Deadbeat or Broke? Understanding the 8 Signs of Insolvency

Ever wonder how someone gets labelled “insolvent”? In South Africa, the law outlines 8 specific actions that can trigger this status. Think of them as red flags that signal a debtor (someone who owes money) is likely unable to pay their creditors.

Who is a Debtor?

The law broadly defines a debtor, encompassing individuals, partnerships, and estates. However, companies typically go through a different process called liquidation.

The 8 Acts of Insolvency

• Skipping Town: If a debtor leaves the country intending to avoid their debts, it’s a big warning sign. This can be particularly frustrating for creditors who have invested time and resources into pursuing legitimate claims. Imagine a contractor who finishes a major renovation project, only to have the homeowner disappear overseas without paying the final invoice.
• Judgment Proof: A creditor wins a court judgment against the debtor, but the debtor has no assets to cover the debt. This “nulla bona” return from the sheriff signals trouble. In simpler terms, the sheriff looks for the debtor’s stuff to seize and sell to pay the debt but comes up empty-handed. This act of insolvency suggests the debtor may have been strategically hiding assets to avoid paying their debts.
• Shady Deals: If a debtor starts selling off assets in a way that hurts creditors, like fire-sale prices or deals that favour certain creditors, it’s an act of insolvency. Imagine a struggling business owner suddenly selling off valuable equipment at a fraction of its worth. This kind of fire sale might raise eyebrows, especially if the proceeds disappear or are used to pay off one creditor while others are left hanging.
• Packing Up and Leaving: The debtor tries to move assets out of reach of creditors, perhaps to another location or even another person’s name. This can be a desperate attempt to shield valuable property from being seized to pay off debts. For example, a debtor might try to transfer a car title to a friend or family member, hoping it won’t be discovered by creditors.
• Lowball Offers: The debtor proposes a deal with creditors to settle outstanding debts for a fraction of the amount owed. This can be a sign they’re struggling financially and may be on the verge of insolvency. Creditors need to weigh these offers carefully. While accepting a reduced payment might seem better than nothing, it’s important to consider the likelihood of recovering the full amount if the debtor is truly insolvent.
• Surrender Fumble: If a debtor publishes a notice of surrender (giving up their assets) but doesn’t follow proper legal procedures, it’s an act of insolvency. This suggests the debtor might be trying to rush the process or avoid certain legal obligations. A botched surrender notice can be a red flag for creditors that something fishy is going on.
• Written “I Owe You”: A written statement from the debtor admitting they can’t pay their debts is a clear sign of insolvency. Important note: Just saying it verbally doesn’t count! A written statement provides concrete evidence that the debtor acknowledges their financial difficulties. This can be crucial for creditors pursuing legal action.
• Business on the Brink: A business owner gives notice they’re transferring their business but then can’t pay all their debts. This suggests the business is likely insolvent. Perhaps the owner is hoping for a fresh start with the new business, but leaving behind a trail of unpaid bills. For creditors who have extended credit to the business, this can be a devastating blow.

What Does This Mean for You?

As a creditor, knowing these 8 acts of insolvency empowers you. If you suspect a debtor is playing financial shell games, you can use this information to take legal action and try to recover what you’re owed. The sooner you identify the signs of insolvency, the sooner you can take steps to protect your interests.

Need Help? Don’t Wait!

Whether you’re a creditor facing a potentially insolvent debtor or a debtor struggling to meet your obligations, we can help. Contact us today and let’s discuss your situation. Remember, early action can make all the difference. If you’re a creditor, it can mean the difference between recovering what you’re owed and facing significant financial losses. If you’re a debtor, we can help you explore your options and navigate the legal complexities of insolvency.