How Do You Determine Insolvency in South Africa?

You may struggle financially, but are you insolvent? To apply for voluntary sequestration of your personal financial estate, you must be truly insolvent. But how do you determine insolvency? We answer the question below and explain the grounds upon which a creditor can claim that you are insolvent.

Keep in mind that business insolvency requirements are different from that of the individual. To determine insolvency of a business, one looks at whether the liabilities exceed the entity’s assets and whether the business entity is able or unable to pay its debts when they become due, or likely not to be able to do so within the next six months. If the business is both cash and capital insolvent, it must stop trading and be liquidated or undergo business rescue.

The creditors, shareholders, members of the close corporation, board of directors, employees, or one of the directors can apply for the liquidation of the insolvent business entity. The board of directors can, for example, by means of a special resolution decide to liquidate the firm or a formal court application can be made in the instance where the company has considerable debt. However, for the purpose of this article, we answer the question of how you determine insolvency in South Africa for an individual as a natural person as opposed to a business insolvency.


How Do You Determine Insolvency as a Natural Person?

apply for insolvencyThe test to determine insolvency is whether your liabilities exceed your assets. If yes, then the next question is whether you are able to pay your debts when due? If not, you are cash and capital insolvent. However, overspending on entertainment or leaving too much money for luxuries, and then not being able to pay your debts does not make you insolvent. To be insolvent, you must not be able to pay the essential living expenses and pay your debts while your liabilities exceed your assets.

As such, if with some restructuring of your finances and thus focussing on the payment of the debts, it is possible to avoid bankruptcy, then it should be the route to follow. The same applies for assets. If you are able to sell some of the assets to pay off all the debts, then it should be the first option rather than hoping that sequestration will be a way to avoid paying creditors the money owed.


How Does the Court Determine Insolvency of a Natural Person?

The court looks at the statement of affairs that the applicant must prepare. If the statement shows that the applicant’s liabilities exceed their assets and the court establishes that the applicant is without funds to pay the debts, then it can approve the voluntary sequestration application. Keep in mind that all the formalities must be followed correctly. The court also determines the value of the assets. If by selling the assets it is possible to pay all the debts, then the applicant is not truly insolvent.

However, the court may still approve an application for the sequestration by the creditor of the natural person even if the value of the assets exceeds the total of the liabilities. We recommend seeking legal advice on how to determine insolvency accurately. Even if a person is insolvent, the court determines whether the sequestration will be to the benefit of the creditors.


Acts That Can Be Used to Determine Insolvency by a Creditor

A creditor can apply for the sequestration of a natural debtor if the debtor commits any of the insolvency acts as described below. The court, however, still has the final say as to whether the individual is truly insolvent. If you are in financial trouble, rather seek legal help from our attorneys before you commit one of the insolvency acts below, as such will give the creditors grounds to apply for the sequestration of your estate.


Absence from Your Home or The Republic of South Africa

Of course, you can leave the country and still pay your debts. The same is true for leaving your home. However, if you leave the country or your home with the intention of not having to pay your debts, then you abscond from your debt responsibility. The creditor cannot prove by this action that you are truly insolvent but can apply for your estate’s sequestration based on the fact that you have left the abode or the country without keeping to the payment arrangement.

If you, for instance, make an arrangement to pay a debt at a certain date after extending the original date of payment and then move away from your domicile address without communicating with the creditor, it can be seen as an attempt to delay payment or to avoid it. The creditor must be able to prove that you intended to leave without paying the debt.


Not Being Able to Satisfy a Judgment by The Court

Failure to satisfy a court judgment or to note that you have sufficient property that can be disposed of to satisfy the judgment upon demand of the sheriff, is an act of insolvency. Disposable property refers to movable or immovable property that can be attached and sold to satisfy the demand of the debt judgment by the court.


Attempting to Dispose or Disposing of Property and Choosing One Creditor Over Another

If you sell or attempt to sell assets to pay off one creditor and not the others, it can be seen as an act of insolvency. Note to determine whether it has led to the prejudice of the other creditors is more important than your intention at the time. Even if you intended to pay all the creditors, but only paid one and not the others, it can be seen as an act of insolvency. This can be a complicated matter.

Before disposing of property to pay off debts, consult with our attorneys as to the correct procedure to follow as not to benefit one creditor and disadvantage others. This also applies when you remove or attempt to remove assets with the intention to prejudice one or more creditors or in favour of one creditor to the disadvantage of another.


Making an Arrangement for Relieving You of Debts in Part or Completely

Here is where it becomes difficult. The moment you admit in writing that you are not able to pay a debt and ask for a reduced amount, it can be an act of insolvency. You may not have intended it to be the case, but the creditor can take it as a warning that you are unable to pay. However, if you do not admit to the full debt, but simply ask for an extension of the payment terms, it does not necessarily imply an act of insolvency. Rather consult with our attorneys before approaching the creditors with a settlement offer.


Retracting the Notice of Intention to Apply for Voluntary Sequestration

It is an act of insolvency if you have published the notice of intention to apply for voluntary sequestration and fail to go through with the application. It is also the same if you fail to comply with the formalities for the application or when you submit an incorrect statement of affairs.


Selling Your Business and Not Paying Debts

Once the notice has been published that the business has been sold and the transfer takes place, you are not off the hook for paying the debts of the business. If you fail to make the necessary debt payments, it qualifies as an act of insolvency.


In Conclusion

Do not compromise your financial future through procedural mistakes. Make use of our experienced attorneys to help you determine insolvency.


Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.

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