How to face the harsh reality of small business liquidation

Times are tough and some business owners may be struggling to make ends meet. The possibility of becoming insolvent can be a difficult reality to face, but the sooner you accept this fate, the better off you might be.

Getting into contact with a professional on these matters as soon as possible will be beneficial in the long run. The crucial mistake that business owners most often make in these situations, is holding on for too long.

This kind of behaviour can have some serious implications. For instance, what you don’t realise, is that it is illegal to incur credit while you are insolvent.

Running a business without incurring credit can be incredibly difficult. Things like using a cellphone account, telephone account, incurring rates and taxes and all the while not been able to make payment can and will most certainly be construed as negligence on the part of the business owner.

The logical conclusion of not being able to pay your creditors is the process of a liquidation or sequestration.

This is a process a business must go through in terms of our country’s Insolvency Act when things go belly up.

The liquidator or trustee establishes the extent of the liabilities, takes into account all the assets, has them appraised and secured and eventually distributes the proceeds of the assets according to the rank and size of each creditors claim.

South African small, medium and micro enterprises (SMMEs) are often the businesses that fall into this trap.

The barriers to entry in certain fields can be daunting as the road to obtaining finance is difficult and the business environment in our emerging-market economy is often seen as a hindrance to entrepreneurship.

The SMME sector is said to be one of government’s core focus areas in job creation, according to a statement made by minister of small business development, Lindiwe Zulu.

So while it is hopeful, small business owners who find themselves in this situation often face either a long road ahead to recovery through business rescue (as stipulated in chapter 6 of the Company’s Act), or a definite closure through the process of a liquidation.

Creating a success out of a business venture of any size is no easy feat, but if your books are not balancing, it is essential to face facts and accept that your business needs financial assistance.

The sooner you get the process going, the more likely you are to salvage your efforts, even in a small way – be it paying off some debts, or being able to someday afford to start a new business with no black marks against your name.

Your insolvency practitioner, if you’ve taken the step to nominate one, is obligated to preserve the assets to the best of their ability; this will include paying for storage and/or security costs.

The preservation of assets is done in the best interest of the general body of creditors so as to maximise the potential dividend that they stand to receive. It is therefore always advisable to heed the experts’ advice.

Business rescue is an option you may be able to pursue, but this approach relies on taking action long before it’s too late, in which case liquidation may be your only option.

The smartest thing you can do for your business when things go awry is to get in contact with someone who knows what they’re doing.

A professional in this field may be able to get you out of the red or may just make the transition from business owner to former business owner a little less rocky.

Burying your head in the sand is certainly not the best plan of action – don’t wait, if needed, liquidate.

*Thomas van Zyl is an insolvency practitioner at Mazars.

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