An examination of insolvency alternatives for corporate and non corporate entities in South Africa

Abstract

The journey towards insolvency is often a gradual process, thus enabling a business or person in most circumstances to be aware of the danger ahead if adequate precautions are not taken. This position is recognized by the Statute, hence the definition given to a financially distressed company under the Companies Act1 to mean inability to pay all its debts within the immediately ensuring six months or the likelihood of going insolvent within the immediately ensuring six months. Rescue mechanisms are therefore aimed at ensuring that when faced with the signs of insolvency, a business for instance can be properly driven to become solvent again or at least restructured to achieve better realization of assets.2 Indeed, providing alternatives to insolvency is fast becoming a global trend as many countries now appreciate the need to give a person or business experiencing difficult times, the opportunity to rise again without necessarily going through the rigors of liquidation or sequestration. South Africa is not left out in the quest to assist over-indebted persons and provide them with alternative measures beside insolvency. The National Credit Act3 for instance seeks as one of its objectives to prevent over-indebtedness and where it occurs address same by means of debt rearrangement. This is in addition to certain provisions of the Magistrate CourtP a g e Act4 which allow a debtor the option of applying for an administration order and where granted make payment in instalments. The Companies Act also provides for business rescue as well as compromise between company and creditors.5 This research in brief analyses the above mentioned laws in South Africa that provide alternative measures for financially troubled or over-indebted debtors as applicable to corporate and non-corporate entities. The research considers whether these laws are sufficient to assist debtors in financial crisis, the effectiveness of these laws, challenges as well as loopholes taking into consideration what is applicable in other jurisdictions such as the United States, United Kingdom, Canada and Australia. The end of this research contains recommendations that would assist in achieving effective rescue mechanisms or alternatives to insolvency beneficial to both corporate and noncorporate entities in South African. Copyright