Summary of textbook Insovency chapter with lecture notes incorperated into summary
Textbook
D Collier-Reed and K Lehmann (eds) Basic Principles of Business Law (2nd ed; 2010)
Terms and concepts
Insolvency
What it is
A legal status
Assigned to
Natural or juristic persons
o Natural person
Livin and breating human being
Single male or female, a couple married in/out of COP, a sole proprietor
and a partnership
o Juristic/legal person
Company, a close corporation, a body corporate or a trust
Partnership a juristic person in terms of Consumer Protection Act
When their financial situation is such that either
o Their liabilities exceed their assets
o They are unable to pay their debts
Aims and objectives of insolvency law
Ultimate goal
Benefit the creditors
How this is achieved
Allowing creditors to be paid in order of preference and equitability
o Situation where this is applicable
Creditors want to be paid the entire amount owed to them
There are many creditors
Company cannot sufficiently pay all creditors
Therfore apply preference and equitabliliy order
Maximizing assets for distribution among creditors
Preventing debtors from further diminishing the estate
, 3
Sequestration
The process whereby
o The assets of the debtor
o Are taken over and sold
By a trustee
o Proceeds distributed amongst the creditors
Only applies to debtors
o Debtor
Natural persons, partnerships and trusts
Not for legal persons
o Therefore sequestration only applies to natural persons
Governed by
o Insolvency act 24 of 1936
o Only high court can make sequatration order
Liquidation
Method whereby juristic persons are wound up
o Winding up is he process of
Selling all the business’s assets
Paying off creditors
Distributing any remaining assets
To the principals or parent company,
And then dissolving the business
o Only wound up if don’t want to continue business
o And then declared insolvent
Declared insolvent by the court
Governed by
o Insolvency Act
o Companies Act
o Close Corporations act
, 4
Concurus creditorum
What it means
the position of each and every creditor is frozen
o done at the date of sequestration or liquidation
o no creditor may do anything to alter his position
from that day onwards
Manner of liquidation (JuristicPersons)
General
Liquidation Definition
Also called winding up
The procedure by which
o a company’s assets are sold
o its debts are paid
o any remaining money is divided
among the shareholders
Once process is complete
o CIPC will deregister the company
It will therfore it ceases to exist
o CIPC = Companies and Intellectual Property Commission
Acts that apply
Application of the Companies Act 200
Old companies act still applies to
o Winding up of insolvent companies.
New companies act applies to
o Winding up of solvent companies.
, 6
Ways of liquidation/winding up a company
Winding up by the court/compulsary liquidation
Parties allowed to apply
The company itself
o via shareholder’s special resolution
One or more of the company’s creditors
o who have a claim of over R100
One or more of the shareholders
Master of the High Court
Business Rescue Practitioner
Voluntary liquidation
General
Initiated by special resolution of the shareholders
No court order needed
o Therfore quicker and cheaper
Can be done by either party
o Members’ voluntary winding up
o Creditors’ voluntary winding up
Always done if inslovent
Grounds for liquidation/Winding up
Special resolution
Just and equitable
o If the company fails to achieve its main purpose
If there is a deadlock either
o in management
o amongst shareholders
Controlling parties acting fraudulently/illegally
o Directors or prescribed officers or other persons in control of the company
Inability to pay debts
o 3 situations where a company is deemed unable to pay debts
o more details below
, 7
3 situations a company is deemed unable to pay debts
1. Statutory demand which has not been met
A creditor has a claim of R100 or more
o And submits a written notice to the company
The company does not
o Pay or says they cannot pay.
o Provide security for the debt owed
o Dispute the debt
2. Nulla bona return
Occurs after an attempt at execution of judgment
If the sheriff discovers that
o There are insufficient assets in the estate
o To settle the judgment debt
3. Actual inability to pay debts
Factual insolvency
o Liabilities are greater than assets
Commercial insolvency
o Assets are greater than liabilities
o But the assets are tied up and cannot be realized
Therfeore liabilities are greater than realisable assets
, 8
Manner of Sequestration (Natural Persons)
Voluntary surrender (VS)
General
How it is started
Debtor himself applies to court
o To be declared insolvent/sequestrated
Benefits
Creditors sue insolvent estate jointly
Absolution from debts
People who can apply
The estate of a natural person
The estate of a debtor who is
o Deceased
o Incapable of managing his/her affairs
The estate of a partnership
o All the partners must apply for the sequestration of both
The joint partnership estate
Their individual separate estates
o S3(2) and S13(1)A
Joint estate of souses married ICOP
o Both spouses must apply for the sequestration of the joint estate
o Matrimonial Property Act
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