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Contents
Preface
Part 1 Introduction
Chapter 1 Introduction
Part 2 Obtaining a sequestration order
Chapter 2 Voluntary surrender
Chapter 3 Compulsory sequestration
Part 3 Effects of sequestration
Chapter 4 The legal position of the insolvent
Chapter 5 Vesting of the assets of the insolvent
Chapter 6 Vesting of the assets of the solvent spouse
Chapter 7 Uncompleted contracts and legal proceedings not yet finalized
Part 4 Collection of estate assets
Chapter 8 Preservation of the estate pending the trustee’s appointment
Chapter 9 Meetings of creditors and proof of claims
Chapter 10 The election of the trustee
Chapter 11 The duties and powers of the trustee
Chapter 12 Impeachable dispositions
Chapter 13 Interrogation of the insolvent and other witnesses
Chapter 14 The duties of the insolvent
Part 5 Realization and distribution of the assets
Chapter 15 Realization of the estate assets
Chapter 16 Creditors’ claims and their ranking
Chapter 17 The estate accounts and the distribution of the estate
Part 6 Composition and rehabilitation
Chapter 18 Composition
Chapter 19 Rehabilitation
Part 7 Miscellaneous
Chapter 20 Partnership and sequestration
Chapter 21 Insolvent deceased estates
Chapter 22 Offences
Part 8 Winding-up and rescue of companies and close corporations
Chapter 23 Winding-up of companies
Chapter 24 Winding-up of close corporations
Chapter 25 Business rescue and compromise
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Part 9 Cross-border insolvency
,Chapter 26 Cross-border insolvency
Appendices
Appendix 1 Specimen applications
Appendix 2 Estate accounts
Appendix 3 Insolvency Act 24 of 1936
Appendix 4 Companies Act 61 of 1973, Chapter XIV
Appendix 5 Companies Act 71 of 2008, Chapter 2
Appendix 6 Companies Act 71 of 2008, Chapter 6
Appendix 7 Close Corporations Act 69 of 1984, Part IX
Appendix 8 Cross-Border Insolvency Act 42 of 2000
Table of cases
Table of statutes
Index
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Part 1
Introduction
Chapter 1: Introduction
1.1 Meaning of ‘insolvency’
1.2 Purpose of a sequestration order
1.3 What may be sequestrated
1.4 Jurisdiction of the court
1.5 The Master
1.6 Condonation of irregularities
1.7 Historical overview
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Chapter 1
Introduction
Synopsis
1.1 Meaning of ‘insolvency’
1.2 Purpose of a sequestration order
1.3 What may be sequestrated
1.3.1 Meaning of ‘estate’
1.3.2 Meaning of ‘debtor’
1.4 Jurisdiction of the court
1.4.1 Which court has jurisdiction
1.4.2 Jurisdiction over a debtor and his estate
1.4.3 Jurisdiction in litigation against third parties
1.4.4 Competing courts—removal to another court
1.5 The Master
1.6 Condonation of irregularities
1.7 Historical overview
1.7.1 Roman law
1.7.2 Roman-Dutch law
1.7.3 South African law
1.1 Meaning of ‘insolvency’
In common parlance, a person is insolvent when he is unable to pay his debts. But the legal
test of insolvency is whether the debtor’s liabilities, fairly estimated, exceed his assets, fairly
valued (Venter v Volkskas Ltd 1973 (3) SA 175 (T) 179; Ex parte Harmse 2005 (1) SA 323
(N) 325). Inability to pay debts is, at most, merely evidence of insolvency.
A person who has insufficient assets to discharge his liabilities, although satisfying the test
of insolvency, is not treated as insolvent for legal purposes unless his estate has been
sequestrated by an order of the court. A sequestration order is a formal declaration that a
debtor is insolvent. The order is granted either at the instance of the debtor himself
(voluntary surrender: see chapter 2) or at the instance of one or more of the debtor’s
creditors (compulsory sequestration: see chapter 3).
The terms ‘sequestration’ and ‘sequestration order’ should strictly be used only with
reference to a person’s estate. A debtor’s estate is sequestrated, not the debtor himself.
