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Thread: What happens to loan account when CC closes

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    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

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    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.

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    Question loan account payout

    Quote Originally Posted by Andromeda View Post
    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????

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    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 at 08:10 AM.

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    Loan account versus financial assistance to company

    Quote Originally Posted by Andromeda View Post
    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
    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.

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    Quote Originally Posted by Lilla View Post
    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...
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    Indeed

    Quote Originally Posted by Dave A View Post
    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 🤣

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    The trouble with opportunity is it normally comes dressed up as work.

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    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

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    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.
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