THE ADVANTAGE TO CREDITORS UNDER THE INSOLVENCY ACT 24 OF 1936

BY

ARTHUR SINGINI

U17270643

Submitted in partial fulfilment of the requirements of the degree

MASTER OF LAW (LLM)

At the

UNIVERSITY OF PRETORIA

SUPERVISOR: PROFESSOR MELANIE ROESTOFF

JANUARY 2020
 Declaration

1. I understand what plagiarism is and am aware of the University’s policy in this

regard.
2. I declare that this thesis is my own original work. Where other people’s work has
been used (either from a printed source, Internet or any other source), this has
been properly acknowledged and referenced in accordance with departmental
requirements.
3. I have not used work previously produced by another student or any other person
to hand in as my own.
4. I have not allowed, and will not allow, anyone to copy my work with the intention
of passing it off as his or her own work.

Arthur Singini
January 2020
 INDEX

Contents Page
1. Chapter 1 – INTRODUCTION

1.1 Background information……………………….…………………………. 5

1.2 Problem statement and research objectives…………………………… 7

1.3 Methodology………………………………………………………………. 9

1.4 Delineation and limitations………………………………………………. 9

1.5 Proposed structure………………………………………………………. 9

2. Chapter 2 – DEBT RELIEF MEASURES IN TERMS OF SOUTHJ AFRICAN

INSOLVENCY LAW

2.1 Introduction………………………………………………………………… 11

2.2 Sequestration………………………………………………………………. 11

2.3 Voluntary Surrender………………………………………………………. 12

2.4 Compulsory Sequestration………………………………………………. 13

2.5 Friendly Sequestration………………………………………………….... 15

2.6 Rehabilitation……………………………………………………………… 15

2.7 Debt Review………………………………………………………………. 17

2.8 Administration Order………………………………………………………. 18

2.9 Proposed pre-liquidation composition……………………………………. 20

2.10 National Credit Amendment Act………………………………………… 21

2.11 Conclusion………………………………………………………………. 22

3. Chapter 3 – ADVANTAGE TO CREDITORS REQUIREMENT

3
 3.1 Introduction………………………………………………………………… 24

3.2 Historical background……………………………………………………… 24

3.3 Effect on consumer debt relief……………………………………………. 26

3.4 Impact on law reform………………………………………………………. 28

3.5 Conclusion…………………………………………………………………. 28

3. Chapter 4 - INTERNATIONAL TRENDS IN CONSUMER INSOLVENCY

4.1 Introduction…………………………………………………………………. 30

4.2 Australia……………………………………………………………………. 30

4.3 United States of America………………………………………………… 32

4.4 Conclusion…………………………………………………………………. 33

4. Chapter 5 – CONCLUSION AND RECOMMENDATIONS

5.1 Conclusion…………………………………………………………………. 34

5.2 Recommendations………………………………………………………… 35

5. Bibliography

Books…………………………………………………………………………… 37

Journal Articles………………………………………………………………… 37

Legislation……………………………………………………………………… 39

Case Law………………………………………………………………………. 39

Reports…………………………………………………………………………. 40

Thesis & Dissertations………………………………………………………… 41

4
CHAPTER 1:

INTRODUCTION

SUMMARY

1. Introduction

1.1 Background Information

1.2 Problem statement and research objectives

1.3 Methodology

1.4 Delineation and limitations

1.5 Proposed Structure

1.1 Background information

Insolvency law in South Africa is codified in three main statutory instruments, the most
significant of which is the Insolvency Act. 1 There are also alternative insolvency
procedures which are provided for by the Magistrates’ Courts Act(MCA)2 which introduces
the administration order procedure.3 Alternatively, there is also the National Credit
Act(NCA)4 which introduces debt review5 as an alternative to sequestration.

This study will focus on one of the requirements of the sequestration process namely the
advantage to creditors requirement, which is established under the Insolvency Act. The
Insolvency Act is one of the oldest pieces of insolvency legislation in South Africa having
been introduced in 1936 and has therefore been law for over one hundred years.

1 Act 24 of 1936.
2 Act 32 of 1944.
3 See ss 74 and 74A to 74W of the Magistrates’ Court Act 32 of 1944.
4 Act 34 of 2005.
5 See s 86 of the NCA.

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The sequestration process provides for a procedure which is used to sequestrate a
debtor’s estate. Under South African insolvency law, a debtor’s estate may be
sequestrated by voluntary surrender where a debtor applies for sequestration of his own
estate6 or by way of compulsory sequestration,7 where creditors apply for the
sequestration of the debtor’s estate. Of late, an interesting phenomenon called a friendly
sequestration has emerged as a result of insolvent debtor’s quest to get a fresh start, that
is, to obtain a discharge of all pre-sequestration debt.8 This procedure will also be
discussed in this dissertation.