However, both a debtor’s estate and the debtor himself may properly be described as
|‘insolvent’. When the word ‘insolvent’ is used to describe a debtor, it carries two possible
meanings: either that the debtor’s estate has been sequestrated, or that his liabilities exceed
his assets (cf s 2 of the Insolvency Act 24 of 1936, definition of ‘insolvent’). The notion of
‘becoming insolvent’, thus, has a wider meaning than that
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of ‘being sequestrated’ (Land- en Landboubank van Suid-Afrika v Joubert NO 1982 (3) SA
643 (C) 648).
,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. Executing against the property of a debtor who is in insolvent circumstances
inevitably results in one or a few creditors being paid, and the rest receiving little or nothing
at all. The legal machinery that comes into operation on sequestration is designed to ensure
that whatever assets the debtor has are liquidated and distributed among all his creditors in
accordance with a predetermined (and fair) order of preference.
The law proceeds from the premise that, once an order (or provisional 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
individual creditors (Richter NO v Riverside Estates (Pty) Ltd 1946 OPD 209 223). The debtor
is divested of his estate and cannot burden it with any further debts. A creditor’s right to
recover his claim in full by judicial proceedings is replaced by the right, on proving a claim
against the insolvent estate, to share with all other proved creditors in the proceeds of the
estate assets. Apart from what is permitted by the Act, nothing may be done which would
have the effect of diminishing the estate assets or prejudicing the rights of creditors (Ward v
Barrett NO & another NO 1963 (2) SA 546 (A) 552). In Walker v Syfret NO 1911 AD
141 166, Innes J explained the underlying principle as follows:
‘The object of the [Insolvency Act ] is to ensure a due distribution of assets among creditors in the
order of their preference. . . . The sequestration order crystallises the insolvent’s position; the hand of
the law is laid upon the estate, and at once the rights of the general body of creditors have to be
taken into consideration. No transaction can thereafter be entered into with regard to estate matters
by a single creditor to the prejudice of the general body. The claim of each creditor must be dealt with
as it existed at the issue of the order.’
The law of insolvency exists primarily for the benefit of creditors (cf Ex parte Pillay; Mayet v
Pillay 1955 (2) SA 309 (N) 311) and, accordingly, a court will not sequestrate a debtor’s
estate unless it is shown that the sequestration will be to the advantage of creditors. Thus,
sequestration will generally not be resorted to if the debtor, although insolvent, has only one
creditor and the latter is already in possession of a judgment against the debtor. In such a
case, the normal execution procedure offers a less expensive means of exacting from the
debtor whatever amount he is able to pay (cf Absa Bank Ltd v De Klerk and related cases
1999 (4) SA 835 (E) 839; Lynn & Main Inc v Mitha NO 2006 (5) SA 380 (N) 383). And
sequestration will not be ordered if the assets in the debtor’s estate will be consumed by
placing the estate under sequestration and there will be nothing left over for creditors. The
court will make an order of sequestration only if the expected result will be an appreciable
dividend for creditors. The requirement of advantage to creditors is discussed further in
2.2.3 and 3.1.3.
Although sequestration was not designed to alleviate the position of the debtor, it
inevitably has this effect because it relieves him from legal proceedings by creditors
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and allows him, through rehabilitation, to free himself from all unpaid pre-sequestration
debts (s 129(1)(b)).
Because insolvency law aims to ensure that creditors receive an equitable share of the
debtor’s estate, it is sometimes regarded as no more than an elaborate system of execution.
In some legal systems, for instance, insolvency law is classified under civil procedure rather
than under mercantile law, as in our system. But the notion that insolvency law is merely a
system of execution is simplistic. If it were merely this, sequestration would affect only the
debtor’s assets, whereas, as will be noted later (chapter 4), sequestration also affects the
debtor personally, restricting his capacity and freedom to enter into contracts, to follow a
chosen vocation, to litigate, and to hold office. In Naidoo v Absa Bank Ltd 2010 (4) SA 597
,(SCA) 601, the court accepted that a sequestration order is ‘not an ordinary judgment
entitling a creditor to execute against a debtor’. It affects ‘not only the rights of the two
litigants, but also of third parties, and involves the distribution of the insolvent’s property to
various creditors, while restricting those creditors’ ordinary remedies and imposing
disabilities on the insolvent’. It followed that sequestration proceedings instituted pursuant
to breach of a credit agreement could not be classified as ‘legal proceedings to enforce the
agreement’ as envisaged by s 129(b) of the National Credit Act 34 of 2005. Cachalia JA
remarked (600): ‘[An] order for the sequestration of a debtor’s estate is not an order for the
enforcement of the sequestrating creditor’s claim, and sequestration is thus not a legal
proceeding to enforce an agreement.’ (See also FirstRand Bank Ltd v Evans 2011 (4) SA 597
(KZD) 606.)
