The Basics of How Insolvency and Liquidation Relate to Your Business Debt
Insolvency and liquidation are frequently used interchangeably. However, though both words apply to bankruptcy proceedings, there are distinctions as explained below.
Difference Between Insolvency and Liquidation
Insolvency is a monetary state. A company can be insolvent, but not yet liquidated. If the commerce liabilities exceed the assets, then the business is insolvent. But, if it is still capable of servicing debts when due, then the business is not cash-flow insolvent. If it is unable to pay debts when due and the liabilities exceed the assets, then it is insolvent.
By law, when this state of insolvency is reached, the business owners must apply for it to be liquidated. Failure to do so when necessary can mean that the directors become responsible for the debts. As such, if your business has reached a point where it is not able to pay salaries, rent, and debts due at the required time, and the liabilities exceed its assets, you must take the responsible step to have the entity liquidated. However, if it is possible to rescue the entity through a rescue plan in which a practitioner is appointed to oversee the process, then it should be the route of choice.
Liquidation is the winding up of the business estate. However, a company does not have to be insolvent for the entity to be liquidated. If the business is dormant, therefore not operating, and the owner wishes to close it, the best route to prevent creditor claims against the entity in future is to liquidate the entity.
What is The Difference Between Liquidation and Sequestration?
Liquidation relates to commercial entities and trusts. Sequestration represents the legal process whereby an individual applies to court to be declared bankrupt. A compulsory sequestration is where a creditor applies to court to have a debtor announced bankrupt. The person’s estate is insolvent and thus declared bankrupt and not the individual. The Insolvency Act of South Africa governs the judicial proceedings.
Unlike with sequestration where the creditors must be notified of the intention to sequestrate, it is not necessary to first notify the creditors when liquidating a business entity. The application can be brought, and the creditors then notified of the pending application. It is thus a legal means to deal with business bankruptcy, whereas sequestration is the legal process in dealing with the insolvent state of an individual.
If your business is at the brink of bankruptcy, give us a call for professional legal assistance on how to deal with insolvency and liquidation.
Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant as at the date of publishing.
