IURI 322 – Study unit 1

1. Meaning of insolvency
 A person is insolvent when he cant pay his debts, but the legal test of insolvency is
whether the debtor’s liabilities exceed his assets fairly value – Venter v Volkskas Ltd
- Inabiltity to pay debts is at most merely evidence of insolvency
 A person who has insufficient assets to discharge his liabilities, isn’t treated as
insolvent for legal purpose unless his estate has been sequestrated by an order of
the court
 A sequestration order is a formal declaration that a debtor is insolvent and the order
is granted either at the instance of the debtor himself(voluntary surrender) or at the
instance of one or more of the debtor’s creditors(compulsory sequestration)
 A debtor estate is sequestrated, not the debtor himself but both a debtor’s estate and
the debtor’s estate has been sequestrated or that his possible meanings: either that
the debtor’s estate has been sequestrated or that his liabilities exceed his assets s2
of the Insolvency Act
2. Purpose of a sequestration order
 The main objective 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; a concourse of creditors) is established and the interest of creditors as a
group enjoy preference over the interest of individual creditors
 Debtor is divested of his estate and cannot burden it with any further debts and a
creditor’s 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 the Act allows, nothing may be done which would have the effect of
diminishing the estate assets or prejudice the rights of creditors
 In the Walker v Syfret the court explained the underlying principle as follows
- The object of the Insolvency Act is to ensure a due distribution of assets among
creditors in 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 Ex parte Pilla; Mayet
v Pillay and so a court will not sequestrate a debtor’s estate unless it shown that the
sequestration will be to the advantage of creditors
 So sequestration will generally not be restored to if the debtor, although insolvent,
has only one creditor who already hold a judgment against the debtor
 Sequestration will not be order 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 – Lynn & Main Inc v Mitha
 Although sequestration wasn’t designed to alleviate the position of the debtor, it
inevitably has this effect because it relieves him from legal proceedings by creditors
and allows him, through rehabilitation, to free himself from all unpaid pre-
sequestration debs s129(1)(b)
 A further function of insolvency proceedings is to protect creditors against other
creditors’ greediness and dishonesty – Richeter NO v Riverside Estate (Pty) Ltd
3. What may be sequestrated
3.1 Meaning of estate
 Is usually conceived of as a collection of assets and liabilities
 A debtor who only has liabilities may be regarded as having an estate for
sequestration purposes – Miller v Janks page 6
 Joint estate of spouses married in community of property is an estate for the
purposes of insolvency
 A debtor married in community of property doesn’t have a separate estate which can
be sequestrated, even where he or she is carrying on a business independently of
his/her spouse
 Spouses are both debtor and, on the sequestration of their joint estate, they both
become insolvent debtor for the purpose of the Act
 A debtor married out of community has a separate estate that can be sequestrated,
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 be established her/his title
to them
3.2 Meaning of debtor
 A debtor for the purpose of the Insolvency Act is a person or partnership or the estate
of a person or partnership, which is a debtor in the usual sense of the word, expert a
body corporate or a company or other association of persons which may be placed in
liquidation under the law relating to companies’ – s2
 An entity or association of persons is considered a debtor in the usual sense of the
word’ if it can possess an estate and incur debts – Magnum Financial holdings v
Summerly & another NNO
 Debtor embraces the following:
- A natural person
- A partnership
- A deceased person and a person incapable of a managing his own affairs
- An external company that doesn’t fall withing the definition of external company in the
Companies Act
- An entity or association of person that is not a juristic person such as a trust
4. Jurisdiction of the court
4.1 Which court has jurisdiction
 Only a Provincial or Local Division of the High Court may adjudicate upon an
insolvency matter – s2
 A magistrate’s court may preside over prosecution for criminal offence under the
Insolvency Act, proceedings to set aside voidable dispositions, and a few other
matters, provides that ordinary jurisdictional limits as to offence, person and amount,
imposed by the Magistrates’ Court are not exceeded
4.2 Jurisdiction over a debtor and his estate
 In terms of s149(1),a court has jurisdiction over a debtor and in regard to the estate
of a debtor if
(a) On the date when the application for voluntary surrender or compulsory
sequestration of the debtors’ 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
(b) 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
(i) Domicile or property withing jurisdiction
 A personal right a.k.a right to a performance of some kind is taken to be situated
where the debtor liable to render the performance is domiciled – Nahrungsmittel
GmbH v Otta page 9
(ii) Residence or business within jurisdiction in preceding 12 months
 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
4.3 Jurisdiction in litigation against third parties
 Section 149 deals with the question of when a court has jurisdiction over a debtor
and his estate; it isn’t 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 before
sequestration, the ordinary rules of jurisdiction apply and the trustee cant rely on
s149 – Spendiff NO v Koleltor
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 withing the Republic s149 provision
 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
 The essential inquiry isn’t where the sequestration order may more conveniently be
administered, what the court must consider is what will happen after the order has
been granted
5. The Master
 A master is appointed in terms of the Administration of Estates Act to each of the
areas of the Provincial Divisions of the High Court
 The master plays a pivotal role insolvency matters, as will be seen from his many
powers and duties flowing from the Act
 One of his principal functions is keeping custody of all documents relating to
insolvent estates
 A master is a creature of statute
 Any person aggrieved by a decision, ruling , order or taxation of the Master may bring
it under review by the court and to that end may apply to the court after notice to the
Master s151

6. Condonation of irregularities
 The starting point is s157(1) which provides that nothing done under the Act will be
invalid by reason of formal defect or irregularity, unless a substantial injustice has
been thereby done which in the opinion of the court cant be remedied by any order of
the court
 The effect of this section appears to be the following:
- If a formal defect hasn’t caused substantial injustice, the procedural step in question
is valid. It is usually said that the court may condone the defect in these
circumstances, but this word seems incorrect, since s157 doesn’t confer on the court
the power to condone defects
- If a formal defect has caused substantial injustice, but the prejudice to creditors can,
in the opinion of the court, be remedied by an appropriate order, then the defects isn’t
fatal provided the party concerned complies with the corrective order
- If a formal defect has caused a substantial injustice and the prejudice to creditors
cant be cured by any order of the court, then the procedural step is invalid