While in most cases it suffices to refer a party as insolvent where they are unable to pay their liabilities as and when they become due, it becomes necessary at times to distinguish and specify the state of such insolvency especially when it comes to companies. In that case the difference between factual and commercial insolvency becomes an important one.
Factual insolvency is whereby the debtor, due to assets being exceeded by liabilities, is not able to settle debts as they are due. Commercial insolvency on the other hand, is whereby despite the assets exceeding liabilities, the debtor is unable to pay their debts as they are due.
The distinction becomes important to companies because it presents an indication on whether the company may be rescued or not e.g Business Rescue as per Chapter 6 of the Companies Act 71 of 2008.
Nonetheless, a determination must still be made on account of all relevant factors on which option will give a better return to creditors between such interventions as Business Rescue or winding up the business.
In many cases where the business is actually not factually insolvent, Business Rescue may present better returns to creditors than had the business been wound up. Careful analysis therefore needs to be done before the best option is pursued.
Liquidation or winding up is voluntary when the debtor makes a Court application themselves to be liquidated, the debtor must show cause that the declaration is in the best interest of the creditors, and not done to prejudice their claims.
Involuntary surrender is whereby any of the creditors brings an application for the winding up of the debtor and may be brought on factual or commercial insolvency grounds. A creditor may also bring the application if the debtor commits any of the eight acts of insolvency as provided for in Section 8 of the Insolvency Act 24 of 1936 (as amended).
Chapter 14 of the Companies Act 61 of 1973 provides for liquidation of insolvent companies whilst solvent companies are wound up in terms of the new Companies Act of 2008.
We assist debtors and creditors alike with regards to insolvency law procedures. Make contact with us and our astute insolvency attorneys will leave you with fond memories of the assistance you receive from our team.
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