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Insolvency procedures

Procedures
What are the main insolvency procedures applicable to companies in your jurisdiction?

  • Liquidation
  • Compromise agreements and schemes of arrangement
  • Business rescue proceedings

Liquidation – A liquidation is commenced on the application of creditors, shareholders or the company. A liquidator is appointed to realise the company’s assets and distribute the proceeds to creditors and acts as directed by creditors’ meetings. 

Compromise agreements and schemes of arrangement – To avoid liquidation and attempt to trade out of financial difficulty an insolvent company can enter into a formal, court sanctioned compromise agreement or scheme of arrangement with its creditors and members. Typically creditors will compromise some of the company’s debt and extend repayment schedules. Schemes can also be used to effect the sale of the businesses of insolvent companies free of their debts.

Business rescue proceedings – Where a company is financially distressed but not insolvent it can apply to the court for business rescue proceedings. The directors remain in office but a business rescue practitioner takes control of the company’s finances with the aim of rehabilitating the company. Should the attempt at rehabilitation fail the company will be put into liquidation.

Moratorium
Can a company obtain a moratorium whilst it prepares a restructuring plan?

Yes in business rescue proceedings.

Directors
To what extent do the directors of the company remain in control of its affairs during any of the above procedures?

In a liquidation the directors’ powers cease.

In a business rescue the business rescue practitioner takes full control of the company’s finances and supervises the board in the exercise of its other powers.

Timeline to commence liquidation
How quickly can a creditor generally commence the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?

A court application can be made and granted urgently, even on the same day if necessary. In the normal circumstances (where there is no urgency) a provisional order can be granted within a week of the issue if the court application is unopposed. The exact length of time depends on the available court dates.

Overseas proceedings
Do your courts recognise insolvency proceedings commenced in the courts of another jurisdiction?

Yes, the courts will recognise a foreign liquidator on the basis of a letter of request from the foreign court to the South African court. The foreign liquidator will be granted the same powers as a South African liquidator. The court will seek to safeguard South African creditors and can require their claims to be paid before the foreign liquidator can repatriate the proceeds of realising South African assets to his home jurisdiction.

Position of creditors

Forms of security
What are the main forms of security over movable and immovable property?

Security over moveable property is taken by:

  • covering bond
  • surety mortgage bond

Security over specifically identified moveable property is taken by a special notarial bond. 

Security over all the company’s unspecified moveable property is taken by a general notarial bond that ranks behind fixed charge security and is similar to an English law floating charge.

Security over book debts and intangible moveable property is taken by a cession.

Preferential status
Which classes of creditor are given preferential status? Are any classes subordinated?

The following debts have preferential status:

  • the fees and expenses of liquidation rank ahead of all creditors including secured creditors
  • ranking after secured creditors and ahead of unsecured creditors, preferential creditors including: employees’ claims for remuneration (up to a prescribed amount); taxes and social security contributions; and holders of general notarial bonds

Treatment of foreign creditors
Are foreign creditors treated equally to domestic creditors?

Yes, although a foreign creditor who wishes to commence litigation before the South African courts may have to provide security before doing so.

Termination of contract by reason of insolvency
Are contract terms permitting termination of the contract by reason of insolvency valid?

Yes.

Retention of title
Are retention of title clauses effective?

Yes, if the reservation of ownership clause is validly incorporated in the agreement.

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Setting aside transactions

Transaction avoidance provisions
What are the main transaction avoidance provisions, and who can challenge transactions?

On a liquidation, the following can be challenged:

  • Transaction at an undervalue (dispositions without value) that caused the company to become balance sheet insolvent entered into in the two years prior to the commencement
  • of insolvency
  • Voidable preferences - the court can set aside a transaction that caused the company to become balance sheet insolvent entered into in the six months prior to the commencement of insolvency, unless the counterparty proves that the transaction was made in the ordinary course of business and that it was not intended to prefer one creditor over another
  • Undue preferences - any disposition that causes the company to become balance sheet insolvent made with the intention of preferring a creditor
  • Collusive dealings - any disposition prejudicial to the creditors as a whole or preferring one creditor over another where the colluded with another party to effect the disposition
  • Voidable sale of business or property forming part of the business any disposal of a business, its property or goodwill if the sale is not properly advertised to creditors in accordance with the Insolvency Act entered into in the six months prior to the commencement of insolvency

Position of directors

Risks for directors
What are the risks facing the directors of an insolvent company?

Directors can be held civilly liable for some or all of the company’s debts if they are knowingly party to the carrying on of the debtor’s business in a reckless or fraudulent manner.

In certain limited circumstances the public officer of the company (usually also a director) can be held personally liable for unpaid income tax, employees’ tax and VAT.

In business rescue proceedings, once the moratorium has come to an end directors can be held liable for being knowingly party to the carrying on of the debtor’s business in a reckless or fraudulent manner even if the company has been rehabilitated.