1.3 What may be sequestrated
The Act provides for the sequestration of the ‘estate’ of a ‘debtor’.
1.3.1 Meaning of ‘estate’
An estate is usually conceived of as a collection of assets and liabilities (cf Ex parte Foxcroft
1923 OPD 234 235), but a debtor who has only liabilities may be regarded as having an
estate for sequestration purposes. In Miller v Janks 1944 TPD 127, M had acquired an estate
by means of his occupation as a professional gambler. His assets had subsequently
disappeared under highly suspicious circumstances, leaving only liabilities. His wife
possessed fixed property which she had received while M was pursuing his occupation. The
court granted an order sequestrating M’s estate. It rejected M’s argument that, because he
no longer had any assets, he had ceased to have an estate and, therefore, sequestration
was not possible. Murray J observed (132):
‘A debtor who has £1,000 assets and £2,000 liabilities has an estate, though one insolvent to the
extent of £1,000: he does not cease to have an estate when the next day he pays over his £1,000 to
his creditors, and remains insolvent to the same extent. . . . [A]n estate . . . is [no] less an estate
because at one time it has only assets, at another time only liabilities, and at yet another time both
assets and liabilities.’
The joint estate of spouses married in community of property is an estate for purposes of
insolvency. A debtor who is married in community of property does not have a separate
estate which can be sequestrated, even where he (or she) is carrying on a business
independently of his (or her) spouse (Ex parte Vally 1930 CPD 304; De Wet NO v Jurgens
1970 (3) SA 38 (A) 48). The spouses are both debtors and, on sequestration of
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their joint estate, they both become insolvent debtors for purposes of the Act (Acar v Pierce
and other like applications 1986 (2) SA 827 (W) 830; Du Plessis v Pienaar NO & others 2003
(1) SA 671 (SCA) 676; Berrange NO v Hassan & another 2009 (2) SA 339 (N) 369). On
divorce, each spouse regains a separate estate which must obviously be sequestrated
separately (sequestration does not extinguish the liability of the solvent spouse for debts of
the joint estate: s 17(5) of the Matrimonial Property Act 88 of 1984; Maharaj v Sanlam Life
Insurance Ltd & others 2011 (6) SA 17 (KZD) 19-20). However, if the divorce takes place
after a creditor has already acquired the right to apply for sequestration of the joint estate,
then the creditor is required to sequestrate the separate estates of both spouses (BP
Southern Africa (Pty) Ltd v Viljoen en ’n ander 2002 (5) SA 630 (O) 638).
A debtor who is married out of community of property has a separate estate that can be
sequestrated. However, as will be seen later (6.1), the solvent spouse’s assets are also
affected by the order, since they vest in the trustee of the insolvent estate until the solvent
spouse can establish her (or his) title to them.
, A debtor whose estate has been sequestrated may, during his insolvency, acquire a new
estate under a title valid against his trustee. This new estate may itself be voluntarily
surrendered (Ex parte Foxcroft (supra)) or sequestrated at the instance of a creditor (Ex
parte Geeringh 1980 (2) SA 788 (O) 789). Compulsory sequestration is possible, it seems,
even where the assets in the second estate have been dissipated by the time the application
for sequestration is made (Miller v Janks (supra)).
1.3.2 Meaning of ‘debtor’
A ‘debtor’ for purposes of the Insolvency Act is ‘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’ (s 2). An entity or association of persons is regarded as
‘a debtor in the usual sense of the word’ if it is able to possess an estate and incur debts
(Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly & another NNO 1984 (1)
SA 160 (W) 163). The law governing the liquidation of insolvent companies is Chapter 14 (ss
337-426) of the Companies Act 61 of 1973. These provisions were left in operation by the
Companies Act 71 of 2008 and for the time being apply to the winding up and liquidation of
companies (and other entities) under the latter statute (see further chapter 23). The entities
that may be placed in liquidation, according to s 337 of the 1973 Act, are a company, an
‘external’ company (one registered outside the Republic and meeting certain requirements:
see s 1 of that Act), and ‘any other body corporate’. ‘Body corporate’, in this context, refers
to a juristic person or universitas, ie, an association of persons that has perpetual succession
and is capable of holding property and of suing and of being sued in its corporate name
(Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly & another NNO (supra)
163).
