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Summary Mercantile Law 312 - Law of Insolvency 2016 -UPDATED-
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Lecture notes, textbook and cases (extensive and simple to read and study format)
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Prescribed material:• Hockly 1.1 – 1.7
• 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)
Overview and outcomes:
1. Terms and concepts
2. Purpose of a sequestration order
3. Jurisdiction of courts
4. Sources and history
Ch 1. Introduction
1. Important concepts
1.1) Meaning of insolvency
• Commercial sense = An inability to pay debts
o Insolvent in the Commercial sense ! inability to pay their debt = merely evidence of
insolvency
o Owe the bank 5 million
" They have assets with a greater value than 5 million, but their assets aren’t liquid.
" They need to find a buyer to liquidise their assets (Pg6??)
• In the legal sense = legally insolvent when your liabilities exceed your assets
o Test for legal insolvency = Venter v Volkskas Bank
o Even though test may be satisfied, person who has insufficient assets to discharge
liabilities is not treated as insolvent for legal purposes unless his estate has been
sequestrated by an order of the court
" Sequestration order is a formal declaration that a debtor is insolvent
" Can either be voluntary or compulsory sequestration
# Voluntary = Order is granted at the instance of the debtor himself (Ch2)
# Compulsory = Order is granted at the instance of one or more of the
debtors creditors (Ch3)
Options available to creditors: Remedies
• If money is owed, these are the steps taken before insolvency is declared:
i. A letter of demand is served
ii. Assets attached and sold in execution (Property law)
iii. Summons served to debtor
iv. Garnishing order = Lay a claim to a portion of the debtors wages or salary
v. Whether debtor is commercially insolvent, legally or technically = these are available to the
creditor
• After this, the creditor can have the debtor declared insolvent if they can prove he is legally
insolvent
,Sequestrate (verb) vs Insolvent (Adjective/noun)
• You sequestrate a person’s estate, not the person.
• Once the sequestration has been ordered, the person and his estate may be described as insolvent
o When word ‘insolvent’ is used to describe the debtor, there are 2 possible meanings:
1. The debtor’s estate has been sequestrated
2. Liabilities exceed assets (Definition of ‘insolvent’ in s2 of the Insolvency Act)
, 1.2) Purpose of a sequestration order
a. Main aim = to secure the fair, orderly and equitable distribution of a debtor’s assets where they are
insufficient to meet the claims of all his creditors
• Executing (property law) against the property of a debtor who is in insolvent circumstances
(liabilities > assets) results in one or few creditors being paid, and the rest receiving little or
nothing at all.
o Thus, the legal machinery that comes into operation on sequestration is designed to
ensure that whatever assets the debtor has are liquidated and distributed among all
creditors in accordance with a predetermined (and fair) order of preference.
• Once an order of sequestration is granted, a concursus creditorum is established, and the interests
of creditors as a group enjoy preference over the interests of individual creditors (Richter NO v
Riverside Estates
o Concursus creditorum = ‘coming together of creditors’
o The aim of the sequestration order is to bring together the creditors so that:
1. Once order granted, Debtor = divested of his estate, cannot burden with any more
debts
2. Creditor will no longer be able to use the above remedies
# Creditor’s right to recover his claim in full by judicial proceedings is
replaced by the right, on proving a claim against the insolvent estate, to
share with all other proved creditors in the proceeds of the estate assets.
3. Apart from what is permitted by the Act, nothing may be done which would have
the effect of:
# Diminishing the estate assets or
# Prejudicing the rights of creditors
• Walker v Syfret: ‘No transaction can thereafter (order granted)
be entered into with regard to estate matters by a single creditor
to the prejudice of the general body of creditors (Concursus
creditorum)
• The claim of each creditor must be dealt with as it existed at the
issue of the order.’
• * If the court is not satisfied that the sequestration will be to the advantage of the creditors, it
won’t grant the order:
o Where only 1 creditor = cheaper to exact the amount able to pay with an execution order
o Thus, requirement of advantage to creditors (2.23 + 3.13)
,b. Enable the debtor to free himself from all unpaid pre-sequestration debts:
• Although sequestration was not designed to alleviate the position of the debtor, it inevitably has
this effect because it relieves him from legal proceedings by creditors and allows him to free
himself, through rehabilitation, from all unpaid pre-sequestration debts.
o People can be victims of fraudulent investment schemes
o Misfortune
o Business which fail due to economic melt down
o People don't always become insolvent on purpose
o Rehabilitation ! so can carry on with financial life.
• The law uses this mechanism to hand over your estate, otherwise you would be the victim of
continuous court proceedings and you wont be able to acquire new assets
c. Insolvency law is not just an elaborate system of execution:
• Sequestration does not only affect the debtor’s assets
o It also affects the debtor personally, restricting his:
1. Capacity and freedom to enter into contracts
2. To follow a chosen vocation (choice of career or occupation)
3. To litigate
4. To hold office
o Naidoo v Absa Bank:
" Accepted that sequestration order is ‘not an ordinary judgement entitling a
creditor to execute against a debtor’.
