Law of Insolvency: Study Unit 1-7
Mercantile Law 312: 2021
Table of Contents
1 INTRODUCTION TO INSOLVENCY LAW..............................................................................3
1.1 IMPORTANT TERMS & CONCEPTS............................................................................................................. 4
1.2 PURPOSE OF SEQUESTRATION ORDER....................................................................................................... 5
In terms of the ‘estate’...................................................................................................................... 6
In terms of the debtor....................................................................................................................... 8
1.3 JURISDICTION OF COURT...................................................................................................................... 15
1.4 HISTORY & SOURCES OF INSOLVENCY LAW.............................................................................................. 19
1.5 THE MASTER.................................................................................................................................... 20
1.6 CONDONATION OF IRREGULARITIES........................................................................................................ 21
2 VOLUNTARY SURRENDER.............................................................................................. 22
2.1 INTRODUCTION.................................................................................................................................. 22
2.2 APPLICATION OF DEBTOR..................................................................................................................... 22
2.3 PRELIMINARY FORMALITIES & REQUIREMENTS FOR APPLICATION...................................................................24
2.3 (a) Substantive requirements.................................................................................................... 24
2.3 (b) Preliminary formalities......................................................................................................... 29
2.4 CONSEQUENCES OF THE PUBLICATION OF A NOTICE OF SURRENDER..............................................................34
2.4 (a) Stay of sales in execution.................................................................................................... 35
2.4 (b) Curator bonis may be appointed.......................................................................................... 36
2.4 (c) No withdrawal of notice without consent..............................................................................36
2.4 (d) Lapse of notice of surrender................................................................................................ 36
2.5 APPLICATION FOR VOLUNTARY SURRENDER (READ ONLY)............................................................................39
2.6 GENERAL DISCRETION OF COURTS......................................................................................................... 39
2.7 COSTS OF SURRENDER........................................................................................................................ 40
2.8 SETTING ASIDE SEQUESTRATION ORDER.................................................................................................. 40
3 COMPULSORY SEQUESTRATION....................................................................................40
3.1 INTRODUCTION.................................................................................................................................. 41
3.2 SUBSTANTIVE REQUIREMENTS FOR APPLICATION.......................................................................................42
3.2 (a) Applicant (creditor) must have locus standi.........................................................................42
3.2 (b) Debtor has to be insolvent or must have committed an act of insolvency...........................42
3.2 (c) Reason to believe that sequestration will be to the advantage of the creditors...................51
3.2 (d) Friendly sequestration.......................................................................................................... 58
3.3 APPLICATION FOR SEQUESTRATION........................................................................................................ 62
3.3.1 Form & content of application (read only)..............................................................................62
3.3.2 Steps prior to adjudication on application (read only)............................................................62
3.3.3 Provisional sequestration........................................................................................................ 63
3.2.4 Service of rule nisi.................................................................................................................. 66
3.2.5 Opposition to application........................................................................................................ 67
3.2.6 Anticipation of return day....................................................................................................... 67
3.2.7 Intervention by another creditor............................................................................................. 67
3.2.8 Final sequestration order........................................................................................................ 67
3.4 COURTS DISCRETION.......................................................................................................................... 71
3.5 COSTS OF PROCEEDINGS..................................................................................................................... 71
3.6 UNWARRANTED OR VEXATIOUS PROCEEDINGS.......................................................................................... 71
3.7 SETTING ASIDE SEQUESTRATION ORDER.................................................................................................. 71
4 EFFECTS OF SEQUESTRATION: LEGAL POSITION OF THE INSOLVENT (PART 1)..................72
4.1 CONTRACTING................................................................................................................................... 72
4.2 FREEDOM OF ECONOMIC ACTIVITY: S23(3).............................................................................................77
4.3 INSTITUTING OR DEFENDING OF LEGAL PROCEEDINGS: LOCUS STANDI............................................................79
4.4 HOLDING OFFICE................................................................................................................................ 81
4.5 PRESCRIBED MATERIAL........................................................................................................................ 82
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,4 EFFECTS OF SEQUESTRATION: INSOLVENT & ESTATE (PART 2).......................................89
4.1 INTRODUCTION.................................................................................................................................. 89
4.2 PROPERTY WHICH FALLS INTO INSOLVENT ESTATE.....................................................................................91
4.3 PROPERTY WHICH DOES NOT FALL INTO ESTATE........................................................................................ 98
4.4 DISPOSAL OF ESTATE PROPERTY BY INSOLVENT......................................................................................100
4.5 ACQUISITION OF NEW ESTATE PROPERTY DURING INSOLVENCY...................................................................100
