How insolvency affects a spouse and a business

Divorce is not the only scenario in which you can be affected by whether you married in community of property or out of community of property, according to attorney Simon Dippenaar.

He points out that another major event to consider is insolvency.


What is insolvency?

He explains that insolvency is not the same as bankruptcy, although the terms are often used to mean the same thing. One is a financial state; the other is a legal procedure.

Someone is insolvent when they are unable to pay their debts, either because their liabilities exceed their assets, or because they have insufficient cash flow.



Bankruptcy, on the other hand, occurs when one of the following takes place:

  • A person or legal entity – that is a close corporation or company – makes an application to the relevant court to have themselves declared bankrupt;
  • A creditor of a person or legal entity makes an application to the relevant court to have the company or person declared bankrupt;
  • A legal entity files a special resolution with the Registrar of Companies to be declared bankrupt.

Insolvency may lead to bankruptcy but does not necessarily do so. It may be possible to rectify the situation without legal protection from creditors.


In the context of marriage


In community of property

When married in community of property, all assets are held jointly by both spouses. Of course, it also means liabilities are shared.

If the main income earner is declared insolvent and subject to sequestration – where one’s assets are sold to pay creditors – the joint estate is sequestered.


Marriage out of community of property

It is increasingly common for couples approaching marriage to draw up an antenuptial contract and elect to be married out of community of property.

In this scenario, the solvent partner’s estate does not form part of the insolvent partner’s estate in the event of insolvency of either spouse.

However, should the insolvent party be sequestrated, the solvent party is considered liable until documentation is produced (such as an antenuptial contract) that proves the separate legal ownership of assets.

The court must be satisfied that the solvent partner’s assets were legitimately acquired in compliance with the Insolvency Act.


Protecting a business

Both partners are protected by the out of community of property marital regime. A couple may be able to maintain a reasonable standard of living and continue to enjoy credit facilities if one spouse is insolvent but the other retains their solvent status.

More importantly, if one partner runs a company (or if both have business interests), the solvent spouse is afforded protection.

They can continue trading separately from the insolvent spouse. However, the solvent spouse will have to show that any interest the insolvent estate has in the assets is protected.


Source: Fin24

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