Insolvency: What It Means for Individuals and Businesses

Insolvency is a word no one wants to hear – but if you’re facing mounting debts, struggling to pay your bills or watching your business’s finances spiral, it’s important to take corrective steps as soon as possible. Knowing how insolvency works can help you protect your interests, make informed decisions and take the first steps toward financial recovery.

What Is Insolvency?

In simple terms, insolvency occurs when a person or company can’t pay their debts when they become due. There are two main types of insolvency:

Cash flow insolvency: 

This means there is not enough available money to pay your debts, even if your assets are technically worth more than what you owe.

Balance sheet insolvency

In this case, your total liabilities are greater than your total assets. In other words, if you sold everything you own, you still wouldn’t have enough to pay all your debts.

In South Africa, insolvency can lead to formal legal processes such as sequestration (for individuals) or liquidation (for companies). While it is often associated with financial failure, insolvency procedures can also serve as an opportunity to restructure and reset for the future.

What Causes Insolvency?

Insolvency can happen to anyone, often because of things outside of their control. Some common causes include:

• Loss of income or sudden unemployment
  
• Unforeseen expenses, such as medical bills or legal costs
  
• Overuse of credit facilities (like credit cards, overdrafts or loans)
  
• Poor financial management or business decisions
  
• Economic challenges such as inflation, interest rate hikes or decreased consumer demand
  

For businesses, insolvency can also result from poor cash flow, uncollected debts or the loss of a major client.

Individuals: How Sequestration Works

For individuals, the most common legal route when facing insolvency is voluntary sequestration. This involves applying to the High Court to be declared insolvent, after which a court-appointed trustee takes control of the individual’s estate. The trustee is responsible for selling off assets to repay creditors as far as possible. Once this process is complete, the individual may be discharged from the remaining debt, offering relief from creditor pressure.

There is also the option of compulsory sequestration, where a creditor applies to the court to have a debtor declared insolvent. While sequestration has serious consequences, such as a negative impact on one’s credit record, it can offer a lifeline to those who are genuinely unable to recover from financial hardship on their own.

Businesses: Liquidation and Business Rescue

For companies, insolvency is typically addressed through liquidation or business rescue proceedings. Liquidation involves winding up the business, selling its assets and distributing the proceeds among creditors. Once the process is complete, the company ceases to exist.

However, liquidation is not always the only option. If there is a reasonable prospect of restoring a business’ financial health, it could enter into business rescue. This is a legal process in which an independent business rescue practitioner is appointed to restructure the company’s affairs under the supervision of the court. The goal of business rescue is to rehabilitate the company while providing temporary protection from legal action.

What Happens After Insolvency?

The consequences of insolvency can be difficult, but they’re not always permanent:

• Your credit score will be affected, making it difficult to access credit in future
  
• Certain assets may be lost as part of the liquidation or sequestration process
  
• You’ll face some restrictions on business ownership or financial activities until you’re rehabilitated
  

That said, many individuals and businesses go on to rebuild stronger than before. With the right legal guidance and a realistic plan, insolvency can offer a way out from crushing debt and an opportunity to start over.

Need Help Navigating Insolvency?

Insolvency is a stressful matter, but it doesn’t have to be the end of the road. Whether you’re a private individual or a business owner, getting professional legal advice can help you understand your options and plan a better financial future.

At Cawood Attorneys, we specialise in helping individuals and businesses across the country manage their debt and move forward with confidence. Our team can guide you through the process, and help you explore the most practical and legally sound solutions for your unique circumstances. Contact us today to schedule a confidential consultation and take the first step toward financial clarity and control.