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INSOLVENCY LAW - CASE LAW SUMMARY
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Magnum Financial Holdings (Pty) Ltd (In Liquidation) V Summerly No 1984 (1) Sa 160(W)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.
Facts
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
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?
question
Finding The provisional sequestration order was granted.
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
Ratio
sequestrated.
decidendi
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)
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;
Facts
ii) that the respondent would be much better off if the application for voluntary 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 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
question to the advantage of the creditors?
Finding The voluntary surrender of the applicant’s estate was accepted.
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
Ratio
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
decidendi
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)
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
Facts
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?
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
Finding
refused.
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 3 of 8 is why the courts pay special attention to the requirement of advantage to creditors when it appears that the applicant's primary
motivation in bringing the application is to assist the debtor. Also, where a family member's offered of a small contribution as the "price" for granting a sequestration
Ratio decidendi
order, it was held that it should reluctantly be approved. This procedure conflicted with the principles underlying the Act and the role which it assigned to the court. It
amounted to confronting the court with a not very wholesome "carrot" to induce it to grant relief if it could not, and would not, otherwise do so. The court should resist
such inappropriate cajolery. Although the first two requirements of granting a provisional order were satisfied, the third requirement relating to advantage to creditors
posed a problem. The concurrent creditors in this case wouldn’t have received anything out of the estate, because the Receiver of Revenue had a preferent claim with
respect to arrear income tax, which would in any event have swallowed up everything that might have remained after payment of the costs of sequestration.
, Amod v Kahn 1947 (2) SA 432 (N)
Respondent had a claim against applicant’s son, which was larger than the claim of applicant against respondent. Sequestration would mean that respondent would no
Facts longer have a claim against the son. In the circumstances, sequestration would not have been to the advantage of the creditors as a group and the application was
dismissed. The applicant appealed.
Legal question Could a court exercise its discretion in the granting of a sequestration order?
Yes, the court exercised its discretion by refusing an application for compulsory sequestration because the applicant was clearly abusing the process. The applicant's
Finding correct remedy was to take out a warrant for the execution of his judgment against the debtor, and then have the debtor's claim against the applicant's son attached in
payment of the judgment debt.
Even if it were assumed that sequestration would have been to the advantage of the creditors, it was clear that the applicant had brought the application with the
Ratio decidendi exclusive aim of preventing the debtor from enforcing his claim against the applicant's son. That amounted to an abuse of the court process, and for that reason the court
should in any event exercise its discretion against the applicant.
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