MRL3701 EXAM PACK 2022

MRL3701 EXAM PACK 2022. Meaning of “insolvency” Section 2 of the Insolvency Act, 24 of 1936 (“Act”) – Definitions 'insolvent' when used as a noun, means a debtor whose estate is under sequestration and includes such a debtor before the sequestration of his estate, according to the context. 'insolvent estate' means an estate under sequestration. Everyday language A person is unable to pay his debts = merely evidence of insolvency Legal test of insolvency A debtor’s liabilities, fairly estimated, exceed his assets, fairly valued. A person is not treated as insolvent for legal purposes unless his estate has been sequestrated by an order of court, being a formal declaration that a debtor is insolvent granted either at request of: the debtor (voluntary sequestration); or one or more of the debtor’s creditors (compulsory sequestration). Only after a sequestration order has been granted, the consequences of the Act will apply for example Sections 26, 29, 30 and 31 making provision for some dispositions1 to be set aside. Although the dispositions have taken place before sequestration, the relevant sections of the Act may be invoked only after the court has sequestrated the debtor’s estate. 1.2. Purpose of a sequestration order The main objective of a sequestration order is to secure the orderly and equitable distribution of a debtor’s assets where they are insufficient to meet the claims of all his creditors. Once an order of sequestration is granted, a concursus creditorum (coming together of creditors) is established and the interests of creditors as a group enjoy preference over the interests of the individual creditor. Creditors who have proved a claim have the right to share with other proved creditors in the proceeds of the estate assets replacing their right to recover claims by judicial proceedings. Court won’t grant a sequestration order if no advantage to creditors has been shown and generally not when there is only one creditor. If debtor’s assets aren’t enough to cover the costs of sequestration, there is no sense in sequestrating his estate as creditors won’t get anything thus being a waste of time and money. The debtor is divested of his estate and can’t burden it with more debts. 1.3. What may be sequestrated? An Estate is usually conceived as: an estate that includes assets and liabilities; an estate that consists of liabilities only; the joint estate of spouses married in community of property; the separate estates of spouses married out of community of property; and a new estate of a debtor whose estate has been sequestrated. A Debtor may be: a natural person; a partnership; a deceased person and a person incapable of managing his own affairs; an external company that does not fall within the definition of external company, eg a foreign company that has not established a place of business in South Africa; and an entity or association of persons that is not a juristic person, eg a trust. 1 Refer to paragraph 10 below Ways to sequestrate an estate The Act provides for the sequestration of the ‘estate’ of a ‘debtor’ MRL301-M Page 2 of 47 Section 2 of Act – Definitions 'debtor', in connection with the sequestration of the debtor's estate, means a person or a partnership or the estate of a person or partnership which is a debtor in the usual sense of the word, except a body corporate or a company or other association of persons which may be placed in liquidation under the law relating to Companies. A body corporate established in terms of the Sectional Titles Act, 95 of 2986, is a body corporate as defined in the Companies Act, 61 of 1973 and, therefore, not a debtor for purposes of the Act. 1.4. Jurisdiction of the court Which court has jurisdiction? As a rule, only a Provincial or Local Division of the High Court (“HC”) may adjudicate upon an insolvency matter, but a Magistrate’s Court (“MC”) may preside over prosecutions for criminal offences under the Act, setting aside of voidable dispositions and a few other matters if the jurisdictional limits are not exceeded. Jurisdiction over a debtor and his estate In terms of Section 149 of the Act, a court has jurisdiction over a debtor and his estate if: on the date of lodging, the debtor is domiciled or owns property, or is entitled to property, situated within the jurisdiction of the court; or at any time within the 12 months immediately preceding lodging, the debtor ordinarily resided or carried on business within the jurisdiction of the court. A person is domiciled at a particular place if he is lawfully present there and has the intention to settle there for an indefinite period (Section 1(2) of the Domicile Act, 3 of 1992). Jurisdiction in litigation against third parties Section 149 of the Act: It is not relevant where the trustee of an estate litigates against third parties. Competing courts – removal to another court A court having jurisdiction over a debtor may refuse or postpone proceedings if it appears to the court equitable or convenient that the estate should be sequestrated by another court. The inquiry is not where the sequestration order may more conveniently be granted, but where the estate may more conveniently be administered. 