INSOLVENCY LAW: MRL3701

 law of insolvency = (voluntary surrender and compulsory sequestration), and with the liquidation
(winding up) of companies.

 people may become insolvent, they become insolvent when they are so overburdened by debt that they
owe to others, meaning their creditors, that the debts owing by such debtors to the creditors exceed the
value of the debtor’s own property (assets).

 Insolvency Law also allows the debtor through rehabilitation to make a fresh financial start and thereby,
protects the debtor from being constantly harassed by his or her creditors.

 A trustee is appointed to administer the insolvent estate; a liquidator is appointed to administer the
company or the close corporation in winding up. This appointee must then take control of the
insolvent estate or the company and collect all the property of the debtor that lawfully forms part of the
insolvent estate. Provisions enable the trustee or the liquidator to challenge suspect transactions (called
impeachable dispositions.

 insolvent natural person may apply to the High Court for rehabilitation. A rehabilitation order ends the
period of sequestration.

 when the winding-up (liquidation) of the company or the close corporation has been completed the
juristic person is dissolved and its existence comes to an end. It is then a “dead” company or close
corporation.

 A natural person (a human being) may be able to enter into a compromise (or composition) with his or
her creditors, by which the creditors agree to accept a partial payment of their claims.

INSOLVECY ACT DEFINITIONS:

1. Disposition: any transfer/abandonment of rights to property and includes a

sale/mortgage/payment/donation but does not include a disposition in compliance with an order of the
court. ( transfer/gift/sale of property from one person to another)
2. Debtor: ‘in connection with the sequestration of the debtors estate’ means a person or estate of a person,
which is debtor in usual sense of the word ( the party that owes money)

PURPOSE OF A SEQUESTRATION ORDER:

The sequestration procedure is aimed mainly at achieving a fair distribution of the available assets among
competing creditors of the debtor.

JURISDICTION OF THE COURT:

Domicile is one of the grounds on which a court has jurisdiction to sequestrate a person’s estate. 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.

Which court has jurisdiction?

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  Only provincial/local division of the High Court may adjudicate upon insolvency matters.
 Magistrates court may preside over prosecutions for criminal offences under the insolvency act.

JURISDICTION OVER A DEBTOR AND THEIR ESTATE:

 Court has jurisdiction over a debtor/estate of debtor if:

1. On the date when the application for surrender (voluntary) or sequestration (compulsory) of
debtors estate is lodged with the Register of the court/debtor is domiciled within jurisdiction of
the court.

VOLUNTARY SURRENDER:

Who may apply?

 Estate of deceased debtor
 Partnership estate
 Estate of natural persons
 Joint estates of spouses married in community of property.
Requirements:
 Court may only accept the surrender if:
1. The debtor’s estate is in fact insolvent.
2. Sequestration will be of benefit to the creditors.

Voluntary surrender applications must comply with the provisions in Section 6(1) of insolvency act:

 If the court is satisfied that the estate of the debtor in question is insolvent, that he owns realisable
property of a sufficient value to defray all costs of the sequestration which will in terms of this Act be
payable out of the free residue of his estate and that it will be to the advantage of creditors of the debtor if
his estate is sequestrated, it may accept the surrender of the debtor’s estate and make an order
sequestrating that estate.

 Under voluntary surrender courts require applicants to make a full and frank disclosure of their affairs.
The required high level of disclosure is also affected by the fact that the application is ordinarily brought
on a ex parte basis, as in the present judge. ( ex parte = for one party)

NOTICE OF INTENTION TO SURRENDER:

If a debtor decides to surrender his estate, he will first have to publish a notice of surrender in the Government
Gazette, or if he is a trader, in the district where he has his principal place of business. The purpose of a notice of
surrender is to alert creditors to the intended voluntary surrender of his estate.
Notice in the Government Gazette:
 The notice must the following:
 Debtors personal details ( full names, residential address and occupation)
 Court details (the particular division of the high court before which the application will be made)
 Details of statement of affairs ( when and where)

NOTICE TO CREDITORS AND OTHER PARTIES:

