Insolvencies and Liquidations

 

Insolvencies & Liquidations

Insolvency and Liquidation in South Africa

Although the terms “insolvency” and “liquidation” are sometimes used interchangeably, there are some differences between these two concepts.

Insolvency Meaning

Insolvency refers to the monetary state of a company or organisation. A company can be insolvent but not yet liquidated.

Types of Insolvency

Balance-Sheet Insolvency

This is when a company’s liabilities (debts) exceed its assets (income, stock, furniture etc).

Cash-Flow Insolvency

This refers to when a company is no able longer pay its debts when they become payable.

Typically speaking, before an insolvent company enters into insolvency proceedings, it would have first been involved in informal arrangements with its creditors.

These arrangements are most commonly aimed at setting up alternative payment arrangements to honour the agreements between the company and its lenders.

A company can become insolvent for numerous reasons which include but are not limited to:

  • A significant reduction in cash flow
  • A significant increase in expenses
  • Poor cash management
Liquidation Meaning

Liquidation refers to the process a legal entity follows that involves selling off its inventory in order to generate the necessary capital to pay its creditors as well as anyone the company owes money to.

A company does not need to be insolvent to be liquidated. Liquidating a company can be done voluntarily. However, once liquidated, the company becomes dissolved and is no longer a legal entity.

As cash is generated from the liquidation process, paying off creditors will be done in the following order:

  • Secured creditor – these creditors have a legal right to keep in their possession the property belonging to another person or company until their debt with the creditor is paid. This is known as a lien
  • Unsecured creditor – these creditors have no lien or security interest. Therefore, debts with these creditors are paid only after the secured creditors have been paid
  • Stakeholders – these are people organisations that have invested in the business but have no formal claim on its assets. Employees are considered stakeholders.

Van Deventer & Van Deventer Incorporated – Attorneys Cape Town and Johannesburg

Our attorneys are available to provide expert legal advice regarding insolvency and liquidation in South Africa.

We aim to ensure the correct legal procedures are followed throughout each process, resulting in the best possible outcome.

For more information on liquidation and insolvency, please feel free to contact our attorneys in Johannesburg and Cape Town.

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