What happens to a company’s debts when its shares are sold?

Selling the shares does not create a new company

In an ordinary share sale, the company continues to exist after its owners change. That is the starting point for understanding its debts. A supplier balance, loan or tax obligation does not disappear merely because a different person now holds the shares. The company’s history remains relevant to the buyer’s investment and to the people managing its affairs.

The foundation is the company’s continuing legal identity under section 19 of the Companies Act. Applying that principle, a share sale should be assessed as a change of ownership of the existing entity. It is different from forming a new company or negotiating a separate sale of assets.

This distinction matters even where a company is advertised as a shelf company. The label does not establish that it has no obligations. An entity may have incurred administration costs, borrowed funds or entered an agreement without generating sales. Ask for an account of what it did, and the records that support that account.

Separate the company’s debt from personal liability

Two questions are often mixed together: does the company still owe the money, and is a shareholder or director personally liable for it? The first follows the company’s continuing identity. The second requires a separate assessment of the legal basis, documents and conduct involved. Buying shares is not a sufficient reason to give a blanket answer about someone’s personal exposure.

For example, a person may have signed a guarantee or suretyship, or a particular statutory provision may be relevant. Ask an adviser to identify the actual obligation and the person who assumed it. Do not assume that resigning as a director cancels a signed personal commitment, or that an incoming director automatically replaces the person named in it.

The SARS guide to tax administration also describes specific circumstances involving third party liability. Those provisions are a reason to examine the facts, not to tell every buyer that all company tax debts become personal. Obtain focused advice where an actual guarantee, tax notice or disputed act is involved.

Build a liability map before agreeing the sale

Start with the accounting records, but do not stop at the balance sheet. Ask the seller and the person maintaining the accounts to identify actual balances, disputed amounts and commitments that may create later costs. Reconcile the explanation with supporting documents rather than accepting a single total labelled “liabilities”.

• Suppliers: statements, unpaid invoices, credit notes and disputed deliveries.
• Borrowing: loan agreements, current balances, repayment terms and any security.
• Tax: statements of account, returns, assessments, correspondence and payment arrangements.
• People: employment commitments, unpaid amounts and active disputes, where applicable.
• Contracts: leases, service agreements, deposits, cancellation charges and guarantees.
• Claims: litigation, demand letters and matters that have not yet become an agreed debt.

For each item, record the creditor, legal basis, period, due date, evidence and proposed treatment in the sale. Mark missing information clearly. This turns a general fear of “hidden debt” into specific questions that can be investigated and addressed in the transaction documents.

An illustrative handover: three obligations, three questions

The following example is fictional and contains no market figures. A buyer is considering shares in Company B. The records show an unpaid supplier invoice, a loan from the outgoing shareholder and an open SARS query. All three need attention, but they are not the same kind of item.

Unpaid supplier invoice

Confirm the supply, amount recorded and any dispute. Ask how payment will be funded and whether settlement is required before completion.

Outgoing shareholder’s loan

Inspect the loan terms. Ask whether the claim will be repaid, assigned, waived or retained, and ensure the intended treatment is documented correctly.

Open SARS query

Identify what SARS requested, the response deadline and the records needed. Do not treat a query as either a confirmed debt or a matter that can be ignored.

The buyer should obtain a documented outcome for each item. “The seller will sort everything out” leaves too much unanswered. Name the responsible person, the evidence required and the consequences if the promised action does not happen. Have the legal and accounting treatment checked where the parties propose to change an obligation.

A tax compliance result is not a complete debt review

A Tax Compliance Status result serves a defined purpose. It does not provide a list of every commercial liability or guarantee that no earlier transaction will require attention. The SARS TCS guide describes the system and its conditions. Review the underlying tax records as well as the result.

Ask for current statements of account for the relevant tax types, outstanding returns, assessments and correspondence. Reconcile them with the accounts and the seller’s explanation. If a payment arrangement exists, obtain the actual terms and check the position at handover. An agreed schedule is different from evidence that the balance has been paid.

SARS explains the options for dealing with tax debt and provides a payment arrangement request process. Those routes have conditions and should not be described as automatic debt cancellation. Ask a tax practitioner to assess unresolved amounts and deadlines before they are built into the purchase assumptions.

The sale agreement should deal with the findings

Give the transaction adviser the actual liability map and supporting documents. The agreement should respond to what was found. Possible matters for discussion include settlement before completion, how a known obligation affects the price, responsibility for an earlier tax period and how an undisclosed issue will be handled.

Warranties and indemnities need careful drafting and an understanding of who can realistically perform them. Ask what must be proved, what notification is required, what limits apply and whether the seller will remain reachable. A reassuring clause has limited practical value if its operation has not been considered.

Also distinguish the buyer and seller’s allocation of cost from the rights of the creditor. If the parties want to release, substitute or change a debtor or guarantor, ask the adviser what creditor consent and documentation are required. Do not assume a private promise between buyer and seller resolves every outside obligation. Keep the accepted evidence of settlement or release with the completion file.

Make the handover usable for the incoming team

Give the incoming accountant the agreed opening balances, underlying records and schedule of unresolved matters. Explain which periods fall before and after completion and who can answer questions about the earlier activity. A cut-off date is an accounting and transaction reference point; it is not evidence that older documents are no longer needed.

Keep payment authority clear. Agree who can approve company payments, how supporting invoices are checked and how the team will avoid paying the same item twice. If a seller undertook to settle something, ask for proof and reconcile it before removing the balance from the working list.

Preserve correspondence and deadlines for disputes, returns and official requests. Do not close an item because a new owner has taken over. Close it when the agreed action is complete and the evidence supports that conclusion. Bookkeeping support can help maintain the records, while cash flow planning should reflect the obligations the company still has to meet.

Get the right review for the actual problem

If you are preparing a share change, explain the known debts and unresolved questions when enquiring about Vatco’s shareholding support. Administrative updates and transaction legal advice are different work. Confirm which professionals and services the proposed scope includes.

Where an existing SARS balance is the issue, use the tax debt and payment arrangement service to discuss the available route. Supply the relevant notices through the agreed document process rather than reducing the matter to a screenshot of a headline balance.

The useful outcome is a clear account of which obligations continue, which have been resolved and who must act next. For a company with trading history, borrowing, disputes or possible personal exposure, have the transaction reviewed before signing. The fact that shares can change hands does not make the underlying debt questions disappear.