4 EFFECTS OF SEQUESTRATION: SPOUSE OF INSOLVENT (PART 3)...................................101
4.1 INTRODUCTION................................................................................................................................ 101
4.2 SPOUSE......................................................................................................................................... 104
4.3 CONSTITUTIONALITY OF PROVISION...................................................................................................... 105
4.4 VESTING OF PROPERTY...................................................................................................................... 113
4.5 PROPERTY THAT HAS TO BE RELEASED.................................................................................................. 114
4.5.1 Onus..................................................................................................................................... 122
4.5.2 Procedure for the release of the property.............................................................................123
4.5.3 Effect of release by trustee.................................................................................................. 123
4.6 RELEASE OF PROPERTY BY COURT........................................................................................................ 123
4.7 CREDITORS OF SOLVENT SPOUSE......................................................................................................... 124
5 COLLECTION OF THE ESTATE ASSETS...........................................................................125
5.1 THE PRESERVATION OF THE ESTATE PENDING THE TRUSTEE’S APPOINTMENT.................................................125
5.2 THE ELECTION OF THE TRUSTEE.......................................................................................................... 129
5.3 THE DUTIES AND POWERS OF THE TRUSTEE........................................................................................... 134
5.4 THE DUTIES OF THE INSOLVENT.......................................................................................................... 138
5.5 IMPEACHABLE DISPOSITIONS............................................................................................................... 140
5.5.1 Introduction & important concepts.......................................................................................140
5.5.2 The five types of impeachable dispositions in more depth...................................................151
5.6 DISCUSSION OF PREVIOUS EXAM QUESTIONS.......................................................................................... 189
6 CREDITORS & THEIR RANKING.....................................................................................202
6.1 MEETING OF CREDITORS & PROOF OF CLAIMS........................................................................................ 202
6.1.1 Meeting of creditors.............................................................................................................. 202
6.1.2 Proof of claims...................................................................................................................... 205
6.1.3 Voting & resolutions of creditors.......................................................................................... 211
6.2 INTRODUCTION TO THE REALISATION OF ESTATE ASSETS (SECTION 82).......................................................212
6.3 CREDITORS’ CLAIMS AND THEIR RANKINGS............................................................................................ 214
6.3.1 Introduction.......................................................................................................................... 214
6.3.2 Types of creditors................................................................................................................. 214
6.4 THE ESTATE ACCOUNTS AND THE DISTRIBUTION OF THE ESTATE.................................................................226
7 COMPOSITION & REHABILITATION...............................................................................229
7.1 COMPOSITION................................................................................................................................. 229
7.1.1 The common law compromise.............................................................................................. 229
7.1.2 Statutory composition (section 119 Insolvency Act).............................................................231
7.2 REHABILITATION – SECTION 124......................................................................................................... 237
7.2.1 Automatic rehabilitation after 10 years................................................................................237
7.2.2 Rehabilitation by the court................................................................................................... 237
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,1 INTRODUCTION TO INSOLVENCY LAW
Scenario:
o An individual’s liabilities exceed their assets.
Individual has a few creditors who each want to get what’s theirs
Law of insolvency allows the debtor to bring about a benefit for the
creditors so that they may all benefit from the particular estate.
As a debtor, you may voluntarily approach the court yourself &
surrender, or the creditors of the particular debtor can apply for the
compulsory sequestration of that particular debtor.
o If court is satisfied that the various requirements have been fulfilled, they
will grant a sequestration order.
= the estate is sequestrated NOT the individual (although the
individual is affected – the debtor/individual becomes the insolvent)
o Once estate is sequestrated, concursus creditorum comes into fruition
This specifies that the interests of a group of creditors must reign
supreme over the interests of a single creditor.
o Next, the insolvent will be divested of his/her estate & the estate vests
in the Master & then the trustee (if there is no trustee) or in the trustee.
If married in community of property; there is a single estate, thus
both spouses will be affected.
If married out of community of property; the solvent spouse (person
married to individual who is insolvent) will also be affected in the
sense that they will be deprived of their property. The effect of
being deprived of their property is so that the trustee can determine
which property belongs to the insolvent estate.
Nonetheless, the insolvent will be divested of his/her estate
o Then, the trustee has to collect & sell the assets
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, o Once that has happened, there needs to be a distribution of proceeds
by the trustee to the creditors, in the predetermined order
o Then there may be rehabilitation.
Note that insolvency law in RSA is pro-creditor
o although the debtors do also benefit once the court grants a
sequestration order, the debtor is relieved of having to deal with the
creditors directly as the trustee will not deal with them
Overview
1. Terms & concepts
2. Purpose of a sequestration order
3. Jurisdiction of courts
4. Sources & history
1.1 Important terms & concepts
Meaning of insolvency:
o in terms of common terminology (in terms of Hockly) you are insolvent if
you are unable to pay your debt. But what if your inability to pay your
debt is temporary? When is someone regarded as being unable to
permanently pay their debts? This is why we use the phrase “common
terminology” as the inability to pay debt is loosely defined – it is simply a
guideline to see if someone is insolvent. But being unable to pay debt is
an indication of possible insolvency.
