The application of the narrower definition of “difficult financial situation” (d.b effective insolvency control, which excludes subordination agreements and other management measures) provides a response that may not serve the interests of the parties concerned (shareholders, creditors and employees). There is no point in informing the persons concerned in writing that the company is in financial difficulty, when in fact it is quite able to continue doing business. In addition, start-ups are usually in default in the first few years of negotiation and the application of the narrower definition would undermine their sustainability. This approach does not support the purpose of the Act, which also aims to promote South Africa`s economic development, entrepreneurship, investment and innovation, and can have a negative impact on the company and its stakeholders. The second part of the Financial Distress Query deals with insolvency and often raises the question of whether it is a de facto (technical) bankruptcy or a commercial bankruptcy. There are conflicting points of view. Some argue that because Part (i) clearly deals with commercial insolvency, Part (ii) must address de facto insolvency (i.e., an accounting audit). For the purposes of this approach, an enterprise is considered technically insolvent (and therefore financially in difficulty) if the company`s liabilities exceed its assets. This approach does not take into account subordination agreements or other management measures.
Others, however, believe that the definition associated with the definition of business rescue and the objectives of the Business Rescue Act should be considered. If this approach is accepted, Part (ii) of the Financial Distress Tests should take into account the complete financial situation of the company and not just the technical insolvency. To meet the objective of the law and in light of the definition of business rescue, it is necessary to take into account the complete financial situation of the business when it is established whether there is a “reasonable” likelihood that the business will be insolvent within six months. With respect to this approach, an entity is considered to be “in a financial emergency” only if it is insolvent even after all other circumstances have been taken into account, including the consideration of alternative fair values of assets and liabilities, the inclusion of reasonably foreseeable assets and liabilities in accordance with the solvency and liquidity test in Section 4, and the consideration of other Management proposals these will be measures such as subsertion agreements. Recapitalization or letter of support. This approach was confirmed by a recent decision of the Supreme Court of the United Kingdom (BNY Corporate Trustee Services Ltd v Eurosail [2013] UKSC 28) in which the court stated that the insolvency “balance sheet” test must take into account the broader business context and that courts must go beyond assets and liabilities to decide whether a company is “off balance sheet” or not, used for the establishment of the legal accounts of a company. In section 128(f), the Companies Act defines as follows: • temporary supervision of the enterprise and the management of its affairs, operations and property; Circular 2/2016 – Illustrative report of a certificate issued by a company for transfer purposes The court explained the difference between actual solvency (if assets exceed liabilities on the balance sheet) and economic solvency (if the company is able to repay its debts) and confirmed that the principle that the commercial insolvency of an enterprise is a reason, which justifies a liquidation order, is a legal efficiency that has served us well over time….