No ducking and diving – stick to the rules of insolvency
The Covid-19 crisis has had an overwhelming impact on local business with corporate South Africa struggling to keep its head above water and the wolves at bay.
With no clear indication as to how the lockdown process will further impact businesses in the coming months, an understanding of the law of insolvency can provide much clarity on the available options for companies that find themselves in financial difficulties, giving them advice on how to dispose of assets legally.
A business facing insolvency may be tempted to dispose of or conceal assets. “In a word – don’t!” advises Katherine Timoney, associate at Gillan & Veldhuizen.
If you or your business is in financial difficulty, it is important to do the right thing by your creditors so as to avoid committing any offences such as attempting to dispose of or conceal assets, giving undue preference to certain creditors, colluding with creditors or disposing of assets prior to sequestration or liquidation. “While you may think it will give you short term relief, the consequences are simply not worth it,” says Timoney.
The Insolvency Act
The Insolvency Act 24 of 1936 (“Insolvency Act”) was developed to create a consolidated set of rules for how an insolvent’s assets are dealt with and is aimed at ensuring that the interests of all parties are protected and that all creditors are treated fairly. The Companies Act and the Close Corporations Act incorporate the provisions of the Insolvency Act when dealing with corporate insolvency and these Acts go to some lengths to ensure that insolvent individuals and companies do not try to circumvent the system in order to get money to one creditor rather than another.
Timoney says that in order to ensure that all creditors are treated fairly, the Insolvency Act states that if you are in financial difficulty, there are certain things you should avoid doing, such as giving away assets or choosing which creditors you would prefer to pay.
There are several categories of actions by an insolvent which can have the effect of disadvantaging creditors. These are:
Dispositions without value – where the insolvent gives away an asset or money without receiving anything of value in exchange and whilst their liabilities exceed their assets;
Voidable dispositions - where an insolvent disposes of any property in his/her estate less than 6 months before their sequestration, which has the effect of preferring one of their creditors over another;
Undue preference – where the intention or goal of paying money or giving assets to one creditor is to the disadvantage of other creditors; or
Collusive dealings before sequestration - where a debtor who, in collusion with another person, disposes of property belonging to him in a manner which has the ultimate result of disadvantaging his creditors or preferring one of his creditors above another.
“The actions highlighted above are complex and if you find yourself in financial difficulties personally or in business it is wise to take advice from a professional rather than from your friends over your weekly zoom call,” cautions Timoney. This can avoid potentially disastrous consequences for everyone involved, and a lot of unpleasantness down the line.