At the heart of the sequestration process is the requirement for advantage to creditors.9
Although the phrase ‘advantage to creditors’ is not defined in the Insolvency Act, the
courts have, in the past, constantly alluded to the dictum in Meskin & Co v Friedman
(1948 2 SA 555 (W) 559) that there must be a ‘reasonable prospect that some pecuniary
benefit will result to creditors’.10 Accordingly, in order for a debtor to succeed with an
application for voluntary surrender, the Insolvency Act requires the debtor to show that
sequestration will be to the advantage of his creditors.11 Likewise in compulsory
sequestration,12 the courts require the debtor to show that the sequestration of the
debtors’ estate will be to the advantage of creditors.13

With respect to voluntary surrender, the Insolvency Act stipulates that the insolvent debtor
proves to the court that there is reason to believe that the sequestration of his estate will
be to the advantage of his creditors.14 Judge Bertlesmann echoed the same sentiments
in Ex parte Ogunlaja and Others:15

6 Ss 3-7 of the Insolvency Act 24 of 1936.

7 Ss 9-12 of the Insolvency Act.
8 S 129 (1)(b) of the Insolvency Act.
9 Roestoff & Boraine “Body Corporate Palm Lane v Masinge: Discretion and powers of the court in
applications for sequestration” 2013 De Jure 208.
10 Roestoff & Boraine 2013 De Jure 211.
11 S 10(c) of the Insolvency Act.
12 S 3(1) of the Insolvency Act.
13 See s 6(1) of the Insolvency Act. See also Ex Parte Collins (1927) WLD 172.
14 Ss 6(1),10(c) and 12(1).
15 2011 JOL 27029 (JNP) para 36.

6
 “Unless and until the Insolvency Act is amended, the South African Insolvency law
requires an advantage to creditors before the estate of an individual can be
sequestrated. Much as the troubled economic times might engender sympathy for
debtors whose financial burden has become too much to bear, the insolvency law
seeks to protect the interests of creditors at least to the extent that a minimum
advantage must be ensured for the concurrent creditor when the hand of the law
is laid on the insolvent.”

The advantage to creditors requirement has also been emphasised in several court
judgments as the key requirement in obtaining a sequestration order and these cases will
be discussed at a later stage in this dissertation. This dissertation will also explore the
alternatives to sequestration such as debt review as provided in the NCA and
administration as provided for in the MCA. Lastly the research will compare the advantage
to creditors requirement as an access requirement to formal sequestration in South Africa,
with the requirements for access to formal sequestration in other jurisdictions such as the
Australia, and the United States of America and suggest proposals for reform.

1.2 Problem statement and research objectives

The advantage for creditors requirement is the point of departure for a debtor who is
desirous of benefiting from debt relief provided by the sequestration procedure.16 An over
indebted debtor will not meet the threshold to access formal sequestration processes
unless they can prove that it will be to the advantage of creditors.17 In Ex Parte Matthysen
et uxor (First Rand Bank Ltd intervening),18 the court held that there must be enough
assets in the estate to cover all costs of the sequestration and yield not negligible dividend
to creditors.

The MCA19 also provides for administration as another legislative tool to assist the over-
indebted consumer. The administration has been described as a modified form of

16 See Par 2.2.

17 See Par 2.3.
18 2003 (2) SA 308 (T) 311J 312G.
19 S 74 of the MCA.

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insolvency proceedings and it is intended to deal with relatively small estates where the
costs of sequestration would exhaust the estate. 20 However, this statutory instrument also
places significant importance on the debtor’s earnings and without constant income, a
debtor will not qualify for administration as it aims to reduce the debtor’s monthly
repayments to an amount that the debtor can afford. It is submitted, therefore, that
administration does not provide an over-indebted debtor with immediate relief as the
debtor will have to repay the debt over a longer period to obtain relief.

