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CML2010S - Bus Law 2 Notes 2016
Section 1 – Insolvency
1. Terminology and Concepts
What is insolvency?
• Insolvency is a legal status assigned to natural and juristic persons when their financial
situation is such that their liabilities exceed their assets or they are unable to pay their
debts
• NOTE: A person is not legally insolvent unless declared insolvent by court
Aims and Objectives of the Law of Insolvency:
1. To allow creditors to be paid in their order of preference
2. To maximize assets for distribution among creditors
• This is done by minimizing legal costs that would’ve been incurred if each
creditor had sued the insolvent separately for their debts
• In addition, the law of insolvency creates mechanisms which allow for enquiries
and investigations into the insolvents affairs, which can uncover hidden
assets/fraud
3. To prevent the debtor (insolvent) from further diminishing their estate
• The assets are removed from the control of the debtor (he no longer has
ownership of the assets) and they are placed in the hands of a trustee/liquidator for
the benefit of creditors
4. Ultimately, insolvency must be for the benefit of creditors
• NOTE: Not a punishment for debtor
Sequestration:
1|Pa ge
, • This is the method by which the estate of a debtor is wound up
• In the Insolvency Act, a debtor is defined as a natural person, a partnership or a trust
• When a debtor has been declared insolvent by court, he is divested of his assets (taken
away from him) and they are placed in the hands of a trustee
• The trustee then winds up his estate for the benefit of creditors
• Winding up (Sequestration) is the process whereby the assets of a debtor are taken over
by the trustee, sold and the proceeds divided among the creditors
• Sequestrations are governed by the Insolvency Act 24 of 1936 and the Common Law
Liquidation:
• This is the method by which juristic persons are wound up when they are declared
insolvent by the court
• The assets of the company are removed from the control of the directors and placed in the
hands of a liquidator
• The liquidator sells the assets for the benefit of the creditors
• Once the process of winding up (liquidation) is complete, the company is dissolved
(ceases to exist)
• Liquidations are governed by the Insolvency Act 24 of 1936, the Companies Act of 1973,
the Companies Act of 2008 and the Close Corporations Act of 1984
Concursus Creditorum:
• Example: Distribution of the estate of Joe Blogs
Assets Liabilities
House 250 000 Bond on house 200 000
Car 20 000 Income tax (SARS) 95 000
Cash 30 000 Furniture store 6000
School fees 4000
Total 300 000 Total 305 000
NOTE: Creditors are paid in a set order of preference/ranking
• Bank has a secured claim because of the mortgage bond
o This means the bank will be paid first from the proceeds of the sale of the house
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,• House is sold for R250 000. Bank gets paid R200 000 and there is R50 000 from sale of
house
• Therefore, R50 000 (left over from sale of house) + R20 000 (car) + R30 000 (cash) =
R100 000
• SARS has a preferent claim. Therefore, they get paid next. Leaves us with R5000
• Furniture store and school are known as concurrent creditors
o They must take pro rata from the R5000
▪ They are owed a total of R10 000. So each will get
5000
× 100 c
10000
= a dividend of 50 c in the rand for their claim
i. e. only half of their debt will be paid
• Concursus Creditorum means that the position of each and every creditor is frozen as at
the date of sequestration/liquidation, and from that date onwards, no creditor may do
anything to alter his position
▪ So, from example, furniture store can’t now try become a secured or
preferent creditor
3|Page
, 2. Manner of Sequestration
• In this section, we are only looking at sequestrations (individuals, partnerships, trusts)
• There are 2 ways of sequestrating:
• Only the high court can make a sequestration order
Voluntary Surrender and Substantive Requirements:
• Here, the debtor himself applies to court to be sequestrated
• One of the effects of sequestration is that the debtor is absolved/relieved of any debts
incurred before sequestration
o i.e. The creditors cannot sue him personally
o They must put in a claim against his estate with the trustee
o The trustee will then use/sell the assets to pay creditors
o If there is not enough money and some creditors cannot be paid in full, they
cannot sue the debtor personally. (That is the end of it)
• Note on people married ICOP and partnerships:
o With people married ICOP, there is a single joint estate
o Therefore, both spouses must apply for sequestration of the joint estate and both
are declared insolvent
o In the case of partnerships, all the partners must apply for the sequestration of
the partnership estate and their individual estates
Example: Alex is married ICOP to Jane. Alex owns a business called Good Food in partnership
with Cindy. Cindy is married Out of Community of Property to Max.
Question: If the partnership is in financial trouble, who will be sequestrated?
▪ Good Food
▪ Alex
▪ Jane
▪ Cindy
Example 2:
Similar facts to above but this time it is Cindy who wants to apply for her own sequestration.
Does anyone else have to apply with her?
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