 Insolvency Second Amendment Act 69 of 2002

 Amendment Act replaces section 4 (2) of the Insolvency Act, 1936 so as to provide that within a period
of seven days as from the date of publication of the notice of surrender, the petitioner must deliver or post
a copy of the said notice to every one of the creditors of the debtor.
 within that period a copy of the notice must be furnished to every registered trade union that represents
any of the debtor’s employees, to the employees themselves, and to the South African Revenue Service.
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SETTING ASIDE A SEQUESTRATION ORDER:

 one of the consequences of a rehabilitation order is that the debtor is discharged from all debts the cause
of which arose before sequestration.
 a rehabilitation order enables the debtor to start building up a new estate without the possibility of being
harassed by “old” creditors.
 If the debtor is not rehabilitated the debtor then remains fully liable for all debts which existed before the
granting of the sequestration order.

COMPULSARY SEQUESTRATION:

REQURIMENTS FOR GRANTING OF COMPULSARY SEQUESTRATION ORDER:

 An applicant for compulsory sequestration must prove a certain type of claim against the debtor.
 applicant for compulsory sequestration does not need to prove specifically that there are sufficient assets
to cover the costs of sequestration. But the absence of these assets will often lead to the conclusion that
sequestration will not be to the advantage of creditors.
 onus of proof with respect to the requirement of advantage to creditors is lighter in the case of
compulsory sequestration than in the case of voluntary surrender.

DEBTOR COMMITTED ACT OF INSOLVENCY OR IS INSOLVENT:

Insolvency act section 8:

A debtor commits acts of insolvency if:
 (b) if the court has given judgement against them and they fail, upon the demand of the officer to satisfy
it (the judgement) or fails to indicate to the officer disposal property sufficient to satisfy it (the
judgement) – failure to satisfy judgement
 (g) if they give notice in writing to any of their creditors that they are unable to pay their debts. – notice
of inability to pay
 (h) if, being a trader, they give notice in the Gazette in terms of Sub Section (1) of Section 34, and
thereafter is unable to pay all their debts. – inability to pay debts after notice

FRIENDLY SEQUESTRATION:

 Use Epstein v Epstein 1987

 Making use of friendly sequestration avoids complying with the preliminary formalities for an
application for voluntary surrender.
 creditors other than the “friendly” creditor do not get advance notice of the application (except
employees, trade unions and the South African Revenue Service). Neither can they take notice of the
debtor’s financial position.

TRANSFORMATIVE CONSTITUTIONALISM:

 section 8(1) makes the Bill of Rights applicable to all law. So, the Constitution generally extends to state
organs such as the judiciary, legislature and executive.
 role played by the courts, executive and legislature in the process of insolvency, functions of the Master
of the High Court, sheriff, registrar of titles to immovable property, and Registrar of the High Court all
make the Bill of Rights relevant to the whole issue of insolvency.

FORM AND CONTENT OF APPLICATION: Even if marital status is not mentioned by debtor,
joint estate will still be under sequestration.

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  applicant must mention the marital status of the debtor in his application. The reason for this is to prevent
the granting of a sequestration order if the debtor is married in community of property and his or her
spouse has not been joined as a second respondent.
 it is not permissible to apply in one application for the sequestration of the estates of two different
debtors.
 when a petition is presented to the court, the petitioner must furnish a copy of the petition to every
registered trade union which, as far as the petitioner can reasonably ascertain, and to the South African
Revenue Service.
Rule Nisi: an interim order granted by a court when a
person must come to court to give evidence as to why a
PROVISIONAL SEQUESTRATION: final order in that specific matter should not be made.

 Section 11 now provides that if the court sequestrates the estate of a debtor provisionally, it must
simultaneously grant a rule nisi calling on the debtor on a day mentioned in the rule to appear and to
show cause why his or her estate should not be sequestrated finally. A copy of the rule nisi must be
served on any trade union referred to above the debtor’s employees and the South African Revenue
Service.

UNWARENTED/VEXTIOUS PROCEEDINGS:

 An application for compulsory sequestration is malicious if the applicant is not motivated by the best
interests of the creditors as a group, but by enmity towards the debtor. An application is vexatious if the
applicant clearly has no grounds for a sequestration order.
 Section 15 now provides for compensation to a debtor if a petition for the sequestration of his or her
estate is an abuse of the court’s procedure or malicious or vexatious. The phrase “an abuse of the
court’s procedure” has therefore been added to section 15.