Test for insolvency
o General test = Debtors liabilities fairly estimated, exceed his
assets fairly valued
This test for insolvency is provided in Venter v Volkskas Ltd (1973)
(3) SA 175 (T) [NOT PRESCRIBED]
Allegation that unable to pay debts entails that onus shifts to debtor to prove
that assets exceed liabilities (prima facie case established)
o Debtor needs to prove that they DO have enough money to pay their
debts.
Commercial insolvency
o Inability to pay debts as they become due because of a cash flow or
other problem but assets still exceed liabilities
o Usually spoken about in companies, business trusts etc. because they are
involved in selling products or building etc. & then these companies run
out of money to pay their debt due to a cash flow issue.
Actual insolvency
o Debtors liabilities exceed assets.
o NB! ONLY LEGALLY INSOLVENT IF ESTATE HAS BEEN SEQUESTRATED BY
AN ORDER OF COURT
Voluntary surrender (Topic 2, Chapter 2)
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, o = the debtor pursues application
Compulsory sequestration (Topic 3, Chapter 3)
o = creditor pursues application
Sequestrate vs insolvent:
o Sequestrate estate of debtor not the debtor itself BUT both the debtor &
the estate are regarded as insolvent.
1.2 Purpose of sequestration order
1 Fair, equitable & orderly distribution of assets where there are not enough
assets to meet the claims of all the creditors
o Eg. Mr X. has a car that belongs to him, worth R200 000 and he has
liabilities worth R400 000 and he has 5 creditors, all of whose liabilities
are split in the R400 000. Taking wear & tear into consideration, the car
might only be worth R150 000. This one asset needs to satisfy the
liabilities of the 5 creditors. A sequestration order tries to ensure there
is an equitable distribution of the assets. It includes a provisional
sequestration order which is granted under a compulsory
sequestration order (not applicable under voluntary sequestration).
2 Protects creditors against other creditors
o In terms of our example above: The concept concursus creditorum
comes into operation. When the court grants a sequestration order, this
includes a concursus creditorum (what does it mean?)
Concursus creditorum: coming together of the creditors where
the interests of this group of creditors reigns supreme over that of
an individual creditor. A single creditor may no longer proceed with
the execution on their own, but must proceed with the machinery as
provided in the Insolvency Act ranking etc.
In terms of our example, creditor B wants to pursue his claim.
With the coming into effect of the sequestration order,
creditor B can longer continue with his claim because once the
sequestration order is granted, it confirms the position that all
the creditors must now benefit. The group of creditors’ claims
reigns supreme over the individual creditor’s claim. The one
asset, the car, must be sold & the proceeds thereof must be
utilised to meet the individual creditors’ claims. Although it is
not totally possible because the asset is less than the debt
owed.
The insolvency law machinery in SA is geared towards the
creditors.
Benefit for the creditor arises more often than not.
Eg. in terms of s6(1) of the Insolvency Act, when dealing with
voluntary surrender; the Act says that it would be to the
advantage of the creditors of the debtor, if the debtor’s estate is
sequestrated.
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, Further eg. in terms of s10(c), there is reason to believe that
it would be to the creditors advantage, if the debtor’s estate is
sequestrated.
3 Enables the debtor to free himself up from pre-sequestration debts
o There is relief for the debtor, as the debtor gets rid of all their pre-
sequestration debts & now there is an orderly function which needs
to play out.
o Generally accepted that it comes into operation upon the granting of a
sequestration order.
Consequences of sequestration order
For debtor
o Will be deprived of estate. Estate will
vest in the Master, thereafter in the
trustee if there is no trustee appointed,
or it will vest in the trustee.
o Will no longer have control over estate
as you had under normal
circumstances.
o Prior to the granting of the
sequestration order, the debtor would still be permitted to deal with their
estate. Although the Insolvency Act does have mechanisms/ safeguards to
protect the dissipation of assets in the estate, for eg. a creditor bonis may
be appointed to prevent a debtor from dissipating his/her estate.
o Only once the sequestration order has been granted by the court, can the
consequences relating to insolvency take effect.
Eg. Master cannot take over a debtors estate if there is no
sequestration order yet.
Eg. If married out of community of property, the debtor has a
separate estate that can be sequestrated. However, the assets of
the solvent spouse is also affected since they vest in the trustee of
the insolvent estate UNTIL the solvent spouse can establish his/her
title to them.
For creditor
o Once the order has been obtained/granted, either through voluntary or
compulsory sequestration, then the concept concursus creditorum comes
into consideration & the group of creditors must benefit (as opposed to
the individual creditor). Ranking will determine how much each creditor
will get. There is a possibility that a creditor may not get the full amount
owed to him/her.
In terms of the ‘estate’
Who or what is being sequestrated?
“Estate” of a “debtor”
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