The term ‘debtor’, therefore, embraces the following:
• A natural person.
• A partnership—even one whose members are all juristic persons (Commissioner, South
African Revenue Services v Hawker Air Services (Pty) Ltd; Commissioner, South
African Revenue Service v Hawker Aviation Partnership & others 2006 (4) SA 292
(SCA) 306, overruling P de V Reklame (Edms) Bpk v
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Gesamentlike Onderneming van SA Numismatiese Buro (Edms) Bpk en Vitaware
(Edms) Bpk 1985 (4) SA 876 (C)).
• A deceased person and a person incapable of managing his own affairs (cf s 3(1)).
• An external company that does not fall within the definition of ‘external company’ in
the Companies Act 61 of 1973, eg, a foreign company that has not established a place
of business in the Republic (Lawclaims (Pty) Ltd v Rea Shipping Co SA: Schiffscommerz
Aussenhandels Betrieb der VVB Schiffbau intervening 1979 (4) SA 745 (N) 751).
• An entity or association of persons that is not a juristic person, such as a trust
(Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly & another NNO
(supra); Commissioner for Inland Revenue v Friedman & others NNO 1993 (1) SA 353
(A) 356). In Melville v Busane & another 2012 (1) SA 233 (ECP), the court explained
(234–7) that although a trust falls within the definition of a ‘juristic person’ in the
Companies Act 71 of 2008 (s 1), it does not meet the definition of a ‘company’ in that
Act (a juristic person incorporated in terms of the Act) and, hence, cannot be liquidated
under Chapter 14 of the 1973 Companies Act.
A body corporate established in terms of the Sectional Titles Act 95 of 1986 is a ‘body
corporate’ as referred to in the definition of ‘debtor’ in the Insolvency Act and, therefore, is
not capable of being sequestrated. It also cannot be wound up for non-payment of its debts
or by reason of its insolvency. The legislature did not intend the law governing the winding-
,up of insolvent companies to apply to bodies corporate (Reddy v Body Corporate of
Croftdene Mall 2002 (5) SA 640 (D) 645-7).
1.4 Jurisdiction of the court
1.4.1 Which court has jurisdiction
As a rule, only a Provincial or Local Division of the High Court may adjudicate upon an
insolvency matter (s 2 sv definition of ‘Court’). A magistrate’s court may preside over
prosecutions for criminal offences under the Insolvency Act (see 22.1), proceedings to set
aside voidable dispositions (see 12.3.2), and a few other matters, provided, in each case,
the ordinary jurisdictional limits as to offence, person, and amount, imposed by the
Magistrates’ Courts Act 32 of 1944, are not exceeded (ibid).
1.4.2 Jurisdiction over a debtor and his estate
In terms of s 149(1), a court has jurisdiction ‘over [a] debtor and in regard to the estate of
[a] debtor’ if:
• on the date when the application for voluntary surrender or compulsory sequestration
of the debtor’s estate is lodged with the Registrar of the court, the debtor is domiciled,
or owns property, or is entitled to property, situated within the jurisdiction of the court
(s 149(1)(a)); or
• at any time within the 12 months immediately preceding the lodging of the application,
the debtor ordinarily resided or carried on business within the jurisdiction of the court
(s 149(1)(b)).
(i) Domicile or property within jurisdiction
A personal right, ie, a right to a performance of some kind, is taken to be situated where the
debtor liable to render the performance is domiciled. In Nahrungsmittel GmbH v
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Otto 1993 (1) SA 639 (A), N applied to sequestrate the estate of O, a German citizen who
was imprisoned in Germany. N sought to found jurisdiction on the fact that O had been
awarded costs in an earlier court case decided in South Africa. N contended that, because of
this award, O owned or was entitled to property situated within the jurisdiction of the court.
The court held that the location of the right to costs, being intangible property without any
physical existence, followed the domicile of the debtor liable to pay the costs. This debtor
was a German company, resident in Germany. It followed that the right was located in
Germany, not within the jurisdiction of the South African court.
