Bankruptcy – What does that even mean?

BANKRUPTCY – WHAT DOES THAT EVEN MEAN?

The law of insolvency in South Africa is known by many through the phrases “the business went belly-up” or “you remember so-and-so, they are bankrupt!”

Aside from the general expressions of concern many have when they hear others experiencing bankruptcy, they know little about how others ended up there or rather how to avoid ending up there themselves.

This is alarming, considering the serious consequences that becoming so-called “bankrupt” have.

Bankruptcy in the legal fraternity is known as ‘insolvency’. Insolvency is regulated by the Insolvency Act 24 of 1936 (the Insolvency Act).

Insolvency can be the result of either:

• One’s assets exceed their liabilities / debts;
• Where you are unable to pay your debts, as and when they become due and payable; or
• Where you commit one of the so-called ‘acts of insolvency’ as listed in the Insolvency Act.

Being declared insolvent can happen in one of two ways:

1. By voluntarily applying to be declared as insolvent; or
2. By Application by one or more of your creditors if your debt exceeds R100.00 and you have committed an act of Insolvency.

Only the High Court has the power to grant an order declaring someone insolvent and sequestrating his/her estate. Sequestration simply means that you are divested of control over your entire estate and it is placed in the control of a liquidator.

If an application for insolvency succeeds, an insolvent’s estate will be sequestrated for a period of 10 years.

There are eight (8) ‘acts of insolvency’ provided for in Section 8 of the Insolvency Act.

These 8 acts of insolvency include:

1. leaving the country with the intention of avoiding a debt;
2. Failure to satisfy a Judgment Debt;
3. If a person attempts to dispose of his/her property in a way that would be unfair or prejudicial to one or more of his/her creditors;
4. Removing property with the intention to cause prejudice;
5. Concluding an offer of arrangement with a creditor which either releases him/her completely from the debt or is a partial release from the debt that is owed to the creditor and/or creditors;
6. Failing to bring an application in order to be declared as “insolvent”. Failing to meet all of the requirements of this application effectively results in the person committing an act of insolvency;
7. A person commits an act of insolvency in the instance where he/ she gives written notice to his/her creditors that he/she is unable to pay his/her debts. This is inclusive of a notice which refers to only one debt! (Optima Fertilzers (Pty) Ltd v Turner 1968 (4) SA 29 (D));

One should take note of this act of insolvency because it includes the instance where a debtor notifies his/her creditor that he/she cannot pay a debt for the time being and makes an offer to pay the debt in installments. (Goldblatt’s Wholesale (Pty) Ltd v Damalis 1953 (3) SA 730 (O) 732);

1. Inability to pay debts after the transfer of business.

Unfortunately, many people aren’t aware of the different situations described above. That is why it is important to familiarize yourself with all the potential consequences of day to day transactions, to prevent falling into any one of the above categories.

It is however beneficial to note that insolvency must only be used as a remedy of last resort, particularly by creditors wishing to enforce payment of a debt. What this means is that any creditor that is awaiting payment from his/her debtor must first utilize other methods of obtaining repayment of a debt before proceeding with an application for insolvency.

This is the generally accepted approach adopted by our courts as a result of the severe consequences on individual autonomy and capacity that is incurred by an order of insolvency.

Liquidations of companies and close corporations, as well as business rescue, are dealt with in terms of the Companies Act 61 of 1973, Close Corporations Act 69 of 1984 and the Companies Act 71 of 2008, as the case might be, and will be dealt with in our next article.

If you would like any further information regarding insolvency please contact us at info@pagdens.co.za or 041 502 7200.

This article is for general information should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact an attorney for specific and detailed advice. Errors and omissions excepted (E&OE)