What happens to loan account when CC closes

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  • Lilla
    Junior Member
    • Apr 2017
    • 15

    #1

    What happens to loan account when CC closes

    Hi there, I would like to leave a CC that is not making any profit and has not had the finances to pay salaries to the 2 members for the last 15 months. We have no debt. The other partner wishes to continue but does not have the finances to buy me out. I would like to resolve this in an amicable way. I have the larger loan account as I have had to put cash into the business.
    * Does my loan account fall away if we close the business
    * What are my options to recoup the loan
    * What are the legal implications to close the business, we are VAT registered

    Any advice to help us do resolve this and still remain friends will be highly appreciated

    Regards
    Lilla
  • Andromeda
    Gold Member

    • Feb 2016
    • 734

    #2
    Hi Lilla

    Firstly to cease trading and de-register for vat entails a possible vat bill if there are assets on which vat input credits were claimed. Without knowing the size and extent it is difficult to say whether or not there will be. An alternative is to liquidate the close corporation which you probably could do either voluntarily or as a creditor, in the event that it cannot repay your loan account.

    Your loan account can never fall away. You can waive it, or convert it to equity, but unless the corporation is liquidated it simply stays there.

    To recoup the loan you would need to liquidate the assets to produce cash in order to do that. Such a scenario simplifies the exit vat thing because you would account for output vat on the assets when you liquidate them.

    Comment

    • Lilla
      Junior Member
      • Apr 2017
      • 15

      #3
      loan account payout

      Originally posted by Andromeda
      Hi Lilla

      Firstly to cease trading and de-register for vat entails a possible vat bill if there are assets on which vat input credits were claimed. Without knowing the size and extent it is difficult to say whether or not there will be. An alternative is to liquidate the close corporation which you probably could do either voluntarily or as a creditor, in the event that it cannot repay your loan account.

      Your loan account can never fall away. You can waive it, or convert it to equity, but unless the corporation is liquidated it simply stays there.

      To recoup the loan you would need to liquidate the assets to produce cash in order to do that. Such a scenario simplifies the exit vat thing because you would account for output vat on the assets when you liquidate them.
      Thank you for clarifing that. That makes a lot of sense
      We were told that I have two options to exit the company.
      1. Loan account to be paid out and I walk away (was told this is the law)
      2. Dissolve company and share assets in which case my loan account falls away

      This does not make any sense to me as I am the one that has put the cash in but would then either get my loan account paid out and walk away from the busniness with no share in the assets. Or share the assets and lose my loan account????

      Comment

      • Andromeda
        Gold Member

        • Feb 2016
        • 734

        #4
        The members are managers of the corporation (like directors in a company) and they are also holders of beneficial interest in the capital of the corporation, represented by the members contributions (like shareholders in a company).T he loan account is distinct from the members contributions. There is nothing at all mysterious about it, it is simply an amount of money owed to a member in respect of financial assistance given by the member.

        Assuming the other member wished to continue operating the corporation, there would need to be an agreement regarding the purchase and sale of your members contributions, and it would include the fate of your loan account. The choices would be you waive repayment thereof, cede it to the purchaser, or arrive at terms with the corporation regarding repayment. Only after the terms have been met and discharged do you "walk away", if I understand the term correctly.

        Dissolving the company can take a few forms. I have attached the Act and you should look at S67. Be that as it may, your loan account is a liability and only "falls away" if the corporation is finally liquidated. In that regard see S68 and S69. remember that as far as the loan account, in excess of R200 is concerned, you are a creditor and can apply for a liquidation order.

        The Act is hereCLOSE_CORPORATIONS_ACT_69_OF_1984.pdf
        Last edited by Andromeda; 11-Apr-17, 08:10 AM.

        Comment

        • Lilla
          Junior Member
          • Apr 2017
          • 15

          #5
          Loan account versus financial assistance to company

          Originally posted by Andromeda
          The members are managers of the corporation (like directors in a company) and they are also holders of beneficial interest in the capital of the corporation, represented by the members contributions (like shareholders in a company).T he loan account is distinct from the members contributions. There is nothing at all mysterious about it, it is simply an amount of money owed to a member in respect of financial assistance given by the member.

          Assuming the other member wished to continue operating the corporation, there would need to be an agreement regarding the purchase and sale of your members contributions, and it would include the fate of your loan account. The choices would be you waive repayment thereof, cede it to the purchaser, or arrive at terms with the corporation regarding repayment. Only after the terms have been met and discharged do you "walk away", if I understand the term correctly.

          Dissolving the company can take a few forms. I have attached the Act and you should look at S67. Be that as it may, your loan account is a liability and only "falls away" if the corporation is finally liquidated. In that regard see S68 and S69. remember that as far as the loan account, in excess of R200 is concerned, you are a creditor and can apply for a liquidation order.

          The Act is here[ATTACH]6732[/ATTACH]
          Ok so at least the loan to the company is seperate from my loan account so that needs to be addressed seperately.

          Thank you for that information.

