including the following:
- when a business is unable to pay its debts;
- as a result of a legal court process;
- by application of the creditors; or
- voluntarily, i.e. by application of the members.
Advantages of proper dissolution
As long as your business exists, it is liable to pay taxes and other fees. If you want to avoid those unnecessary expenses, it is important to ensure that the business is dissolved properly. Until you do so, your business will be held liable to file all relevant tax returns. Failure to file these returns will result in heavy penalties and fees associated with the late filing.
Another consideration to take into account, is that even if you have already stopped your business operations, legally the company/close corporation, directors, and officers (in some cases also shareholders/members) will still be considered as personally liable for certain aspects of the company business – unless you file cancellation legally.
What happens to the employees of the company?
There is obviously a need to protect the employees of a business that is undergoing dissolution. In the past, the termination of contracts of employment meant that employees were not considered as dismissed and therefore they did not receive any protection or benefits the law offered e.g. severance pay in terms of the Basic Conditions of Employment Act or the right not to be unfairly dismissed in terms of the Labour Relations Act.
The amendment to Section 38 of the Insolvency Act applies to the insolvency of individual employers who trade in their personal capacity and to companies and close corporations wound up due to insolvency, with the effect that:
- contracts of service are suspended on the insolvency of the employer from the date of the winding-up order;
- during the suspension of the contract, the employee is not obliged to render any services to the employer, and the employee is not entitled to receive any pay or employment benefits arising from the contract;
- the employee whose contract has been suspended is deemed to be unemployed and is entitled to claim UIF; and
- an employee whose contract is suspended is terminated due to the employer’s insolvency is entitled to claim compensation for loss suffered by suspension or termination of the contract of service.
Furthermore, the trustee / liquidator may not terminate contracts of services unless he has consulted with:
- persons as required to by virtue of a collective agreement;
- a workplace forum;
- a registered trade union representing affected employees; or
- the affected employees themselves.
If the trustee / liquidator has not already terminated the services of employees, the contracts will automatically terminate after 45 days of the trustee / liquidator having been appointed.
An employee whose services has been terminated in this manner is entitled to claim severance benefits as if he/she were dismissed for operational reasons, from the employer’s insolvent / liquidated estate in terms of section 41 of the Basic Conditions of Employment Act. Also in terms of section 197A of the Labour Relations Act, if a transfer of business takes place between an old employer and a new employer in the circumstances above, the new employer is automatically substituted in the place of the old employer in all contracts of employment in existence immediately before the old employer’s winding-up.
In conclusion, dissolving a business doesn’t have to catch you off guard or end in a power-struggle. If done properly, it can be a quick and simple process. Talk to a legal professional from the start, be transparent and make sure you follow the necessary steps.