An Overview of Insolvency Law in South Africa
If you are dealing with overwhelming debt, insolvency law offers a structured legal approach to manage it. It is designed to offer clear mechanisms towards financial recovery and to ensure that creditors get what they are owed. It works to support both creditors and those who need relief from debts. Under South African Law, insolvency legislation has several main pillars, including liquidation, business rescue, and sequestration. In this article, the experienced team at Francois Uys Attorneys will explain the different areas of insolvency law.
What is Insolvency Law in South Africa
Before we explore insolvency law, it’s essential to understand what insolvency means for individuals and businesses.
When a person or company can no longer pay their debts on time, they are considered insolvent. Before entering formal insolvency proceedings, they might try to work out informal payment arrangements with their creditors, such as adjusting the repayment schedule. Insolvency can happen due to poor cash management, a drop in income, or a rise in expenses. If these informal arrangements fail, the next step is often formal insolvency proceedings, such as bankruptcy for individuals or liquidation for companies.
In these cases, assets may be sold off to repay creditors. For businesses, this could mean ceasing operations and selling property, equipment, or other assets. Insolvency not only affects the insolvent party, but it also impacts creditors, employees, and other stakeholders, as they may face delays or reductions in payments owed to them. It’s crucial to seek legal and financial advice early to explore all possible options before reaching this stage.
The Three Main Pillars of Insolvency Law
Liquidation
Liquidation occurs when a company is no longer financially viable. During the liquidation process, the company winds up its affairs because it cannot pay its debts. Under South African law, there are two types of liquidation. Voluntary liquidation happens when a company’s directors or shareholders acknowledge that the company is in financial distress and can no longer successfully operate. This type of liquidation is initiated by the key stakeholders themselves. Compulsory liquidation, on the other hand, occurs when creditors take action by applying to the courts because the company is unable to meet its financial obligations. Once a company enters into liquidation, a special liquidator is appointment to manage the sale of the company’s assets and fairly distribute them amongst creditors.
Business Rescue
Business rescue falls under the Companies Act 71 of 2008. This process helps companies who are in financial distress by effectively restructuring their financial affairs. During business rescue, a specialised practitioner is appointed. They develop the business rescue plan, work towards renegotiating debts, and potentially downsize various business operations. During business rescue, companies are protected temporarily from their creditors. Nonetheless, creditors vote on the specific plan and if it is approved the business can continue their operations, albeit under new terms. This process allows organisations to keep their business running and safeguard jobs.
Sequestration
Sequestration occurs when individuals cannot pay their debts and surrender their assets and estate to a dedicated trustee. The process is governed under the Insolvency Act 24 of 1936 and can be either voluntary – when the debtor themselves initiates it – or compulsory whereby creditors initiate it. The court must ensure that sequestration benefits creditors by covering costs and offering some repayment.
Reach Out to Our Dedicated Legal Team
If you are grappling with the complexities of insolvency law, reach out to our legal experts at Francois Uys Attorneys Inc. With over 3 decades of experience in the sector and over 8000 successful cases to date, we are experienced when it comes to all things insolvency law and will always work to achieve the best possible outcome for our clients.