Although sequestration may offer some relief with regards to pre sequestration debt, it is
not the aim of the sequestration procedure to provide relief to debtors. 21 For this reason,
debt relief occurs when sequestration is automatically terminated after a period of ten
years from the date of sequestration or when the insolvent applies to court to be
rehabilitated.22

The advantage to creditors requirement is the reason why the South African insolvency
legislation being regarded as pro-creditor.23 Despite having been law for almost one
hundred years, the South African Law Reform Commission has recommended the
retention of the advantage to creditors requirement.24

In summary the objectives of the study are therefore:

a) To evaluate the natural person insolvency system as a whole, with particular

attention to sequestration, debt review and administration;
b) To specifically evaluate the advantage to creditors’ requirement and whether it
should be retained;

20 Kelly-Louw, Nehf & Rott The Future of Consumer Credit Regulation: Creative Approaches to Emerging
Problems (2008) 194.
21 See chapter 2 para 2.2 for a detailed discussion on sequestration.
22 S 127A (1).
23 See Ss 6(1), 10(c) and 12(1) of the Insolvency Act. See also Boraine et al “The Pro-Creditor Approach
in South African Insolvency law and the Possible impact of the Constitution” 2015 NIBLeJ 61.
24 Roestoff & Coetzee “Debt relief for South African NINA debtors and what can be learned from the
European Approach” 2017 CILSA 251.

8
 c) To compare the advantage to creditors requirement in South Africa with
international trends as regards access requirements in Europe and the United
States of America; and
d) To look at international guidelines specifically on access to formal sequestration or
debt relief measures;

1.3 Methodology
The method which will be followed in this research will entail a literary study of legislation,
case law, books, journals, reports and thesis. The research will investigate the South
African insolvency legislation, particularly the advantage requirement for sequestration,
debt review and administration and how the requirement has affected the development
of insolvency law in South Africa.

1.4 Delineation and limitations

This research will focus on the South African natural persons’ insolvency legislation, in
particular, the advantage to creditors’ requirement as an access requirement to formal
insolvency procedures. In as much as there are other access requirements to
sequestration, they will not be the focal point of this dissertation.

1.5 Proposed structure

a) Chapter one provides a general introduction to the subject of advantage to
creditors as well as a historical background. The research objectives and problem
statement are also discussed. The chapter also discusses the methodology as well
as delineation and limitations.
b) Chapter two discusses the debt relief measures that are available to natural person
debtors in South African insolvency law. Sequestration is discussed as well as debt
review and administration with a view to ascertain whether the debt relief measures
provide discharge from debt.
c) Chapter three deals with the advantage to creditors requirement, the requirement
is critically evaluated especially with regards to its effect on debt relief, impact on

9
 law reform and how the courts have applied the advantage requirement in various
decisions.
d) In Chapter four, International trends in consumer insolvency are discussed.
Australia and the United States of America are juxtaposed with the South Africa
system and comparisons are drawn especially with regards to access
requirements to formal insolvency.
e) Chapter five is the conclusion. It summarizes the whole discussion on advantage
to creditors and recommendations are made concerning the advantage to creditors
requirement and how it affects natural person debt relief and law reform.

10
CHAPTER 2:

DEBT RELIEF MEASURES IN TERMS OF SOUTH AFRICAN INSOLVENCY LAW

SUMMARY

2.1 Introduction
2.2 Sequestration
2.3 Debt Review
2.4 Administration Order
2.5 Proposed pre-liquidation composition
2.6 National Credit Amendment Act
2.7 Conclusion

2.1 Introduction
Debt relief has been at the centre of recent law reform initiatives in natural person
insolvency law.25 The most recent development being the National Credit Amendment
Act.26 This comes as a result of the lawmakers realising that the existing debt relief
measures are inadequate in addressing debt relief. This chapter will discuss the existing
debt relief measures which are sequestration, debt review, administration, the proposed
pre- liquidation composition27 and debt intervention.28

2.2 Sequestration

25 The South African Law Reform Commission made several propositions aimed at reforming natural
person insolvency law such as, the Draft Insolvency Bill of 1996, The Draft Insolvency Bill of 2003, The
proposed Unified Insolvency Act of 2003 and finally the Insolvency Bill of 2015.
26 Act 7 of 2019.
27 The South African Law Reform Commission proposed an Insolvency Bill which proposes a debt relief
measure known as pre- liquidation composition.
28 S 86A of the NCA. Debt intervention is introduced in the Debt Relief Act as an amendment to the
NCA.

11
A sequestration order is defined in section 2 of the Insolvency Act as any order of Court
whereby an estate is sequestrated, including a provisional order when it has not been set
aside.29 Sequestration brings about debt relief in that it results in the discharge of pre-
sequestration debts.30 The discharge takes place as a result of automatic rehabilitation
after ten years from the date of sequestration,31 or after an application to court for
rehabilitation.32 As indicated,33 in terms of the Insolvency Act, there are three ways in
which a debtor’s estate may be sequestrated, namely; voluntary surrender, compulsory
sequestration or a so-called friendly sequestration, which is in actual fact a compulsory
sequestration. These procedures will be discussed hereunder.

