MRL3701 EXAM PACK 2022. Insolvency Law. Section 2 of the Insolvency Act, 24 of 1936 (“Act”) – Definitions
'insolvent' when used as a noun, means a debtor whose estate is under sequestration and includes
such a debtor before the sequestration of his estate, according to the context.
'insol...
1. INTRODUCTION TO INSOLVENCY LAW
1.1. Meaning of “insolvency”
Section 2 of the Insolvency Act, 24 of 1936 (“Act”) – Definitions
'insolvent' when used as a noun, means a debtor whose estate is under sequestration and includes
such a debtor before the sequestration of his estate, according to the context.
'insolvent estate' means an estate under sequestration.
Everyday language A person is unable to pay his debts = merely evidence of insolvency
Legal test of insolvency A debtor’s liabilities, fairly estimated, exceed his assets, fairly valued.
A person is not treated as insolvent for legal purposes unless his estate has been sequestrated by
an order of court, being a formal declaration that a debtor is insolvent granted either at request of:
the debtor (voluntary sequestration); or Ways to sequestrate
one or more of the debtor’s creditors (compulsory sequestration). an estate
Only after a sequestration order has been granted, the consequences of the Act will apply for
1
example Sections 26, 29, 30 and 31 making provision for some dispositions to be set aside.
Although the dispositions have taken place before sequestration, the relevant sections of the Act
may be invoked only after the court has sequestrated the debtor’s estate.
1.2. Purpose of a sequestration order
The main objective of a sequestration order is to secure the orderly and equitable distribution of a
debtor’s assets where they are insufficient to meet the claims of all his creditors. Once an order of
sequestration is granted, a concursus creditorum (coming together of creditors) is established
and the interests of creditors as a group enjoy preference over the interests of the individual
creditor. Creditors who have proved a claim have the right to share with other proved creditors in
the proceeds of the estate assets replacing their right to recover claims by judicial proceedings.
Court won’t grant a sequestration order if no advantage to creditors has been shown and generally
not when there is only one creditor. If debtor’s assets aren’t enough to cover the costs of seques-
tration, there is no sense in sequestrating his estate as creditors won’t get anything thus being a
waste of time and money. The debtor is divested of his estate and can’t burden it with more debts.
1.3. What may be sequestrated?
The Act provides for the sequestration of
An Estate is usually conceived as:
the ‘estate’ of a ‘debtor’
an estate that includes assets and liabilities;
an estate that consists of liabilities only;
the joint estate of spouses married in community of property;
the separate estates of spouses married out of community of property; and
a new estate of a debtor whose estate has been sequestrated.
A Debtor may be:
a natural person;
a partnership;
a deceased person and a person incapable of managing his own affairs;
an external company that does not fall within the definition of external company, eg a foreign
company that has not established a place of business in South Africa; and
an entity or association of persons that is not a juristic person, eg a trust.
1
Refer to paragraph 10 below
,MRL301-M Page 2 of 47
Section 2 of Act – Definitions
'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.
A body corporate established in terms of the Sectional Titles Act, 95 of 2986, is a body corporate
as defined in the Companies Act, 61 of 1973 and, therefore, not a debtor for purposes of the Act.
1.4. Jurisdiction of the court
Which court has jurisdiction?
As a rule, only a Provincial or Local Division of the High Court (“HC”) may adjudicate upon an
insolvency matter, but a Magistrate’s Court (“MC”) may preside over prosecutions for criminal
offences under the Act, setting aside of voidable dispositions and a few other matters if the
jurisdictional limits are not exceeded.
Jurisdiction over a debtor and his estate
In terms of Section 149 of the Act, a court has jurisdiction over a debtor and his estate if:
on the date of lodging, the debtor is domiciled or owns property, or is entitled to property,
situated within the jurisdiction of the court; or
at any time within the 12 months immediately preceding lodging, the debtor ordinarily resided or
carried on business within the jurisdiction of the court.
A person is domiciled at a particular place if he is lawfully present there and has the intention to
settle there for an indefinite period (Section 1(2) of the Domicile Act, 3 of 1992).
Jurisdiction in litigation against third parties
Section 149 of the Act: It is not relevant where the trustee of an estate litigates against third parties.