(ii) Residence or business within jurisdiction in preceding 12 months
The debtor need not have ordinarily resided or carried on business for the entire 12 months
preceding the application: ordinary residence or conduct of business at any time during that
period suffices. However, ‘ordinary residence’ means something more prolonged than a
temporary stay (Philips v Commissioner of Child Welfare, Bellville 1956 (2) SA 330 (C) 334).
1.4.3 Jurisdiction in litigation against third parties
Section 149 deals with the question when a court has jurisdiction over a debtor and his
estate: it is not relevant where the trustee of an estate litigates against third parties. So, in
proceedings to set aside a voidable disposition made to a third party prior to sequestration,
the ordinary rules of jurisdiction apply and the trustee cannot rely on s 149 (Spendiff NO v
Kolektor (Pty) Ltd 1992 (2) SA 537 (A)).
1.4.4 Competing courts—removal to another court
, A court having jurisdiction over a debtor may refuse (or postpone) the surrender or
sequestration of his estate if it appears to the court equitable or convenient that his estate
should be sequestrated by another court within the Republic (s 149(1) proviso). The court
may order that the matter be transferred to the other court (s 9 of the Supreme Court Act
59 of 1959); the transferee court need not have original jurisdiction (Mulder & another v
Beacon Island Shareblock Ltd 1999 (2) SA 274 (C)).
In deciding whether another court should make a sequestration order, a court must
consider whether, on the particular facts, and in the light of factors such as the convenience
of the parties and the court and the general disposal of litigation, the transferee court should
dispose of the matter (Mulder & another v Beacon Island Shareblock Ltd (supra)). The
essential inquiry is not where the sequestration order may more conveniently be granted,
but where the estate may more conveniently be administered (in other words, what the
court must consider is what will happen after the order has been granted). Thus, in Goode,
Durrant and Murray (SA) Ltd & another v Lawrence 1961 (4) SA 329 (W), the court
transferred a sequestration application from the Witwatersrand to the Durban court because
most of the matters which the trustee would have to investigate arose in the Durban area,
and the parties whom the trustee would have to examine—the debtor, his wife and their
witnesses—all resided in that area. The fact that the sequestrating creditors were in the
Witwatersrand was not enough, in the court’s view, to alter the balance of convenience.
In Lawclaims (Pty) Ltd v Rea Shipping Co SA: Schiffscommerz Aussenhandels Betrieb der
VV Schiffbau intervening (supra), the court declined to sequestrate a foreign
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company on the grounds that it would be more equitable and convenient for it to be
sequestrated in its own domicile. The debtor, RS Co, was registered in the Republic of Liberia
with its registered office in Monrovia. RS Co had no place of business in the Republic, but it
owned a ship that was lying in Durban harbour at the time of the application. The Natal court
accepted that it had jurisdiction to sequestrate RS Co, but it held that sequestration should
rather be left to a court where the debtor was domiciled. Factors which weighed with the
court were: RS Co’s only link with South Africa was the entirely fortuitous presence of its
ship in Durban harbour; the claims of creditors relating to the ship were based on contracts
concluded outside South Africa; the order of preference of claims in respect of RS Co’s
movable property would have to be decided according to the law of its domicile; and if a
purchaser were to buy the ship from a local trustee, his title might not be recognized outside
South Africa.
These decisions may be contrasted with Deutsche Bank AG v Moser & another 1999 (4)
SA 216 (C), in which the court refused to relinquish jurisdiction in favour of a foreign court.
The debtor, a German citizen, resided with his wife in Germany and owed debts there. But
he owned immovable property within the jurisdiction of the court and owned virtually no
assets in Germany. The court held that it was more convenient for it, rather than a German
court, to adjudicate on the matter, especially since a foreign order of sequestration would
not, by itself, divest the debtor of his immovable property in South Africa and, consequently,
might not produce any advantage to creditors.
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 High Court. The Master has a pivotal role to play in
insolvency matters, as will be seen from his many powers and duties flowing from the Act.
One of the most important functions which the Master exercises is the custody of all
documents relating to insolvent estates (s 154(1)). In Ex parte The Master of the High Court
South Africa (North Gauteng) 2011 (5) SA 311 (GNP), Bertelsmann J remarked (322):
