What is an “Act of Insolvency” and how common are they?

3 July 2017

– Summary

How a person "acts" when they owe someone money is important. What an act of insolvency is exactly will be helpful to Debtors and Creditors.

An act of insolvency is the legal presumption that when a person or entity acts in a certain way, that person or entity is insolvent. Thereafter, steps may be taken by third parties to have that person or entity sequestrated.

“Entity”, in this case, refers to Trusts.

Acts of insolvency apply to a person or a partnership; or the estate of a person or partnership. Entities that can be placed in liquidation, such as Companies or Close Corporations, must be dealt with under the Companies Act, and these Act of Insolvency would not apply.

There are 8 acts of insolvency (more fully explained below):

ACT OF INSOLVENCY	DESCRIPTION OF THE ACT OF INSOLVENCY
Letter with “Offer of Settlement”	A letter by a debtor confirming they owe money to a creditor, which letter contains an offer to pay the creditor an amount less than the amount owed and asking the creditor to write-off (or abandon) the balance.
Notice of inability to pay	A letter by a debtor confirming that they cannot pay the debt; the notice must be in writing. This is a very common act of insolvency.
Leaving house/country	If a debtor leaves their house or the country with the intention of evading or delaying payment of a debt. “Intention” is a requirement so if a person leaves to go on holiday, this act of insolvency will not apply. Bear in mind, as always, “intention” is difficult to prove.
Failure to satisfy a Judgement	Judgments must be satisfied. If a debtor cannot pay a judgement, or if the debtor does not possess sufficient assets to sell to satisfy a judgement debt, then the creditor may apply to the court to have the debtor declared insolvent (i.e. sequestrated).
A disposition that prejudices creditors	If a debtor sells/removes/hides their assets and such action prejudices one or more of their creditors. When a debtor is declared insolvency, and they have acted in this manner it is called a “voidable disposition”. The appointed trustee (in the case of a person) or liquidator (in the case of an entity) will often go back 6 months to 2 years looking for voidable dispositions. The trustee has the power to overturn a voidable disposition and try to recover the asset if any are found. This is an objective test, one does not need to prove intention.
Benefiting one creditor over another	A debtor may not benefit one creditor over another. This is an objective test, one does not need to prove intention.
Notice of surrender of estate	A debtor may publish a notice of intention to surrender their estate in the Government Gazette. If the debtor does not proceed with the subsequent steps required to surrender their estate, it is considered an act of insolvency.
Inability to pay debts after notice of transfer of business	It is a requirement of Section 34 of the Insolvency Act that the sale of a business by a “trader” should be advertised in the Government Gazette and newspapers. All liquidated (or, easy to calculate) debt of the trader’s business, due at a future date, became immediately payable when a notice has been published. A “trader” is a sole proprietor. If the trader cannot pay any creditor that requires payment, it is an act of insolvency.

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