2.2.1 Voluntary surrender

A debtor who wishes to surrender his estate has to publish a notice of surrender in the
government gazette and in the newspaper circulating in the district in which he resides,
or in which his principle place of business is located. 34 An application for surrender may
be brought by the insolvent debtor himself or his agent or any person interested with the
administration of the estate of a deceased insolvent debtor, or an insolvent debtor who is
incapable of managing his affairs.35
The court will accept the surrender of the debtor’s estate only if it is satisfied of three
aspects, namely:36

a) Actual insolvency

The debtor has to show that they are actually insolvent and that their liabilities exceed
their assets.37 In the decided case of Ex Parte Harmse,38 the court explained the meaning
of insolvency with reference to section 6(1) of the Insolvency Act to mean that it must be

29 S 2 of the Insolvency Act.

30 S 129(1)(b) of the Insolvency Act.
31 S 128A of the Insolvency Act.
32 S 124(1) of the Insolvency Act.
33 Chapter 1, para 1.1.
34 S 4(1) of the Insolvency Act.
35 S 3(1) of the Insolvency Act.
36 S6(1) of the Insolvency Act.
37 Davis “Step-by-Step Voluntary Surrender: Application for the voluntary surrender of a debtor’s estate”
2000 De Rebus 34.
38 2005 (1) SA 323 (N) 362.

12
established that the debtor is without funds to pay his debts in full and that it is improbable
that the assets will realize enough for this purpose.

b) Sufficient free residue to pay the costs of sequestration

The debtor must also show that there are sufficient assets in the free residue to defray
the costs of the sequestration.39 The phrase “free residue” is defined in section 2 of the
Insolvency Act as that portion of the estate which is not subject to any right of preferences
by reason of any special mortgage, legal hypothec, pledge or right of retention.40

c) Sequestration must be to the advantage of creditors

As indicated,41 the Insolvency Act does not define advantage for creditors, however, the
courts have helped in shedding light on the intention of the legislature. In Trust
Wholesalers and Woolens (Pty) Ltd v Mackan42 the Court defined advantage to creditors
to mean, “a substantial portion of the creditors, determined according to the value of the
claims, will derive advantage from the sequestration”. In London Estates (Pty) Ltd v Nair,43
the court reiterated further that there will be advantage for creditors if a reasonable
prospect that there will a pecuniary befit to creditors is established. Again in Ex Parte
Matthysen et Uxo (First Rand Bank intervening),44 it was submitted that for the
sequestration of an estate to be to the advantage of creditors, the applicant for surrender
must show that a not negligible dividend will be paid to creditors.

2.2.2 Compulsory sequestration

39 Davis 2000 De Rebus 34.

40 See S 2 of the Insolvency Act.
41 Chapter 1, para 1.1.
42 1954 (2) SA 109 (N).
43 1957 (3) SA 591 (N).
44 2003 (2) SA. 308 (T) 316B-C.

13
Compulsory sequestration is another way in which a debtor’s estate may be sequestrated.
An application for compulsory sequestration is initiated by the debtors’ creditors.45 The
Court may grant an application for the sequestration of the debtor’s estate if it is satisfied
that a creditor or his agent who has a liquidated claim for not less than R100, or two or
more creditors (or their agents) claims for not less than R200 against a debtor who has
committed an act of insolvency or is insolvent,46 and finally if there is reason to believe
that it will be to the advantage of the debtor if his estate is sequestrated,47 a provisional
sequestration order will be granted. If t the return date of the rule nisi the court establishes
that there is reason to believe that sequestration will be to the advantage of creditors,48 a
final sequestration order will be granted.

The most notable difference between a voluntary surrender and a compulsory

sequestration is that in compulsory sequestration the onus of satisfying the court rests on
the sequestrating creditor.49 Furthermore, with respect to the advantage to creditors’
requirement, in compulsory sequestration the creditor is required to show that there is a
reason to believe that sequestration will be to the advantage of the creditors, 50 while in
voluntary surrender the debtor is required to show that sequestration will be to the
advantage of creditors.51

In explaining the concept of advantage to creditors, the Court in Gardee v Dharmanta

Holdings and Others,52 held that sequestration will only be to the advantage of the
creditors if it will result in a greater dividend to them than would otherwise be the case,
for example, through the setting aside of impeccable transactions, or the exposure of
concealed assets, or if it will prevent an unfair division of the proceeds of the assets or
some creditors being preferred to others.

