This is a summary of all the work we did - it includes EVERYTHING that was discussed but shorter and in list format for memorising. It also includes all the prescribed and non-prescribed cases with the bare facts, legal question and principle to be derived as well as the quizzes/class examples we d...
(4) The effect of a sequestration order:
The legal position of the insolvent
Summary
Introduction
Once an order of sequestration has been granted (through the voluntary or compulsory process),
certain consequences will occur for the insolvent ⏬
(1) Contracting
Prohibited contracts
Generally, an insolvent retains their contractual capacity and has a general competency to
make binding agreements as stated in s23(2) of the IA
**WL Caroll & Co v Ray Hall Motors 1975 - confirms s23(2)
Contracts entered into with the insolvent won’t be affected (validity) provided it isn’t a s23(2)
prohibited contract
Prohibited contracts (3)
The proviso of s23(2) sets out 3 prohibited contracts that will render the contract voidable
by decision of the trustee
(1) That try to dispose of property of the insolvent estate
Look at the s2 definitions of “dispose” and “property”
Dispose means any transfer or abandonment of rights wrt property (including sale,
lease, mortgage, pledge etc.) but not including dispositions in compliance with court
orders
Property means any movable or immovable property wherever situated in the
Republic, which includes contingent interest except those of fideicommissary heirs or
legatees
If insolvent attempts to or does dispose of property, it is prohibited
Doesn’t necessarily require consent from the trustee
(2) That will adversely affect the estate (or likely to)
Where the insolvent, through other conduct that is not disposing, affects the estate
(e.g. acquiring an expensive service like painting the house)
Requires consent from the trustee in writing
(3) That will adversely affect the contribution to the estate (or likely to)
A ‘contribution’, as seen in s23(5) is any money received or to be received by the
insolvent by virtue of their profession, occupation or other employment which the
Master has deemed unnecessary for the support of the insolvent and their
dependants
Mercantile Law 312 - cram package 1
, Only once the Master has made a determination will the consent from the trustee be
needed to enter into contracts which could adversely affect the contribution
Mervis Brothers v Hanekom 1963
Before the Master has made an assessment on the contribution, there is
absolutely no obligation on the insolvent to make any contribution out of their
earnings towards the estate
Shows application of s23(2) - insolvent made an agreement without the consent
of the trustee which adversely affected the ‘contribution’
However, since there was no assessment from the Master there was no
contribution; insolvent didn't have to make any ‘contribution’ and the
contract is valid since no duty to get consent from the trustee existed
**Ex Parte van Dyk 2015
Facts:
Applicant wants the court to grant voluntary sequestration and would be
willing to afford a payment of R2900 to the insolvent estate in terms of s23(5)
LQ:
(a) Can an insolvent create an advantage for creditors using s23(5)?
(b) What are the implications of making a contribution to the insolvent estate
ito s23(5)?
Courts:
(a)
Not in this application
(b)
MARS Law of Insolvency shows that it is possible for a debtor to forfeit
their salary to establish an advantage to the creditors but isn’t done in
recent times because
Its difficult to monitor
It delays administration of the estate
The contributions that acrrue, will do so to the estate
On the facts - sketchy employment history, no training in a specific
profession/trade, responsibility to look after their family (constitutional
considerations)
Valid contracts
A valid contract is any contract the insolvent entered into which formed part of their
general competence, didn’t need the trustee’s consent or if they did need the trustee’s
consent, consent was acquired
The effect of a valid contract is that it valid and enforceable
The insolvent can’t enforce performance unless the IA gives them the right to
The person who enforces a valid contract is thus generally speaking the trustee
De Polo v Dreyer 1991
Confirms that even though an insolvent may generally enter into a contract, this does
not mean they are able to sue for their own benefit
Mercantile Law 312 - cram package 2
, There is no nexus between the right to enter into a contract and the entitlement to
receive the benefit of the contract/entitlement to sue in their own name for their own
benefit
Thus it is the trustee who pursues these matters as legislature never intended for the
insolvent to receive the benefit of the contract
Effect of a contract…
Not prohibited
The contract is valid and enforceable by the trustee (generally speaking) or the Insolvent
in specific instances where they are granted powers in terms of the IA (ss23(7), 23(8),
23(9))
De Polo v Dreyer 1991 - trustee is the appropriate person to enforce valid contracts, for
the benefit of the estate
Prohibited
Governed by s23(2), read with s24(1) of IA
S23(2) sets out the general principle that insolvent may contract generally speaking and
lists 3 prohibited contracts (try to dispose of property or contract without the consent of
the trustee that will adversely (or likely to) effect the estate or the contribution)
If property is disposed of or somehow adversely affects the contribution or estate (not got
the consent from the trustee) the contract is voidable at the option of the trustee
This means that the trustee can choose to either set aside the contract or abide by the
contract
If the trustee chooses to set aside the contract, restitution needs to occur
This will involve recovery of performance rendered by the insolvent and return of
benefits that the insolvent received
There is, however, s24(1) which aims to protect third parties who are ignorant of the
insolvency from the insolvent
S24(1) says that if the insolvent alienates property without the consent of the trustee the
alienation will still be valid if the 3 requirements are met
Requirements (3)
1. Bona fide purchaser
2. New assets that came into possession after sequestration
Rationale = property belongs to the Master thereafter the trustee in accordance
with the sequestration procedure and s20(2)(b) includes property acquired during
sequestration
But it does not include assets acquired in exchange for or in replacement of
property in the estate at the time of sequestration
If exchanged a painting of similar value after sequestration commenced it is
not a new asset
Is inheritance a new asset?
3. Onus on third-party
TP must prove that, at the time when they received the property, they were not
aware or had any reason to suspect the debtor was insolvent
Fey NO v Mackay
Mercantile Law 312 - cram package 3
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