1.5. The Master A Master is appointed in terms of the Administration of Estates Act, 66 of 1965, to each of the areas of the Provincial Divisions of the HC and one of his most important functions is the custody of all documents relating to insolvent estates. For the performance of various functions the Master is entitled to charge fees, some being in cash, some by means of revenue stamps. The Master is a “creature of statute” and only has the powers granted to him by legislation. 1.6. Condonation of irregularities In terms of Section 157(1) of the Act, irregularities in procedure can be condoned in the following instances: where the irregularity has not caused a substantial injustice; or where the irregularity has caused a substantial injustice, but the prejudice to creditors can be remedied by an order of court. The courts have recognised the following additional grounds whereby an irregularity can be condoned: where a deviation is so slight as to fall within the maxim de minimis non curat lex (the law is not concerned with trifles); where all interested parties have waived compliance with the provisions of the Act; where the provision in question is not peremptory and has substantially been complied with; and where it was impossible to comply with the Act. 1.7. Historical overview South Africa followed Roman Dutch law regarding insolvencies, but in 1843 a landmark ordinance was passed changing the law and more specifically abolishing the cessio bonorum (voluntary MRL301-M Page 3 of 47 surrender of goods by a debtor to his creditors). The Constitution provides a basis for the further reform of Insolvency Law as it poses a potential threat to a number of fundamental rights, but mere conflict does not render a provision constitutionally invalid. Constitutional invalidity involves a twofold inquiry: Does the provision conflict with a fundamental right? If so, is the limitation reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom? 2. VOLUNTARY SURRENDER 2.1. Who may apply The following persons may apply to surrender the estates mentioned: Estate Person Estate of natural person Debtor or his agent, expressly authorised to do so Estate of deceased Executor Estate of debtor incapable of managing own affairs Party entrusted with administering the estate, ie the curator bonis Partnership estate All members of partnership residing in South Africa, or their agent2 Joint estate of spouses married in community Both spouses 2.2. Requirements The court may accept the surrender of a debtor’s estate only if it is satisfied that: (1) The debtor’s estate is, in fact, insolvent A debtor is insolvent if the amount of his total liabilities exceeds the value of all of his assets. The test is whether it is established that the debtor is without funds to pay his debts in full and it is improbable that the assets will realise enough for this purpose. (2) The debtor owns realisable property of sufficient value to defray all costs of sequestration which will be payable out of the free residue of his estate The “costs of the sequestration” include not only the costs of surrender, but also all the general costs of administration in terms of Section 97 of the Act. Section 2 of Act – Definitions 'free residue', in relation to an insolvent estate, means that portion of the estate which is not subject to any right of preference by reason of any special mortgage, legal hypothec, pledge or right of retention. A logical result of the requirement that the debtor must own sufficient property to meet the costs of sequestration is that a debtor who has no assets and only liabilities cannot surrender his estate even against a guarantee being furnished to the Master for the costs of sequestration. Such an estate can, however, be compulsorily sequestrated. (3) Sequestration will be to advantage of creditors The debtor has to prove that sequestration will be to the advantage of the creditors whereas, in an application for compulsory sequestration, the creditor has to show merely that there is reason to believe that it will be. The onus is thus more strenuous in voluntary surrender. 