45 S 9(1) of the Insolvency Act.

46 Ibid.
47 S 10 of the Insolvency Act.
48 S 12 of the Insolvency Act.
49 Braithwaite v Gilbert 1984 SA 717 (W) 718.
50 S 12(1) of the Insolvency Act.
51 S 6(1).
52 1978 (1) SA 1066 (N) 1068-7.

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2.2.3 Friendly Sequestration

The Insolvency Act does not explicitly provide for a friendly sequestration. However, this
concept has been developed in practice. In a friendly sequestration a debtor’s estate is
sequestrated by an amicable creditor.53 However, the courts have submitted that “the
mere fact that an application for compulsory sequestration is brought by a creditor who is
prepared to cooperate with the debtor, or who is motivated by a desire to assist the debtor,
does not preclude the granting of a sequestration order.54 In fact, the court has a
discretion to either grant or refuse an order of sequestration. 55 Accordingly, where it is
clear that there is an abuse of the process of the court, this discretion is exercised against
the granting of such an order.56

2.2.4 Rehabilitation
According to Bertelsmann,57 insolvency of a natural person debtor comes to an end when
he is rehabilitated.58 Rehabilitation enables the insolvent to make a fresh start, free from
his pre sequestration debts.59 An insolvent who is not rehabilitated by the court within a
period of ten years from the date of sequestration of his estate would be deemed to be
rehabilitated after the expiry the ten years from date of sequestration.60

Bertelsmann61 stipulates that the principle of rehabilitation and the concomitant release
of pre sequestration debts was introduced in South African insolvency law via the Roman
Dutch law under the Amsterdam Ordinance of 1771. It is therefore interesting to note that
although it has been argued that discharge from pre-sequestration debt was not the
intention of legislature in implementing the sequestration procedure, a procedure for

53 Chitimira & Mabina “The meaning of advantage to creditors under voluntary, compulsory and friendly
sequestration” 2019 AUDJ 75.
54 Jhatam & Others v Jhatham 1958(4) SA 36 (N); Van Rooyen v Van Rooyen (Automutual
Investments (EC) (Pty) Ltd, Intervening creditor (2002) (1) SA 689 (C) 703.
55 Evans “Friendly Sequestrations, the Abuse of the process of court and possible solutions for
overburdened debtors” 2001 SA Merc LJ 485.
56 Evans 2001 SA Merc LJ 485.
57 Bertelsmann et al Mars - The Law of Insolvency in South Africa (2019) 555.
58 S 124 of the Insolvency Act.
59 Bertelsmann et al (2019) 555.
60 S 127A of the Insolvency Act.
61 Bertelsmann et al (2019) 555.

15
discharge of pre sequestration debts which is rehabilitation has always been entrenched
in insolvency law as far back as 1771.62

In terms of section 129(1) of the Insolvency Act, rehabilitation has the effect of putting an
end to sequestration and relieving the insolvent of every disability resulting from
sequestration and discharges all his debts, which were due or the cause of which arose
before sequestration.

Roestoff and Coetzee63 believe that debt relief is not the main aim of the sequestration
procedure and that the discharge is mostly a coincidence. They submit further that
requirements for sequestration do not include the so-called ‘No Income No Assets’ (NINA)
debtors64 in that for a debtor to succeed with obtaining a sequestration order he has to
prove advantage to the creditors. They argue that the fact that sufficient assets are set
as an access requirement are not only for the purpose of covering sequestration costs,
but also to ensure an advantage to creditors.65 It is also argued that the cost of
sequestration is another factor that curtails access and makes sequestration unsuitable
as a debt relief measure especially for NINA debtors.66

Sequestration has not been very helpful as a debt relief measure because of the nature
of the proceedings which require the process to be conducted in the High Court. 67 As
sequestration order affects the status of natural persons, the High Court has to be
approached and this results in higher legal costs as the debtor has to pay for
representation, thereby increasing the costs of sequestration.68 Sequestration was
designed as a mechanism for substantially large estates and therefore the cost to a debtor
with a smaller estate will be higher.

62 Ibid.
63 Roestoff & Coetzee 2017 CILSA 254.
64 Roestoff & Coetzee 2017 CILSA 256.
65 Ibid.
66 Ibid.
67 S 2 of the Insolvency Act defines a court in relation to any matter as the provincial and or local divisions
of the Supreme Court which has jurisdiction in that matter.
68 Roestoff & Coetzee 2017 CILSA 259.

16
It may thus be argued that although sequestration leads to a legal discharge of debt, 69
discharge is accidental70 and not the primary objective of the legislator with regards to
sequestration proceedings.

