Insolvency, Explained

Insolvency, Explained: Sequestration and Liquidation

Legally a person is described as insolvent when their liabilities exceed their assets – the primary test being whether the debtor’s liabilities, which are fairly estimated, exceed their assets, which are fairly valued. This creates factual insolvency, as opposed to commercial insolvency which describes an inability to pay debts when they fall due despite the individual or entity’s assets exceeding their liabilities. Some argue that commercial insolvency should be applied as companies are often factually solvent but in no position to pay their debts due to cash-flow issues.

There are several instances in which an individual debtor may also commit acts of insolvency. For example, where they leave the Republic of South Africa or otherwise absent themselves to delay or evade paying their debts; or where the debtor attempts to dispose of property to the prejudice of their creditors, or the disposal of which would prefer the interests of one creditor above another.

Insolvent individuals’ and trusts’ estates are sequestrated, while companies and other juristic entities are liquidated.

In South Africa, insolvent companies are liquidated in terms of Chapter 14 of the Companies Act 61 of 1973 (referred to as the old Companies Act), while solvent companies are liquidated in terms of the Companies Act 71 of 2008 (the new Companies Act).

Sequestration is defined as surrendering an individual’s estate to the High Court under the governance of the Insolvency Act 24 of 1936.

When is an Individual Considered Insolvent?

If an individual is declared insolvent, the individual’s estate has been placed under sequestration and surrendered to the High Court and the Court has issued an order accepting the surrender or sequestration of the estate.

An individual may initiate the application for sequestration themselves or one of their creditors may bring the application forward. The former is known as voluntary sequestration and the latter as compulsory sequestration.

Is My Company Insolvent?

If a company is no longer able to pay its debts when they fall due or will likely not be able to do so within the following six months, and its liabilities exceed its assets, it is insolvent and generally may no longer trade.

A company may be liquidated voluntarily. A special resolution is passed by the directors of the company resolving that it be liquidated and filed with the Companies and Intellectual Properties Commission (CIPC), together with several other prescribed forms and documents.

A company may be liquidated by court order on various grounds including by an application to the Court, subject to certain provisions, by a creditor of the company.

Liquidation and Sequestration are Complex Legal Processes

The above summary of the consequences and general principles of insolvency constitutes a broad overview of the topic at best. Being declared insolvent and having your estate sequestrated or having your company liquidated are stressful and complex legal processes with serious consequences. These processes include strict formal requirements, many of which are time bound. Many of the legal decisions that need to be made can dramatically affect the outcome for the insolvent. In the case of liquidation, the interests of the company’s employees, and not just the creditors, may be at stake.

Francois Uys Incorporated Attorneys are experts in the field of Insolvency Law and Insolvency Litigation. Let us secure the best possible legal and financial outcome, with the least stress for you or your company. We have over 33 years of experience with insolvency, liquidations, and sequestrations. Let us guide you through the legal formalities as we have for our extensive list of satisfied clients. Many important decisions must be made that can affect the result to the benefit or detriment of the insolvent.

We will assist with important strategic decisions that need to be taken to protect your interests. Book an appointment with Francois Uys Inc Attorneys before making any important decisions.


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 topic of insolvency, contact Francois Uys Inc Attorneys. The information is relevant as of the date of publishing.