Types of insolvency
22 December 2020 | Stacy Saffy
Factual Insolvency means that a debtor’s liabilities exceeds his or her assets and results in the inability to pay his or her debts.
Commercial insolvency is a state of illiquidity where there is an inability to pay debts even though the assets may exceed its liabilities.
The only difference between these two terms is whether the person is solvent or not.
Options available to a debtor who is unable to pay debts:
- Administration: A debtor can apply for his estate to be administered such application will be granted where the debts do not exceed R50 000.00.
- Debt review in terms of the National Credit Act 34 of 2005: A consumer can apply to a debt counsellor to have the debtor declared overindebted and will restructure payment terms with creditors by extending periods and reducing the amounts payable.
- Voluntary surrender: A debtor that is factually insolvent can voluntarily surrender his or her estate by complying with the requirements.
- Compulsory sequestration: A creditor applies to court for the compulsory sequestration of the debtor on the grounds of the act of insolvency who
Can a company be placed in liquidation if commercially or factually insolvent?
The answer to this question is yes.
In the event of winding up of a company the same principle applies. The main difference is that if the company is commercially insolvent, there is a possibility of rescuing the financial position by placing the company under business rescue if a reasonable possibility exists that in doing so it will hold a better return for creditors than liquidation. This will obviously depend on various factors and must be determined on a case to case basis. Where a company is commercially insolvent the directors may voluntarily liquidate the company by way of a resolution filed with CIPC.
It is evident that both factual and commercial insolvency can lead to the sequestration of a person or the winding up of a company.