Competing courts – removal to another court
A court having jurisdiction over a debtor may refuse or postpone proceedings if it appears to the
court equitable or convenient that the estate should be sequestrated by another court. The inquiry
is not where the sequestration order may more conveniently be granted, but where the estate may
more conveniently be administered.
1.5. The Master
A Master is appointed in terms of the Administration of Estates Act, 66 of 1965, to each of the
areas of the Provincial Divisions of the HC and one of his most important functions is the custody of
all documents relating to insolvent estates. For the performance of various functions the Master is
entitled to charge fees, some being in cash, some by means of revenue stamps. The Master is a
“creature of statute” and only has the powers granted to him by legislation.
1.6. Condonation of irregularities
In terms of Section 157(1) of the Act, irregularities in procedure can be condoned in the following
instances:
where the irregularity has not caused a substantial injustice; or
where the irregularity has caused a substantial injustice, but the prejudice to creditors can be
remedied by an order of court.
The courts have recognised the following additional grounds whereby an irregularity can be
condoned:
where a deviation is so slight as to fall within the maxim de minimis non curat lex (the law is not
concerned with trifles);
where all interested parties have waived compliance with the provisions of the Act;
where the provision in question is not peremptory and has substantially been complied with; and
where it was impossible to comply with the Act.
1.7. Historical overview
South Africa followed Roman Dutch law regarding insolvencies, but in 1843 a landmark ordinance
was passed changing the law and more specifically abolishing the cessio bonorum (voluntary
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surrender of goods by a debtor to his creditors). The Constitution provides a basis for the further
reform of Insolvency Law as it poses a potential threat to a number of fundamental rights, but mere
conflict does not render a provision constitutionally invalid. Constitutional invalidity involves a
twofold inquiry:
Does the provision conflict with a fundamental right?
If so, is the limitation reasonable and justifiable in an open and democratic society based on
human dignity, equality and freedom?
2. VOLUNTARY SURRENDER
2.1. Who may apply
The following persons may apply to surrender the estates mentioned:
Estate Person
Estate of natural person Debtor or his agent, expressly authorised to do so
Estate of deceased Executor
Estate of debtor incapable of managing own affairs Party entrusted with administering the estate, ie the curator bonis
Partnership estate All members of partnership residing in South Africa, or their agent2
Joint estate of spouses married in community Both spouses
2.2. Requirements
The court may accept the surrender of a debtor’s estate only if it is satisfied that:
(1) The debtor’s estate is, in fact, insolvent
A debtor is insolvent if the amount of his total liabilities exceeds the value of all of his assets.
The test is whether it is established that the debtor is without funds to pay his debts in full
and it is improbable that the assets will realise enough for this purpose.
(2) The debtor owns realisable property of sufficient value to defray all costs of
sequestration which will be payable out of the free residue of his estate
The “costs of the sequestration” include not only the costs of surrender, but also all the
general costs of administration in terms of Section 97 of the Act.
Section 2 of Act – Definitions
'free residue', in relation to an insolvent estate, means that portion of the estate which is not
subject to any right of preference by reason of any special mortgage, legal hypothec, pledge
or right of retention.
A logical result of the requirement that the debtor must own sufficient property to meet the
costs of sequestration is that a debtor who has no assets and only liabilities cannot
surrender his estate even against a guarantee being furnished to the Master for the costs of
sequestration. Such an estate can, however, be compulsorily sequestrated.
(3) Sequestration will be to advantage of creditors
The debtor has to prove that sequestration will be to the advantage of the creditors whereas,
in an application for compulsory sequestration, the creditor has to show merely that there is
reason to believe that it will be. The onus is thus more strenuous in voluntary surrender.
2.3. Preliminary formalities
Court must be satisfied that certain formalities have been observed as set out in Section 4 of Act:
(1) Notice of intention to surrender
How A debtor must publish a notice of surrender in the Government Gazette and in a newspaper
circulating in the magisterial district where he resides or, if he is a trader, in the district where he has
his principal place of business.
Why Alerting the debtor’s creditors of the intended application should they wish to oppose.
Format Form A, First Schedule of the Act3
2
Two exceptions: 1) special partnerships, which have been repealed and can be ignored; 2) partners en commandite, who are not
liable to creditors for partnership debts or co-partners for any losses – they merely contribute
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