maximising recoveries on a R8 million exposure
by the ens insolvency department

In the current tough economic climate, clients are approaching the insolvency department with increasing frequency regarding substantial debts owed to them where the debtor's business may be in jeopardy and the opportunity for real recoveries lies in recovering not only from the debtor itself but other from related parties. Much is also dependent on how quickly action is taken.

Where the debt is undisputed the use of insolvency proceedings is the quickest and most effective way of making substantial recoveries and staunching the outflow of value from the debtor. We explain why this is so below with reference to the timeline of action taken in one of the insolvency department's matters this year:

The scenario: our client has a claim of R8 million against the debtor, a company operating in the property market

18 March 2009: instructions are taken from the client and a liquidation application against the debtor is drafted

20 March 2009: the liquidation application is launched at Court

31 March 2009: after service on interested parties, a rule nisi is issued by the Cape High Court granting a provisional liquidation order against the debtor. In Gauteng, the practice would ordinarily be that a final order of liquidation is granted immediately.

In terms of section 348 of the Companies Act and where a final liquidation order is granted (in the Cape on the return day of the provisional order some six weeks hence), the commencement of the liquidation of the debtor is deemed to occur in this instance on 20 March 2009 – i.e. the date on which the liquidation application is launched. In other words, within two days of giving instructions to ENS the client is able to achieve the effective freezing of the cash flows and assets of the debtor in that the provisions of section 341 of the Companies Act apply with effect from 20 March 2009. Section 341 provides that every disposition of the debtor's property where it is being wound up and unable to pay its debts made after the commencement of the winding-up is void.

The critical importance of the taking charge of the debtor's business and its assets becomes apparent when preliminary investigations reveal that the debtor has a book worth R46 million comprising mainly of monies owed to it in respect of property transactions. In the declining property market it appears that a number of transactions have gone bad but it also appears that millions of rands in debt have been written off by the debtor: millions have been advanced to entities controlled by one of the directors of the debtor where the basis of the advances and the likelihood of recovery is not readily apparent. It appears that some R33 million has been advanced to the director's entities.

Urgent instructions are taken by ENS from another client, the major creditor of the debtor, with a claim against the debtor in the region of R27 million to make application to Court for an enquiry into the affairs of the debtor in terms of section 417 of the Companies Act.

7 April 2009: the provisional liquidators of the debtor are appointed

7 April 2009: application is made to Court for a confidential enquiry into the affairs of the debtor in terms of section 417

7 April 2009: the Court authorises an enquiry into the affairs of the debtor

21 April 2009: the enquiry into the affairs of the debtor commences

19 May 2009: the Court grants a final liquidation order against the debtor on this, the return date of the rule nisi.

The above timeline above illustrates the speed with which a creditor can use insolvency proceedings to take control of a situation where a large undisputed debt is owed and the debtor may be haemorrhaging value.

The effectiveness of this course of action can best be judged when compared to the process of issuing summons on the above facts. Assuming the debtor raises a defence to the claim (which is likely) and default or summary judgment is therefore not possible, the matter will then go to trial within a time frame of 1 – 2 years or more. Even where a liquidation application may be opposed, the matter will be placed on the Court's semi-urgent roll and should be resolved within 6 – 9 months. By the time judgment is taken and after the cost of a trial has been incurred, the creditor is still only left with a judgment with which to attach the debtor's assets. The likelihood of substantial assets still being vested in the debtor by this stage is extremely slim. Furthermore a judgment creditor has no leverage with which to control the process through the appointment of a liquidator who takes control of the debtor's business and assets and who may – where necessary – launch enquiry proceedings and collapse entities which owe monies to the debtor.

Enquiry proceedings have the additional advantage of providing the forum in which to investigate the possibility of holding the directors personally liable for the debts of the debtor where they may be guilty of reckless or fraudulent trading as contemplated in section 424 of the Companies Act.

It is by getting in quickly and using the extensive scope of insolvency proceedings that the best possible recoveries will be made by the creditor.

If you would like further information regarding recoveries and insolvency proceedings, please do not hesitate to contact any of the directors of the insolvency department:

Leonard Katz (021) 410 2750
Gary Oertel (011) 269 7887
Claire Morgan (021) 410 2742
Nicola Nolan (011) 269 7889
Juliette Langford (021) 410 2698
Andr้ Symington (021) 410 2524

No information displayed on our Web Site should be construed as legal advice from any lawyer of this firm. Professional advice should therefore be sought before any action is taken based on the information displayed on this web site.
ENS disclaims any responsibility for positions taken without due consultation and no person shall have any claim of any nature whatsoever arising out of, or in connection with, the contents of this web site against ENS and/or any of its partners and/or employees.