Bankruptcy vs Insolvency and How It Applies to You

Understanding bankruptcy vs insolvency will help you get a better idea of what liquidation entails. Insolvency comes before liquidation or bankruptcy. That being said, a business can be liquidated voluntarily by its directors, members, or shareholders, even if it is profitable and solvent. This can be done once a business has served its purpose and is no longer required. You can even liquidate a shelf company to prevent any legal action against the entity in future.

Bankruptcy and liquidation have something in common – insolvency. If the business liabilities exceed its assets, it is insolvent and, by law, must stop trading. If the business cannot pay its bills, it is insolvent. If an individual cannot pay their debts when they are due, the individual or natural person is insolvent. However, the individual and the business must apply for the status of bankruptcy. In the case of a business, the process is called liquidation. When it is a natural person, it is called sequestration.

At What Point Is the Business Unable to Pay Its Bills?

The insolvency attorneys consider the business cash flow to determine when the company or business could no longer pay its bills. The same holds true for the individual. Bank statements and bills from creditors, in addition to the individual’s asset list and earnings, are inspected to determine whether the individual is indeed insolvent and needs to apply for voluntary sequestration or file for bankruptcy.

Signs of insolvency for a business include several and ongoing losses, overdue taxes, ratio of debt or liabilities to business assets, not having access to finance to pay off the debt or to continue trade, not being able to get more equity capital, supplier payment demands before any further goods will be delivered, dishonoured cheques, returned debit orders, payments to creditors not corresponding to invoices, and the inability to produce financial information to show the exact financial state of the business for a specific date. Tell-tale signs of insolvency for an individual are late payments to creditors, rounded figures of payments not corresponding to the creditor statements or invoices, transferring of money from one account to another in order to make payments or to have cash available, missed debt payments, creditors remaining unpaid, the inability to get more finance, or at least debt consolidation assistance, overdue taxes, and returned debit orders.

In South Africa, the natural person filing for bankruptcy, and thus insolvency status, entails a High Court application. However, the Court only grants a sequestration request if the person can prove that they really are insolvent and if they have immovable property or other large assets that can be sold on auction, and the benefits from this can be distributed amongst the creditors. The creditors must thus be able to receive enough benefit. If the individual does not have enough assets, they should rather apply for debt review or administration, depending on their income. For debt review, the individual must still have an income, as monthly repayment of the debt at a lower interest rate through a consolidated payment amount must be done. However, the debt must be more than a specific amount.

When it comes to a business, filing for bankruptcy entails an application to the High Court for immediate relief through the granting of a provisional order. The creditors are notified of the Court return date and have one month to lodge their opposition to the liquidation. If no opposition is lodged, the liquidation is granted on the return date. For the individual, the process is more complicated. The creditors must be notified of the intention before the court date. The unencumbered assets form part of the insolvent estate including the individual’s vehicles and appliances, electronic equipment, garden equipment, and furniture. It is possible to purchase the vehicle and the furniture from the estate, ensuring that the individual does not end up without any furniture or means of transport. Children’s assets are not included in the insolvent estate.

If the individual is married in community of property, the spouse’s assets also form part of the insolvent estate. If not, only the assets of the applicant are included in the insolvent estate. The question of bankruptcy vs insolvency is a complex issue, but our attorneys will explain the process for liquidation or sequestration in detail at the initial client meeting.