Insolvency

Insolvency as the last two stages in the timeline of financial distress

Insolvency

During insolvency or near insolvency, formal business rescue represents the third stage in the timeline of financial distress.  Should that fail, liquidation follows as the fourth and last stage of financial distress.

Both processes fall within formal legal procedures.  Being court-driven they are rather expensive.

In simple terms, when a business cannot meet its financial obligations, or when its liabilities exceed its assets, insolvency sets in.

Section 131 in chapter 6 of of the draft business rescue legislation defines insolvency as follows:

131. Insolvency of a company

(1) For the purposes of this Act, an insolvency event occurs with respect to a company if -

(a) an amount exceeding the minimum value prescribed in terms of subsection (3) is due and payable by the company to a creditor, by cession or otherwise, and that creditor –

(i) has served on the company a demand requiring the company to pay the amount that is due and payable; and

(ii) the company has not paid the amount demanded, or otherwise satisfied the creditor, within 15 business days after the demand was served;

(b) any process issued on a judgment, decree or order of a court in favour of a creditor of the company has been returned by the sheriff or the messenger with an endorsement that there appears to be insufficient disposable property to satisfy the judgment, decree or order or that any disposable property found did not upon sale satisfy the judgment, decree or order; or

(c) a Court is satisfied that the company is unable to pay its debts.

(2) In determining for the purpose of subsection (1)(c) whether a company is unable to pay its debts, the Court must take into account all current, contingent and prospective liabilities of the company.

(3) From time to time, the Minister must prescribe a minimum value for the purpose of subsection (1)(a).

 

For a definition of insolvency in terms of section 139 of the Companies Bill, 2007 see Part A - Business rescue proceedings.

Business rescue

Presently, business rescue mechanisms are Compromises in terms of Section 311 of the Companies Act, which is highly complex, and Judicial management (Sections 427 - 440 of the Companies Act), which is ineffective.

Judicial management is to be replaced by new business rescue legislation as contained in Chapter 6 of the Companies Bill, 2007 by 2009.

Read more about insolvency


Timeline of financial distress

 

View of the positions of business rescue and liquidation in the timeline of financial distress.

 

Click on Timeline of financial distress table for a popup table explaining the four stages.

 

Restoration of corporate value

 

View the restoration of corporate value at different levels of company health.


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