2.3 Debt Review

The debt review procedure has been introduced by section 86 of the NCA.71 A consumer
applies to a debt counsellor to be declared over indebted.72 Once the application has
been made, a debtor obtains a type of moratorium and creditors are precluded from
enforcing by litigation or other judicial process any right or security they may have against
the debtor in terms of the credit agreement.73

The overarching purpose of debt review as enshrined in the NCA is to offer temporary
relief to over indebted debtors.74 If a debt counsellor is satisfied that a consumer is over
indebted, he may make a proposal to the Magistrates court to make orders which include
an order that one or more of the consumer’s credit agreement be declared reckless
credit.75 A court may also make an order for the extension of the period of the credit
agreement and reduction of the instalment that the debtor ought to pay.76

Unlike compulsory sequestration, debt review can only be initiated by the debtor himself, 77
or by any court hearing a matter where a credit agreement is being considered and where
it is alleged that the debtor is over indebted.78 The debtor retains control of his estate and
does not lose control as in the case of sequestration. The debtor is expected to participate

69 See s 129 of the Insolvency Act.

70 Ex Parte Ford 2009 3 SA 376 (WCC) 383.
71 The National Credit Act.
72 S 86(1) of the NCA.
73 S 88(3) of the NCA.
74 Roestoff et al “The debt counselling process – closing the loopholes in the National Credit Act 34 of
2005” 2009 PER 253.
75 S 86(7) (c) of the NCA.
76 S 86(7) (aa) (bb) (cc) (dd) of the NCA.
77 S 86 (1) of the NCA.
78 S 85 of the NCA.

17
in good faith in the review and in any negotiations designed to result in responsible debt
re-arrangement.79

The limitation of debt review as a debt relief measure is the fact that the NCA is only
applicable to credit agreements, and debt which does not fall within the ambit of the Act80
will not be rearranged or extinguished as in the case where debt review is applicable.

Some scholars81 are of the view that debt review has proved to be insufficient as a debt
relief measure because of, inter alia, the following reasons: firstly, there has been a sharp
increase in the number of consumers applying for debt review; secondly, there has been
a concomitant shortage of competent debt counsellors; and thirdly, although an
application for debt review precludes credit providers from taking legal action against the
consumer, nothing stops the credit providers from pursuing the debt. In essence there is
no effective moratorium and consumers will suffer double jeopardy in that if a particular
creditor refuses to accept the offer made under debt review, they will proceed to enforce
their rights against the debtor.

Debt review therefore does not provide discharge from debt as it merely amounts to a
debt rescheduling mechanism.

2.4 Administration Order

According to Coetzee,82 the administration order involves a relatively simple and

inexpensive procedure whereby the Magistrate’s court reschedules overcommitted
debtor’s obligations. In the case of Bafana Finance Mabopane v Mokwakwa,83 the court
submitted that the purpose of an administrative order is to protect debtors with small
estates, usually those who are poor and either illiterate or uniformed about the law or
both. The court further emphasised that this procedure is also meant to ensure that

79 S 86 5(a)(b) of the NCA.

80 Such as delictual claims, professional services and municipal accounts where no interest is charged.
81 Roestoff et al 2009 PER 251.
82 Coetzee A comparative reappraisal of debt relief measures for natural person debtors in South
Africa (LLD thesis 2014 UP) 172.
83 2006 (4) SA 581 (SCA).

18
creditors to whom money is owed and due for payment by the debtor are able to recover
as much as the administrator permit.84

According to Boraine,85 the administration procedure is a hybrid debt relief measure which
makes provision for debt rescheduling and realisation of assets to service debts. As such,
it is submitted that there is no real relief from debt that can be obtained through the
administration order procedure as it does not lead to a discharge of debts.

When considering the effectiveness of the administration order procedure as a debt relief
measure, one has to also take into account the provisions of section 7486 which states
that the granting of an order under section 74(1) shall be no bar to the sequestration of
the debtor’s estate. This simply means that a debtor cannot just rely on administration
order procedure as he may be sequestrated while in the process of obtaining an
administration order.

The administration order procedure is only available to debtors whose debts do not
exceed R50 000.87 As such it excludes debtors whose estate are more than R50 000 but
who are also over indebted.88 This amount is determined by the Minister of Justice from
time to time.89

The MCA does not provide a time frame for the termination of the administration order.
The administration process will terminate when all the creditors as well as the costs of
administration have been paid in full.90 By implication, administration promotes the notion
of advantage to creditors in that it ensures that the original debt is paid in full despite how
long it takes the debtor to pay off. As such, as a debt relief measure, administration is
devoid of discharge from debts.