THE LEGAL POSITION OF THE INSOLVENT:

PROHIBITED CONTRACTS:

 A debtor may not make a contract which purports to dispose of any property of their insolvent estate.
 A debtor may not, without written consent of the trustee, enter into a contract which adversely affects
their estate of any obligation towards their estate.
 Where the trustee’s consent is not necessary, or where it is given, the contract is valid and binding for all
parties. ( The insolvent may not enforce performance in their favour unless the insolvency act gives them
the right to do so )
 If the insolvent enters into a contract which purports to dispose of the estate property, the contract is
voidable at the option of the trustee. ( Same applies if the debtor enters into a contract without consent of
trustee )

EARNING A LIVING:

 It being in nobodies’ interest for the debtor and their dependants to be rendered destitute. The debtor is
allowed to follow and profession/occupation and may make whatever contracts are reasonably necessary
for this purpose.
 The insolvent may not, without the consent of the trustee carry on, be employed in any capacity, or have
any direct/indirect interests of a trader who is a general dealer or manufacturer.

TRADER as defined in SEC 2 of insolvency act: Any person who carries on any trade, business or undertaking in which
property is sold/bought/exchanged of manufactured for purpose of sale.

GENERAL DEALER: is someone who trades at a fixed and recognized place in all sorts if wares and not just in one kind of a
few kinds.

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  If an insolvent pursues a vocation without obtaining consent where it is required they commit a criminal
offence ( They cannot escape liability on the basis that they did not know consent was needed. )
 Any contracts they make in the course of an unlawful vocation are voidable at option of the trustee.
 Should a trustee give or refuse their consent to carry on a trade, any of the creditors/the insolvent as the
case may be, may appeal to the Master whose decision is final ( Copy of consent must be sent to the
Master by trustee. )
THE MASTER: exercises the custody of all
documents relating to the insolvent estate.
They are allowed to charge prescribed fees.

PROCEEDINGS WHICH MAY BE BOUGHT/DEFENDED PERSONALLY BY THE INSOLVENT:

i. An insolvent may sure of be sued in their own name without reference to trustee of their estate.
ii. A matter relating to status (divorce)
iii. A matter relating to a right which does not affect the insolvents estate.
iv. Claim for a pension to which they are entitled to for services rendered.
v. Claim for compensation in respect of loss or damage that they (insolvent) have suffered by reason
of defamation/personal injury.
 Even though insolvent is entitled to litigate in matters concerning the admin of their estate does not mean
that they have a general right to prescribe how the estate should be administered.

SECURITY FOR COSTS:

 An insolvent who brings an action in the magistrate’s court is obliged to give security for the costs of the
action if the defendant requests it. If the insolvent fails to give security when called upon by the
defendant to do so, the latter may apply for the action to be dismissed.

ENTITLEMENT COSTS:

 Where insolvent sues/ is sued personally in a matter in which they are entitled to litigate and they obtain
an award of costs in their favour, the judgment for costs belongs to them personally and may dispose of
award as they like. (Award of costs does not form part of their insolvent estate.)
 Damages for maladministration on part of the trustee accrue to the insolvent estate, but an award of costs
against the trustee ensure for benefit of the insolvent.

HOLDING OFFICE:

 An unrehabilitated insolvent is disqualified from holding a large number of positions.

 An insolvent will need court consent for positions.
 Insolvent is prohibited from being the trustee of an insolvent estate.
 Insolvent is prohibited from being a member of the National Assembly, National Council of Provinces or
Prohibited Legislation.
 Court can give permission for insolvent to be a company director or take part in the management of a
close corporation. (May be a member of a close corporation without consent of court.)

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VESTING OF THE ASSETS OF THE INSOLVENT:

MARRIAGE IN COMMUNITY OF PROPERTY:

 General position regarding spouses’ matrimonial property regime unless spouses made other
arrangements.
 Assets and liabilities of both spouses fall into a new estate called: joint estate and therefore if one spouse
becomes insolvent the other too becomes insolvent, and both spouses are under sequestration.