" It affects ‘not only the rights of the 2 litigants, but also of third parties, and
involves the distribution of the insolvents property to various creditors, while
restricting those creditor’s ordinary remedies and imposing disabilities on the
insolvent
" Also, sequestration proceedings instituted in accordance with (pursuant to) a
breach of a credit agreement’ could not be classified as a ‘legal proceeding to
enforce the agreement’.
d. Protect creditors against other creditors
• Often greed, conspiracies amongst creditors etc.
• Purpose is to avoid this
• Have to prove to court that sequestration order is in the best interests of the individual
• Debtor is divested from his estate = cannot burden his estate with debts
• Claim in full replaced with claim to share
, Sequestrated
Concursus
Rehabilitation creditorum
Distribution of Insolvent
proceeds by divested of estate
trustee to & estate vests in
creditors trustee
Collection &
sale of assets
by trustee
, 1.3) Who or what is being sequestrated?
Act provides for the sequestration of the “Estate” of a “Debtor”
• 1) What is an estate (meaning)?
o Usually it is the collection of assets and liabilities
• a) Only liabilities?
o But, a debtor who has only liabilities may be regarded as having an estate for
sequestration purposes.
o ! Miller v Janks
" M acquired an estate by means of his occupation as a professional gambler
# His assets subsequently disappeared under highly suspicious
circumstances, leaving only liabilities.
# His wife possessed fixed property which she had received while M was
pursuing his occupation.
" Court looked at logic = if you have assets of a 1000 today and liabilities of 2000
= have an estate
" Para. 132: A debtor who has £1,000 assets and £2,000 liabilities has an estate,
though one insolvent to the extent of £1,000: he does not cease to have an estate
when the next day he pays over his £1,000 to his creditors and remains insolvent
to the same extent... it is no less an estate because at one time it has only assets,
at another time only liabilities, and at yet another time both assets and liabilities.
" The court granted the order of sequestration of M’s estate.
# It rejected M’s argument that, because he no longer had any assets, he
had ceased to have an estate and therefore sequestration was possible
• b) Can you sequestrate an estate that only has liabilities?
o 1. Voluntary surrender =
a) Must prove sequestration order costs will be covered by the assets
b) Unencumbered assets = must have assets in your estate that is not subject to a
preferential claim by creditors
# If not = wont be assets to cover the sequestration costs.
o 2. The creditor would not apply for a sequestration order if the estate only consists of
liabilities, but it is possible – Stratford v Investec
" After a sequestration order is granted, a trustee is appointed
# Has powers to set aside transactions
# Also has power to investigate and is allowed to recover assets that have
been consumed
# It is possible for compulsory sequestration of an estate which only
consists of liabilities if the creditors can prove that an investigation may
lead to the recovery of assets = advantage to creditors
,• c) Marriages in community of property (confusing…)
o Joint estate of spouses in COP is an estate for the purposes of insolvency.
" Spouses are both debtors, and on sequestration of their joint estate, they both
become insolvent debtors for the purposes of the Act
# Divorce before: on divorce, both spouses regain separate estates
(sequestrated separately) ! if sequestration occurs after divorce
• Sequestration does not extinguish the liability of the solvent
spouse for debts of the JE.
# Divorce after: if the divorce takes place after the creditor has acquired the
right to apply for sequestration of the JE, then the creditor is required to
sequestrate the separate estates of both spouses.
" Can use ANC to exclude assets from the estate, but it does not matter because
both spouses become insolvent and therefore all assets are subject to insolvency
• d) If debtor married out of community of property
o Separate estate that can be sequestrated
" Solvent spouse’s assets are also affected by the order = they vest in the trustee of
the insolvent estate until solvent spouse can establish his/her title to them.
" The sequestration of one spouses estate does not have any bearing on the other
spouses estate, BUT
# Mere fact that out of cop does not mean that the solvent spouse is not
affected at all = the trustee is allowed to look at the assets of the solvent
spouse to investigate if there is fraud etc.
, • 2) What is a debtor for the purposes of insolvency?
o Section 2 Insolvency Act: Definitions
" “debtor” in connection with the sequestration of the debtor's estate, means
a. a person (Natural or Juristic)
b. or a partnership (even one who’s members are all juristic persons –
Hawker)
c. or the estate of a person or partnership
" which is a debtor in the usual sense of the word,
# except a
i. body corporate
o P 6 TB ! a juristic person or universitas, ie, an
association of persons that has perpetual succession and
is capable of holding property and of suing and of being
sued in its corporate name
ii. or a company
iii. or other associations of persons (legal person)
# which may be placed in liquidation under the law relating to Companies
" Legal/ juristic person =
# Capable of owning its own assets and incurring own debts = ‘debtor’ in
usual sense of the word
# Liable for own debts
# Can be sued and can sue
# Company:
• Liquidation, not sequestration
• Liquidated according to laws applicable to companies
o Solvent company: 2008 Companies Act
" Idea was that insolvent companies be subject to
another piece of legislation, but not yet released.
That's why still liquidated in terms of 1973 act
o Insolvent: 1973 Companies act
• Distinction made between the liquidation of a solvent and
insolvent company
o Why would you want to liquidate a company that is
solvent?
" Served its purpose, achieved objective
" Legal activities
• Then the investors share the estate?
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