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CASES SUMMARYInsolvency Law
MRL301-M
Magnum Financial Holdings (Pty) Ltd (in liquidation) v Summerly NO 1984 (1) SA 160(W)
Facts A company in liquidation had a claim for R 1,6 million, which was due and payable,
against the Summerly Trust who:
i) committed an act of insolvency in terms of Section 8(g) of the Insolvency Act; and
ii) was insolvent in any event.
This company proceeded with an application for a provisional sequestration order on
an urgent basis as it was to the advantage of the creditors. There had been sufficient
service of the papers on the trustee of the trust and the one provisional liquidator of
the applicant company had locus standi to apply for the provisional sequestration of
the trust estate. Furthermore, the necessary security bond had been duly lodged and
also annexed to the court papers.
Legal question Could a trust be regarded as a debtor in the usual sense of the word for purposes of
Section 2 of the Insolvency Act and, therefore, be sequestrated?
Finding The provisional sequestration order was granted.
Ratio decidendi As no South African case seemed to have dealt with this issue, the court relied on the
Southern Rhodesian case of Ex parte Milton where the voluntary surrender of the
estate of an administrative trust created by contract was approved. The trust fell within
the definition of a “debtor” and could be described as a debtor in the usual sense of
the word. Through its trustee, the trust could borrow money and, as a property owner,
be liable for rates and taxes. Creditors would be paid only from the trust's property
and the trustees incurred no personal liability. A concursus creditorum could not be
established by sequestrating the estates of the donor of the trust property, the trust
beneficiaries, or the trustee. The Rhodesian court also relied on a South African
decision concerning a club which owned property apart from its members, who were
not liable for its debts beyond the amount of their subscriptions. Such a club was a
debtor within the meaning of the Insolvency Act, and its estate could therefore be
sequestrated.
The court further gave the common-law meaning of "any body corporate" as an
association of individuals capable of holding property and of suing and being sued in
its corporate name, or a universitas having the capacity to acquire certain rights apart
from the rights of the individuals which form it, and having perpetual succession (ie,
continuous existence) and held that a trust could not be regarded as a body corporate.
The court held that a trust is not a juristic person and so it may not be liquidated in
terms of the Companies Act.
A trust, however, qualified as a debtor in the ordinary sense of the word as it can
clearly possess assets and incur liabilities, which are evident from the founding
affidavit, and therefore a trust estate may indeed be sequestrated.
Ex parte Henning 1981 (3) SA 843 (O)
Facts In an application for the surrender of the applicant’s estate, it appeared that his wife, to
whom he was married out of community of property, made a monthly contribution from
her salary to pay his creditors. A creditor opposed based on the following grounds:
i) that the application didn’t comply with the requirements of Section 6(1) because the
applicant's assets didn’t cover costs of sequestration payable from the free residue;
ii) that the respondent would be much better off if the application for voluntary
, 2 of 8
surrender were refused and the applicant were compelled to continue paying the
respondent for 9 years;
iii) that the applicant was approaching the court to avoid paying respondent's claim;
iv) that the statement of affairs that lay for inspection did not contain the personal
information (Annexure VIII).
Legal question Can failure to comply with any prescribed formalities be condoned and should the
wife’s contributions be taken into account to determine whether sequestration would
be to the advantage of the creditors?
Finding The voluntary surrender of the applicant’s estate was accepted.
Ratio decidendi The court held the following in respect of the respondent’s grounds:
i) That even if sequestration costs had to be available at the time of the application,
the applicant's assets would probably fetch R 1,030 and would therefore cover the
sequestration costs which the parties had agreed would run to about R 1,000.
Where there are sufficient assets to cover costs of sequestration and administration
at time of an application for voluntary sequestration, there’s proper compliance with
Section 6(1).
ii) That the test was not to compare the respondent's position at the time of immediate
voluntary surrender of the applicant's estate with the respondent's position if the
monthly debt payments were continued for 9 years. The question was merely
whether the court papers showed whether voluntary surrender would be to the
advantage of all the creditors. Nobody could force the applicant’s wife to work if
she did not want to work and, if she stopped working there would scarcely be
sufficient to meet the requirements of the family. Accordingly, this factor is too
vague or uncertain to take into account in evaluating whether sequestration will be
to the advantage of the creditors.
iii) That, on the facts, the argument of applicant’s avoidance lacked substance. If the
applicant had wished to avoid paying the claim, it would have suited him and his
spouse for her to stop working and sit back without paying anything, so that his
creditors could sequestrate his estate.
iv) It was clear that no creditor had been prejudiced by this defect in deciding whether
to oppose the application. In the circumstances, court was prepared to condone
the defect.
Epstein v Epstein 1987 (4) SA 606 (C)
Facts The applicant in an application for a provisional sequestration order was respondent’s
mother, whom he owed R 6,000.00 and to whom he wrote a letter notifying her of his
inability to repay her loan, thus committing an act of insolvency. Respondent's father-
in-law paid an amount of R 2,500.00 into trust account of applicant's attorneys
distribution among respondent's creditors after the sequestration costs had been met.
Aim was to prevent respondent's imprisonment. Sequestration costs being estimated
at R 1,500.00, a sum of R 1,000.00 would then remain for distribution. This is an
example of a “friendly sequestration”.
Legal question Is “friendly sequestrations” precluded from a provisional sequestration order being
granted?
Finding No, but court should scrutinise such applications with particular care in order to protect
the interests of creditors. Application for a provisional sequestration order was refused.
Ratio decidendi In a "friendly" sequestration, debtor avoids complying with preliminary formalities for
an application for voluntary surrender. Accordingly, creditors other than the "friendly"
creditor don’t get advance notice of the application nor can they take notice of debtor's
financial position, as there is no statement of affairs that lies for inspection. For these
reasons there is a risk that a sequestration order may be made in circumstances
where it would in fact not be in the interests of the group of creditors as a whole. That
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