84 Ibid.
85 Boraine 2012 De Jure 87.
86 The Magistrates’ Court Act.
87 Mabe ‘Alternatives to Bankruptcy in South Africa that provides for a discharge of debts: Lessons from
Kenya’ 2019 PER 7.
88 Mabe 2019 PER 7.
89 Ibid.
90 S 74 of the MCA.

19
In African Bank Ltd v Weiner,91 Griesel J submitted that “the mechanism of an
administration order is intended to provide the debtor with relatively short moratorium to
assist in the payment of his or her debts in full and to ward off legal action and execution
proceedings…”

From the above, it can be seen that even the courts do not view the administration order
procedure as a debt relief mechanism, but rather as a way for a debtor to obtain a
temporary moratorium, which if he fails to pay off the debt in full may still be sequestrated.

2.5 Proposed pre-liquidation composition

A draft Insolvency bill was introduced by the South African Law Reform Commission.92
The Bill proposes a debt-relief measure known as a “pre-liquidation composition”. In
particular, clause 118 stipulates that the requirement is that liquidation of the estate of a
natural person debtor should be advantageous to the creditors, therefore, liquidation is
unavailable if the unencumbered assets are not adequate to warrant liquidation. Hence,
provision must be made for debtors with little or no assets, who through no fault of their
own are unable to pay their debts.93

In pre-liquidation composition, a debtor who cannot pay his debts enters into a binding
agreement with his creditors, called a composition.94 The debt must not be less than R200
000.95 If the offer of composition is accepted by the required majority in number of the
creditors, then the composition will be successful.96

However, it has been argued that even the pre-liquidation composition procedure does
not really offer debt relief to debtors97 in that the procedure would only assist those who
already have some form of statutory recourse available. In essence, only those with

91 051/2004.
92 Coetzee “Does the proposed pre-liquidation composition proffer a solution to the No Income No Asset
(NINA) debtor’s quandary and if not, what would?” 2016 THRHR 18.
93 Cl118 of the Insolvency Bill 2019.
94 Coetzee 2016 THRHR 23.
95 Cl 118(1).
96 Cl 118(17).
97 Roestoff & Coetzee 2017 CILSA 251.

20
income and assets will be able to succeed in the compulsory negotiation phase. Roestoff
and Coetzee submit further that the proposed pre composition procedure involves costs
which NINA Debtors will not be able to pay.98

Coetzee99 further suggests that the aim of pre-liquidation composition is to reach a

negotiated settlement between parties. The only advantage of the pre-liquidation
composition is that the procedure is cheaper compared to sequestration and is more
flexible.100

The pre-liquidation composition as a debt relief measure falls short in that if the
composition is not successful, the process collapses and there will be no debt relief for
the debtor. Initially, the proposed Bill allowed for the presiding officer to convert the
composition to sequestration proceedings.101 However, the clause was removed as it
would enable debtors to avoid the advantage to creditors’ requirement by accessing
liquidation without proving advantage to creditors. Consequently, the pre-liquidation
composition is not a viable alternative to debt relief measure as it is not too far from
administration order, coupled with the fact that once it fails, the debtor does not have any
other recourse but to opt for sequestration.

2.6 National Credit Amendment Act 2019

The challenges faced by South African debtors are not brought by lack of alternatives to
insolvency proceedings, they are caused by the fact that the available alternatives do not
provide for a discharge of debt.102 In an attempt to address this, the National Credit
Amendment Act (NCAA)103 was passed into law in August 2019. The NCAA introduces a
process known as debt intervention.104 Section 1 of the NCAA defines debt intervention

98 Ibid.
99 Ibid.
100 Roestoff & Coetzee 2017 CILSA 251.
101 Cl 118(16).
102 Mabe 2019 PER 2.
103 Act 7 of 2019.
104 S 86A of the NCA.

21
as a measure, as contemplated in section 86A, which aims to assist identified consumers
for whom existing natural person insolvency measures are not accessible in practice. 105

In terms of the NCAA, for a natural person or natural persons who own a joint estate to
qualify for debt intervention they must:106

a) be a consumer under unsecured credit agreements, unsecured short-term credit

transactions or unsecured credit facilities;
b) receive no income, or if they receive an income or have a right to receive an
income, regardless of the source, frequency or regularity of that income, that
income did not exceed R7500 on an average of six months preceding the
application for debt intervention;
c) is over-indebted, whether due to a change in personal circumstances or other
circumstances; and
d) is not sequestrated r subject to an administration order.