MARRIAGE OUT OF COMMUINTY OF PROPERTY:

 After marriage both spouses still retain their separate estates consisting of their assets/liabilities.
 To marry out of community of property mean a couple signs antenuptial contract excluding marriage in
community of property.

VESTING OF ESTATE:

 Insolvency act provides that the effect of a sequestration order is to divest the insolvent of their estate and
vest it in the Master and thereafter in the trustee once appointed.
 Estate remains vested in trustee until:
i. The discharge of the sequestration order by court.
ii. Acceptance by creditors of an offer of compensation made by the insolvent which provides that
the insolvents property will be restored to them.
 If the trustee vacates office/is removed from office/dies the estate revests in the Master till a new trustee
is appointed.

PROPERTY WHICH FALLS INTO ESTATE:

 The insolvent estate comprises of the following:

i. All property of the insolvent at the date of sequestration, including property in the hands of a
sheriff under writ of attachment and
ii. All property which insolvent acquires or which accrues to them during the sequestration,
including any property that the insolvent recovers for the benefit of the estate where trustee fails
to take the necessary action.
 Insolvent acquires possession of property, which is claimed by trustee, said property belongs to the
insolvent estate.
 Property inherited by debtor/insolvent during their insolvency falls into the insolvent estate.
 Property of spouse even if married out of community of property, also vests in the trustee of the insolvent
estate until released by trustee.

INSURANCE POLICES:

SECTION 156 INSOLVENCY ACT:

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5.3.8(i) Policies covering liability to third parties:

third party has a claim directly against the liability insurer. The third party therefore does not have to rely on a
mere concurrent claim against the insolvent estate in so far as he may claim the damages from the insurer. It is
also important to note that the third party who has the right to claim directly from the insurer in terms of section
156 is exposed to all the same defences which, in the absence of section 156, the insurer could have raised
against the contracting party (the insolvent).

SECTION 63: LONG TERM INSURANCE ACT:

63 Protection of policy benefits under certain long-term policies:

1. Subject to subsections (2), (3) and (4), the policy benefits provided or to be provided to a person under one or
more assistance, life, disability or health policies in which that person or the spouse of that person is the life
insured and which has or have been in force for at least three years (or the assets acquired exclusively with those
policy benefits) shall, other than for a debt secured by the policy-

a. during his or her lifetime, not be liable to be attached or subjected to execution under a judgment of a
court or form part of his or her insolvent estate; or

b. upon his or her death, if he or she is survived by a spouse, child, stepchild or parent, not be available for
the purpose of the payment of his or her debts.

2. The protection contemplated in subsection (1) shall apply to policy benefits and assets acquired solely with the
policy benefits, for a period of five years from the date on which the policy benefits were provided.

3. Policy benefits are only protected as provided in-

a. subsection (1) (b), if they devolve upon the spouse, child, stepchild or parent of the person referred to in
subsection (1) in the event of that person’s death; and
b. subsection (1) (a) and (b), if the person claiming such protection is able to prove on a balance of
probabilities that the protection is afforded to him or her under this section.

4. Policy benefits are protected as provided for in subsection (1) (a) and (b), unless it can be shown that the
policy in question was taken out with the intention to defraud creditors.

TRUST PROPERTY/FUNDS:

Assets in a trust will not usually form part of the personal estate of the trust trustee if that trustees’
personal estate is sequestrated. Assets in trust are protected assets.
 Money held in a trust account of an attorney, notary or an estate agent does fall part of the insolvent
estate of person concerned.
 Trust property invested, held, kept in safe custody, controlled or administered by a financial institution
does not form part of assets/funs of said institution.
DISPOSAL OF ESTATE PROPERTY BY INSOLVENT:

 Insolvent cannot dispose of property that forms part of their insolvent estate.
 According to Section 25 (4) if an insolvent unlawfully disposes of immovable property or a right to
immovable property which form part of their insolvent estate, the trustee may recover compensation in
respect of the property or right disposed of.
 The trustee can recover from:
i. Insolvent personally.
ii. Person who acquired the property knowing it to be part of insolvents estate.