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When is a company insolvent?

May 5, 2017

Lowvelder Article for 5 May 2017

It is not easy to admit that your business is insolvent. However, it is a director’s responsibility to act when the company is in financial destress. It is therefore important to act as quick as possible to provide the company the best chance to be either saved or to ensure a controlled wind-down of the company.

A company is insolvent the moment it cannot meet its obligations. The new Companies Act 71 of 2008 makes provision for factual insolvency as well as commercial insolvency.

Factual insolvency: A company is factual insolvent the moment its liabilities exceed its assets. As a director, it is important to know at all times what the asset value of your company is in order to act timeously and to take the necessary steps.

Commercial insolvency: A company is commercially insolvent the moment it is not able to pay its debts when it is due and payable. Clear warning signs are when you ask your suppliers’ extension on payments or late payments to SARS.

It is therefore important to know that even if the company’s assets value exceeds its liabilities it may still be insolvent in the event it cannot pay its liabilities due to cash flow constrains.

Not only are the directors of a company obliged by law to take immediate steps as soon as it is clear the company is under financial distress, they are obligated to inform all affected persons of their decision to commence with business rescue or not. If they fail to do so, they may be held personally liable towards the company and even third parties.

However liquidation is not the only option, business rescue and payment arrangements are alternatives.

The company should consult with an expert in insolvency as soon as it is clear that there is a real risk of insolvency of the business.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances