Organised, clear and detailed notes on insolvency law. The notes contain information on an introduction to insolvency law, voluntary surrender, compulsory sequestration, as well as case summaries.
• Hockly’s Chapter 1
• Commissioner South African Revenue Service v Hawker Air Services (Pty) Limited ,
Commissioner South African Revenue Services v Hawker Aviation Partnership and
Others 2006 (4) SA 292 (SCA);
• Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly and Another 1984
(1) SA 160 (W);
• Melville v Busane [2012] 1 ALL SA 675 (ECP) 18 August 2011;
• Goode, Durrant and Murray (SA) Ltd & another v Lawrence 1961 (4) SA 329 (W).
Insolvency Act 24 of 1936 http://www.epaia.co.za/Legislation/act/37-insolvency-act-no-24-
of-1936
Companies Act 71 of 2008
Terms and Concepts:
• Insolvency: where liabilities exceeds assets. The inability to pay debts.
Test for insolvency: where the debtors liability, fairly estimated, should exceed the assets fairly
valued.
Commercial: The inability to pay a debt due to cash flow or other problem but assets still
exceed liabilities.
• Actual insolvency: indicating that the debtors liabilities exceed assets.
Strictly speaking, you are only legally insolvent if the estate has been sequestrated by a court
order.
• Sequestration: applies only to an estate, not a person. The estate is sequestrated, not the
person. A court grants a sequestration order; the person's title of debtor changes to
insolvent.
• Purpose of seq order: primary aim is to secure the fair, equitable and orderly distribution
of assets. A sequestration order will only be granted where it is shown that the seq will
be to the advantage of creditors.
o Aims to ensure that that the creditors receive an equitable share of the debtors
estate.
• Concursus creditorum: once an order is granted, a cc is established and the interests of
the creditors as a group is given preference over individual creditors. It is the coming
together of creditors.
• Consequences of a seq order for debtor: the debtor/ insolvent will be deprived of the
estate. The master will be in control. upon the attainment of the seq order, only then do
the consequences take place; they cannot burden their estate any further with debts.
• consequences of a seq order for creditor: creditor joins the group of creditors, allowing
them to prove a claim in the estate, they are then able to attain a portion of the estate.
,Who or what is being sequestrated?
The estate of a debtor.
Miller v Janks 1944
An estate with only liabilities is still capable of seq. because at a certain point in time, the
estate had both assets and liabilities. The estate can only be seq. through compulsory seq.,
NOT voluntary surrender. The standard for voluntary surrender is higher (must be proven
that the surrender will creditors will be to the advantage of creditors ito s6(1), but the
creditors cannot be satisfied because there are no assts), while the standard for compulsory
seq is lower (ito S10c, the stand is to reasonably believe that the seq will be to the advantage
of the creditor)
Court: by employing the insolvency law machinery, the trustee can investigate how the
assets are disposed of. In this case, the assets were disposed of in a highly suspicious
manner.
Marriages ICoP: one estate, both spouses will be affected by seq order. Both need to voluntarily
surrender; where compulsory seq., there is no fault on the creditor for assuming that there is no
ICoP marriage.
Marriages OCoP: the separate estate of the solvent spouse is unaffected. S21 regulates the
powers of the solvent spouse.
Debtor:
IA S2: “debtor” in connection with the sequestration of the debtor's estate, means a
person or a partnership or the estate of a person or partnership which is a debtor in the
usual sense of the word, except a body corporate or a company or other association of persons
which may be placed in liquidation under the law relating to Companies.
[An entity or association of persons is regarded as ‘a debtor in the usual sense of the word’ if
it is able to possess an estate and incur debts]
Magnum Financial Holdings (in liquidation) v Summerly
Unopposed application for provisional sequestration order against the trust (Companies
Act of 1973)
LQ1: whether it is competent in law to sequestration a trust, since only a debtor can be seq.
Court: looked at ex parte Milton who accepted that it is competent of the court to accept
the surrender of an administrative trust created by a contract because it fell within the
definition of debtor (or could at the very least be described as a debtor in the usual sense
of the word) because it could own property and incur liability. The court Magnum found
that a trust is a debtor in the usual sense of the word ito S2 of IA. A trust is therefore not
governed by company law because it is not a company or body corporate which can be
placed under liquidation by the law relating to companies.
, LQ2: (procedural issue) which Act should be employed?
Court: the trust is not a body corporate and therefore cannot be placed under liquidation,
IA must be employed - seq was the appropriate remedy in this regard.
A provisional seq order granted.
Melville v Busane
A trust is included as a juristic person but not a 'company' ito Companies Act of 2008.
Facts: mismanagement of trust by Busanes. Melville was not aware of whether or not the
trust was insolvent or solvent. Creditors took acton against Melville (who was of the
opinion that it was just and equitable to wind up the trust).
LQ: whether a trust is capable of liquidation.
Court: ito common law, a trust is not necessarily recognised as a juristic person unless
otherwise specified by legislation. Court highlights that while the previous legislation was
in order, it would be appropriate to seqestration the trust; and quoted Magnum as approval
for trust being a debtor in the usual sense of the word. However, a trust is considered as a
juristic person for purposes of the Companies Act (but not a company), it is considered a
body corporate and therefore must be liquidated, NOT seq.
Court confirmed that a trust is not covered by the definition of company because it is not
a juristic person that is incorporated ito the Act. Meaning, the appropriate remedy is still
seq rather than liquidating - regardless of the fact that, in the Companies Act, it is included
in the definition of juristic persons.
Partnerships:
• A partnership is a debtor. Sequestration is carried out differently with partnerships.
• 2 or more individuals can establish a partnership by contract, with the aim of making a
profit. each part contributes by labour, property or money.
• when a partner dies, the partnership ends
• Types of partnerships:
o universal: where partners come together and contribute all their resources
o temporary/focused arrangement: where the contribution of resources is for a
specific arrangement (eg building project)
o ordinary: where all partners are jointly and severally liable for all the debts
o extra-ordinary: where liability of some of the partners are limited in some
manner
o anonymous: partners are not disclosed to the public and are only held liable by
their partners and not third parties
o en commandite: partnership is created when parties agree to carry on the
partnership in the name of one or some of the partners, while the partners whose
names are not disclosed are known as en commandite partners (ECPs).
Insolvency Act S13: sequestration of partnerships
(1) If the court sequestrates the estate of a partnership (whether provisionally or finally or on
acceptance of surrender), it shall simultaneously sequestrate the estate of every member of that
partnership other than a partner en commandite or a special partner as defined in the Special
Partnerships' Limited Liability Act, 1861 (Act 24 of 1861) of the Cape of Good Hope or in
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