2.3. Preliminary formalities Court must be satisfied that certain formalities have been observed as set out in Section 4 of Act: (1) Notice of intention to surrender How A debtor must publish a notice of surrender in the Government Gazette and in a newspaper circulating in the magisterial district where he resides or, if he is a trader, in the district where he has his principal place of business. Why Alerting the debtor’s creditors of the intended application should they wish to oppose. Format Form A, First Schedule of the Act3 2 Two exceptions: 1) special partnerships, which have been repealed and can be ignored; 2) partners en commandite, who are not liable to creditors for partnership debts or co-partners for any losses – they merely contribute MRL301-M Page 4 of 47 Contain • Full names, address and occupation of debtor; • Date upon which, and the particular division of the HC before which the application for acceptance of the surrender will be made; and • When and where the debtor’s statement of affairs will lie for inspection. Time Publication of the notice must take place not less than 14 and not more than 30 days before the stated date of hearing of the application. Proof Filing copies/cuttings of the Government Gazette and the newspaper with the relevant HC OR attach copies/cuttings from the Government Gazette and the newspaper to an affidavit and file them with court. (2) Notice to creditors and other parties Within 7 days after publication of the notice to surrender, the debtor must furnish copies of the notice to: every one of his creditors whose address he knows or can ascertain; to every registered trade union that, to his knowledge, represents his employees. In addition, notice to the employees themselves by – o affixing a copy to notice board o affixing a copy to the front gate of debtor’s premises if employees have no access o affixing a copy to the front door of the premises from which the debtor conducted business immediately prior to the surrender; SARS. (3) Preparation and lodging of statement of affairs Preparation of statement The statement of affairs referred to in the notice of surrender must be framed substantially in accordance with Form B, First Schedule of the Act and contain: Form B Balance sheet Annexure I List of immovable assets, estimated values, as well as any mortgages Annexure II List of any movable property not incl. in Annexures III or V and their value Annexure III List of debtors with their residential and postal addresses, details of each debt and an estimate extent (good, bad or doubtful) Annexure IV List of creditors, addresses, particulars of each claim and security held Annexure V List of any movable assets pledged, hypothecated, subject to a lien or under attachment in execution of a judgment Annexure VI List and description of every accounting book used by the debtor at the time of surrender or ceasing to carry on business Annexure VII Detailed statement of the causes of the debtor’s insolvency Annexure VIII Personal information about debtor incl. prior insolvency and rehabilitation Affidavit Made by the debtor verifying the statement of affairs is true, complete and estimated amounts fairly and correctly estimated When a partnership estate and a private estate of a partner are surrendered simultaneously, separate statements of affairs must be prepared and costs are part of sequestration costs. Lodging of statement The statement with supporting documents must be lodged in duplicate at Master’s Office and lie for inspection by creditors at all times during office hours for 14 days. On expiry of 3 NOTICE OF SURRENDER OF A DEBTOR’S ESTATE (SECTION 4(1)) Notice is hereby given that application will be made to the ………… Division of the Supreme Court on …… the …… day of ………… … 20… at …… o’clock in the forenoon or as soon thereafter as the matter can be heard, for the acceptance of the surrender of the estate of …………… of …………… and that a statement of his affairs will lie for inspection at the office of the Master of the Supreme Court at ……………… (and at the office of ………) for a period of fourteen days as from the ……day of …………… 20... XYZ Attorney for ………………… ………………… ……………20… MRL301-M Page 5 of 47 inspection period, a certificate is issued to the effect that it’s duly lain for inspection and whether any objections were lodged, which is filed with Registrar before application is heard. 2.4. Effect of notice of surrender (1) Stay of sales in execution After publication of the notice, it is unlawful to sell any property in the estate which has been attached under a writ of execution or other similar process, unless the person charged with the sale could not have known of the publication. If the sale proceeded, the trustee of the estate cannot claim it if ownership thereof has been transferred unless he proves that the buyer acted in bad faith and with knowledge that the sale was unlawful. The court or the Master may, however, order that such an asset should nevertheless be sold if, in his opinion, the value does not exceed R 5,000.00 and direct how the proceeds of the sale must be applied. The creditor must show that it would be more to the advantage of the general body of creditors to proceed with the sale. Publication of a notice of surrender has no effect on other civil and criminal proceedings and attachments in execution of judgments may be made, although sale in execution is stayed. (2) Curator bonis may be appointed Debtor is still at liberty to deal with his property as he chooses. As a safeguard against the debtor