          Comment

          • Dave A
            Site Caretaker

            • May 2006
            • 22803

            #6
            Originally posted by Lilla
            Ok so at least the loan to the company is seperate from my loan account so that needs to be addressed seperately.
            Erm - that doesn't seem right. Hopefully what you meant to say is that your loan account is separate from your member interest...
            Participation is voluntary.

            Alcocks Electrical Services | Alcocks Pest Control & Entomological Services | Alcocks Hygiene Services

            Comment

            • Lilla
              Junior Member
              • Apr 2017
              • 15

              #7
              Indeed

              Originally posted by Dave A
              Erm - that doesn't seem right. Hopefully what you meant to say is that your loan account is separate from your member interest...
              Yes that is indeed what I meant 🤣

              Comment

              • Dave A
                Site Caretaker

                • May 2006
                • 22803

                #8
                Participation is voluntary.

                Alcocks Electrical Services | Alcocks Pest Control & Entomological Services | Alcocks Hygiene Services

                Comment

                • Lilla
                  Junior Member
                  • Apr 2017
                  • 15

                  #9
                  HI there, I am still unable to find a way to exit the CC in a friendly manner... after mediation - unsuccessful, consulting a lawyer who is wiling to assist in writing a letter to call up my loan account and a brief consultation with AFSA I more confused and anxious than before!

                  You were the one that explained the best and therefor I am asking you in your opinion (legally) if I sign over my 50% share to my partner who refuses to buy me out because I will not sign a constraint of trade (she offered me a third of the value of my share which I accepted just to end this) can I still call up my loan account? The company does not have the money to pay this and she will either have to borrow the money if she wants to continue with a business that is struggling to keep afloat or liquidate the assets.

                  I just dont want to sign over the shares and thus not have claim to my loan account.

                  Thank you for your time

                  Comment

                  • Justloadit
                    Diamond Member

                    • Nov 2010
                    • 3518

                    #10
                    I have been in a situation a number of times, where there has been a breakdown between members of a C.C.
                    On all occasions, the shares for practical purposes, were worth nothing, however the loan account is what I used to negotiate the deal.

                    On all occasions, I only signed over the shares upon receipt of my loan account. So effectively I sold my shares for the value of my loan account. Use the fact that they will be now the sole owner, and that they will keep all the profits. You may add a little bit of sugar or icing to sweeten the deal here and say that you will not trade in opposition for a period of 3 or 6 months. If the member has to make a loan to pay you out, then they will be out of business long before the time is up, and 3 or 6 months is really a very short time, which will be over before you know it.

                    What ever happens, you must either get the cash up front, or get a surety for the value of your loan account. The fact that the other member must loan money, sell an asset to get your loan in cash is not your concern. Your only concern right now is to get your loan account in cash. What ever happens do not give in and sign the shares over, hoping to get your loan account out later, you will have lost your trump card, and will forever be on your back foot trying to get your cash.

                    Hope I am making clear here, no cash no signing over the loan account, stick to your guns.
                    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
                    Solar pumping, Solar Geyser & Solar Security lighting solutions - www.microsolve.co.za

                    Comment

                    • Lilla
                      Junior Member
                      • Apr 2017
                      • 15

                      #11
                      Thank you I will stick to that. What about the shares though? I am being held "hostage" because I am a 50% member so although it is most unpleasant to be there I still have to perform certain duties which my partner is very capable of doing (like handing over a file to the messenger for the accountant). How will it impact my loan account if I sign the shares over?

                      Comment

                      • Justloadit
                        Diamond Member

                        • Nov 2010
                        • 3518

                        #12
                        Originally posted by Lilla
                        Thank you I will stick to that. What about the shares though? I am being held "hostage" because I am a 50% member so although it is most unpleasant to be there I still have to perform certain duties which my partner is very capable of doing (like handing over a file to the messenger for the accountant). How will it impact my loan account if I sign the shares over?
                        Did you not read my post?
                        On no account do you sign your shares over until your loan account is paid. Once you have your money, it is no longer your concern about your duties, you are no longer part of the company. You can resign as an employee at anytime, but I suggest you remain inside until the deed is done. At least you can have an overview of what is happening, and if you are not happy with the way the business is heading, you can request a liquidation to prevent further losses.
                        Your loan account can not be touched by your partner while you are a share holder. Your partner can not sign any agreements, or accept any liabilities with out your consent as a 50% share holder. Remember that you may have signed personal surety for previous business activities, and part of the signing over of the shares will be to recall these sureties. This may be an over draft at the bank, a supplier credit application, and so forth. You must approach each entity one by one, and cancel/revoke/get back the original surety you signed, and get the current member to be the sole surety holder in the cases that you signed jointly in sureties. This is a very important step!!!!!! If you do not get this sureties annulled, the holders of the sureties will enforce you to pay for the amounts, irrespective that you are no longer a share holder in the business, to be quite frank, they do not care, they have an agreement which usually says "jointly and severely", in other words when the time comes to pay up, they can sue both members together, or if they see that you are able to pay and not the other member, they will sue you directly for the full amount, and will let you go through the process of suing the other member at your own expense.
                        Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
                        Solar pumping, Solar Geyser & Solar Security lighting solutions - www.microsolve.co.za

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