Insolvent? A Need-to-Know Guide

liquidated company - Insolvency - Insolvent

A Need-to-Know Guide for Insolvent Companies and Persons 

It is important to determine whether you are indeed insolvent which in South Africa means that your liabilities exceed your assets. An inability to pay your debts is evidence of insolvency but is not an actual test. Commercial insolvency is a situation where an individual or company is unable to pay their debts although their assets may exceed their liabilities. This constitutes a liquidity or cash flow problem and is not insolvency in the strict legal sense.

An individual’s estate falls under the jurisdiction of the Insolvency Act 24 of 1936 (the “Insolvency Act”), while the legislation governing the winding-up of companies is primarily found in the Companies Act 61 of 1973  (referred to as the “Old Companies Act”).

The formal status of being insolvent is brought about when an individual’s estate is placed under sequestration, or a company is liquidated. Sequestration occurs once a Court has issued an order accepting the surrender of, or sequestration of, an individual’s estate. An individual may apply for sequestration themselves or one of their creditors may make the application. The former is known as voluntary sequestration and the latter compulsory sequestration.

Liquidation occurs when the directors voluntarily resolve to liquidate the company, or a creditor or other interested party obtains a Court Order ordering the company to liquidate.


The Options for Insolvent Companiesliquidated company - Insolvency - Insolvent

An insolvent individual or business has several options available to them. The appropriate course of action depends very much on the specific circumstances of the debtor and the nature of their financial challenges.

One of the options is business rescue. The purpose of business rescue is to restructure the affairs of the company in such a manner that the likelihood of the company continuing in existence on a solvent basis is maximised or the restructuring will result in a better return for the creditors of the company than would ordinarily result from the liquidation of the company. This involves the appointment of a business rescue practitioner to develop and implement a plan to rehabilitate the company. There must be a reasonable prospect that the restructuring will achieve either of these goals.

If a company is no longer viable or cannot be rescued, voluntary liquidation may be the next option. This involves the orderly winding up of the company’s affairs, and the appointment of a liquidator to sell off assets and distribute the proceeds fairly among the company’s creditors.


The Options for Insolvent Individuals

Individuals facing insolvency may consider voluntary sequestration. This legal process allows an individual to surrender their estate to a trustee, who administers the estate while disposing of the assets and distributing the proceeds among the creditors.

Debt review is available for individuals who are struggling to pay off their debts where a debt counsellor steps in to negotiate with your creditors on your behalf to restructure your debts and establish more manageable monthly payments. Once debts are settled, financial rehabilitation can take place.

Debtors can negotiate directly with their creditors to reach a compromise or settlement arrangement. This may include a reduction in the total debt amount or an extension of the repayment period. Creating a repayment plan, whether independently or with the assistance of a legal professional, may be an option.


Choose Insolvency Professionals with a Proven Track Record

Whether for an individual or a company, it is crucial to seek professional advice from an experienced attorney specialising in debt and insolvency before making any decisions. Only an experienced attorney can provide comprehensive debt and insolvency legal services.

Declaring insolvency has serious implications for companies and individuals. Francois Uys Incorporated Attorneys are committed to helping insolvents achieve optimal outcomes. We have over 8,000 successfully completed cases. With more than 33 years of dedication to assisting companies and individuals in financial distress, we can provide expertise and assistance on any aspect of debt.

Make an appointment with Francois Uys Inc Attorneys today and let us help you with the stresses of being insolvent.


Disclaimer: This article is for information purposes only. It does not constitute legal advice and cannot be used to make any decisions. For advice on the topics of insolvency and debt, contact Francois Uys Inc. The information is relevant as of the date of publishing.