squandering his assets after publication, the Master may appoint a curator bonis to debtor’s estate, who takes estate into his custody and assumes control of any business or undertaking of debtor. Estate remains vested with debtor and curator is only the caretaker. (3) Potential compulsory sequestration If after having published the notice of surrender: the debtor fails to lodge a statement of his affairs; or lodges a statement which is incorrect or incomplete in a material respect; or fails to make application to court on the appointed day, and the notice is not properly withdrawn, the debtor commits an act of insolvency which entitles a creditor to apply for the compulsory sequestration of his estate. Compulsory sequestration cannot be applied for if the notice of intention to surrender has lapsed. (4) No withdrawal of notice without consent A notice of surrender cannot be withdrawn without the written consent of the Master. (5) Lapse of notice of surrender The notice of surrender lapses if: the court does not accept the surrender; or if the notice is properly withdrawn; or if the debtor fails to make the application for surrender within 14 days after the date advertised as the date of the hearing of the application. 2.5. Application for surrender Form and contents of application Application for surrender is brought by way of a notice of motion 4 . It is supported by a founding affidavit: 4 IN THE HIGH COURT OF SOUTH AFRICA (…………………… Division) Case number: ………… In the matter of …………………… Applicant NOTICE OF MOTION TAKE NOTICE that application will be made on behalf of the above applicant on the …… day of …………… 20… at 10h00 or as soon thereafter as Counsel may be heard for an order in the following terms: 1. That the surrender of the estate of the applicant is accepted. 2. That alternative relief is granted to the applicant. FURTHER TAKE NOTICE that the affidavit of ……………………, annexed hereto, will be used in support of the application. MRL301-M Page 6 of 47 Why To persuade the court that the 4 requirements for voluntary surrender has been satisfied Contain • Full name, status, occupation and address of applicant to show jurisdiction and locus standi • An allegation of insolvency and facts to establish this • Explanation as to how the insolvency came about • An averment that applicant owns realisable property of sufficient value to defray all the costs of sequestration which will be payable out of the free residue of the estate • An allegation that it will be to the advantage of the creditors if the debtor’s estate is sequestrated, amplified by facts supporting the allegation • Details of any salary or income that the debtor is receiving • Any other information that may influence the courting granting or refusing the surrender • A description of the procedural steps followed by applicant prior to bringing the application supported by documents proving that each step has been taken Confirm It must be sworn in and signed before a commissioner of oaths independent of the office in which it was drawn. Filing of application at court The application must be filed with the Registrar of the HC prior to the date advertised in the notice of surrender. Copy of application to consulting party If the debtor is an employer, he must provide a “consulting party” as contemplated in Section 189 of the Labour Relations Act, 66 of 1995, with a copy of the application. Section 189 deals with the dismissal of employees for reasons based on the employer’s operational requirements and require the employer to consult one of the following: the person whom he is required to consult in terms of a collective agreement; if no collective agreement, the workplace forum and registered trade union of the employees likely to be affected by the proposed dismissals; if no workplace forum, the registered trade union whose members are likely to be affected by the proposed dismissals; if no trade union, the employees likely to be affected by the proposed dismissals or their representatives. Master’s report In the Cape, a Master’s report must be obtained and filed prior to the set-down of the application. Opposition to application A creditor may oppose the application even if his claim is less than the amount required to entitle him to apply for compulsory sequestration and even if his claim is disputed by the debtor. Adjudication on the application When adjudicated upon, the following documents must be before the court: The notice of motion and supporting affidavit(s); The debtor’s statement of affairs, incorporating the verifying affidavit; Any sworn valuation necessary in the circumstances; Proof of publication of the notice of surrender; Proof by affidavit that the applicant has delivered/posted copies of the notice as required; A certificate from the Master that the statement of affairs has lain for inspection; Any report by the Master; Any opposing affidavits by creditors; and The debtor’s replying affidavit.