Summary CML2010S Exam Notes: Insolvency section

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Section 3: Insolvency

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Terms and concepts
Insolvency
What it is
 A legal status
Assigned to
 Natural or juristic persons
o Natural person
 Livin and breating human being
 Single male or female, a couple married in/out of COP, a sole proprietor
and a partnership
o Juristic/legal person
 Company, a close corporation, a body corporate or a trust
 Partnership a juristic person in terms of Consumer Protection Act
 When their financial situation is such that either
o Their liabilities exceed their assets
o They are unable to pay their debts
Aims and objectives of insolvency law
Ultimate goal
 Benefit the creditors
How this is achieved
 Allowing creditors to be paid in order of preference and equitability
o Situation where this is applicable
 Creditors want to be paid the entire amount owed to them
 There are many creditors
 Company cannot sufficiently pay all creditors
 Therfore apply preference and equitabliliy order
 Maximizing assets for distribution among creditors
 Preventing debtors from further diminishing the estate

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Sequestration
 The process whereby
o The assets of the debtor
o Are taken over and sold
 By a trustee
o Proceeds distributed amongst the creditors
 Only applies to debtors
o Debtor
 Natural persons, partnerships and trusts
 Not for legal persons
o Therefore sequestration only applies to natural persons
 Governed by
o Insolvency act 24 of 1936
o Only high court can make sequatration order


Liquidation
 Method whereby juristic persons are wound up
o Winding up is he process of
 Selling all the business’s assets
 Paying off creditors
 Distributing any remaining assets
 To the principals or parent company,
 And then dissolving the business
o Only wound up if don’t want to continue business
o And then declared insolvent
 Declared insolvent by the court
 Governed by
o Insolvency Act
o Companies Act
o Close Corporations act

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Concurus creditorum
 What it means
 the position of each and every creditor is frozen
o done at the date of sequestration or liquidation
o no creditor may do anything to alter his position
 from that day onwards



INSLOVENCY




SEQUSTRATION LIQUIDATION
Natural persons Juristic/legal persons




Compulsory Voluntary
sequestration surrender

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Manner of liquidation (JuristicPersons)
General
Liquidation Definition
 Also called winding up
 The procedure by which
o a company’s assets are sold
o its debts are paid
o any remaining money is divided
 among the shareholders
 Once process is complete
o CIPC will deregister the company
 It will therfore it ceases to exist
o CIPC = Companies and Intellectual Property Commission

Acts that apply
 Application of the Companies Act 200
 Old companies act still applies to
o Winding up of insolvent companies.
 New companies act applies to
o Winding up of solvent companies.

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Ways of liquidation/winding up a company
Winding up by the court/compulsary liquidation
Parties allowed to apply
 The company itself
o via shareholder’s special resolution
 One or more of the company’s creditors
o who have a claim of over R100
 One or more of the shareholders
 Master of the High Court
 Business Rescue Practitioner

Voluntary liquidation
General
 Initiated by special resolution of the shareholders
 No court order needed
o Therfore quicker and cheaper
 Can be done by either party
o Members’ voluntary winding up
o Creditors’ voluntary winding up
 Always done if inslovent

Grounds for liquidation/Winding up
 Special resolution
 Just and equitable
o If the company fails to achieve its main purpose
 If there is a deadlock either
o in management
o amongst shareholders
 Controlling parties acting fraudulently/illegally
o Directors or prescribed officers or other persons in control of the company
 Inability to pay debts
o 3 situations where a company is deemed unable to pay debts
o more details below

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3 situations a company is deemed unable to pay debts
1. Statutory demand which has not been met
 A creditor has a claim of R100 or more
o And submits a written notice to the company
 The company does not
o Pay or says they cannot pay.
o Provide security for the debt owed
o Dispute the debt
2. Nulla bona return
 Occurs after an attempt at execution of judgment
 If the sheriff discovers that
o There are insufficient assets in the estate
o To settle the judgment debt
3. Actual inability to pay debts
 Factual insolvency
o Liabilities are greater than assets
 Commercial insolvency
o Assets are greater than liabilities
o But the assets are tied up and cannot be realized
 Therfeore liabilities are greater than realisable assets

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Manner of Sequestration (Natural Persons)
Voluntary surrender (VS)
General
How it is started
 Debtor himself applies to court
o To be declared insolvent/sequestrated
Benefits
 Creditors sue insolvent estate jointly
 Absolution from debts
People who can apply
 The estate of a natural person
 The estate of a debtor who is
o Deceased
o Incapable of managing his/her affairs
 The estate of a partnership
o All the partners must apply for the sequestration of both
 The joint partnership estate
 Their individual separate estates
o S3(2) and S13(1)A
 Joint estate of souses married ICOP
o Both spouses must apply for the sequestration of the joint estate
o Matrimonial Property Act