A person wishing to apply for debt intervention may apply to the National Credit Regulator
(NCR) in a prescribed manner and form to be declared over-indebted.107 Section 15A of
the NCAA mandates the NCR to assist the debt intervention applicant with, inter alia, the
process of being declared over-indebted,108 to have their obligations re-arranged;109 to
have their debt intervention application considered for an order contemplated in section
87A;110 or to have their application for rehabilitation contemplated in section 88B
considered by the Tribunal.111

Where the intervention applicant’s debts have been re-arranged, such applicant must be
issued with a clearance certificate by the NCR within seven business days after they have
satisfied all the obligations under every credit agreement that was subject to that was

105 S 1(b) of the NCA.

106 S 1(b) of the NCA.
107 S 86(1)A of the NCA.
108 S 15A (a)of the NCA.
109 S 15A (b) of the NCA.
110 S 15A (c) of the NCA.
111 S 15A (d) of the NCA.

22
subject to that debt re-arrangement order or agreement and according to that order or
agreement112 or where they have demonstrated as prescribed:113

a) financial ability to satisfy the future obligations in terms of the re-arrangement

order; or
b) that there are no arrears on the pre-arranged agreements; and
c) that all obligations under every credit agreement included in the re-arrangement
order or agreement have been settled in full.

After the clearance certificate has been issued, the NCR must submit a copy to all
registered credit bureaux.114 In the event that the NCR decides not to issue the clearance
certificate or fails to issue it, or where the NCR fails to submit a copy of the clearance
certificate to all registered credit bureaux, the debt intervention applicant may apply to the
Tribunal for a review of the NCR’s decision or failure to issue. 115 The Tribunal may then,
if he is satisfied that the debt intervention applicant is entitled to the certificate, order the
NCR to issue a clearance certificate to the debt intervention applicant or submit a copy to
all registered credit bureaux.116

When considering an application for debt intervention, the NCR must provide the debt
intervention applicant with counselling on financial literacy as well as access to training
to improve the financial literacy of the debt intervention applicant. 117 After assessing the
application for debt intervention, NCR concludes reasonably that:118

a) the debt intervention applicant does not qualify for debt intervention, the NCR must
reject the application;
b) the debt intervention applicant does not qualify for debt intervention, but is
nevertheless experiencing, or is likely to experience, difficulty satisfying all their
obligations under the credit agreements in a timely manner, the NCR must

112 S 71(1A) (a) of the NCA.

113 S 71(1A) (b) of the NCA.
114 S 71(1A) of the NCA.
115 S 71(3A) of the NCA.
116 Ibid.
117 S 86A (5) of the NCA.
118 S 86A (6) of the NCA.

23
 recommend that the debt intervention applicant and the respective credit providers
voluntarily consider and agree on a plan of debt re-arrangement;
c) a credit agreement that formed part of the application may constitute reckless
lending, an unlawful credit agreement or a credit agreement resulting from
prohibited conduct, the NCR must refer the credit agreement to the Tribunal for an
appropriate declaration;
d) the debt intervention applicant qualifies for debt intervention and the obligations of
the debt intervention applicant can be re-arranged within a period of five years or
such longer period as may be prescribed, the NCR must refer the matter with a
recommendation to the Tribunal in the manner and form for an order contemplated
in section 87(1A); or
e) the debt intervention applicant qualifies for debt intervention, but their income and
assets are insufficient to allow for their obligations to be re-arranged during the
period of five years, the NCR must refer the matter with a recommendation to the
Tribunal in the prescribed manner and form contemplated in section 87A.

In a case where the matter has been referred to the Tribunal, the matter may be
considered by a single member of the Tribunal in the prescribed manner and form,
referring to all documents included in the referral and any representations contemplated
in section 86A (9).119 After considering all information provided, the Tribunal may: make
an order that the debt intervention applicant does not qualify for debt intervention and
reject the application;120 or qualifying suspend all of the credit agreements, in part or in
full, for 12 months, which period may be extended for one further 12 months subject to
certain qualifications and require the debt intervention applicant to attend a financial
literacy programme.121

Where an order for debt intervention was issued, the NCR must review the financial
circumstances of the debt intervention applicant eight months after the order was granted
to determine whether the debt intervention has, at that time, sufficient income or assets

119 S 87A (1) of the NCA.

120 S 87A (2)(a) of the NCA.
121 S 87A (2)(b) of the NCA.

24
to allow their obligations to be re-arranged.122 If the NCR finds that the debt intervention
applicant has enough income and assets to allow for their obligations to be re-arranged,
the NCR must refer the matter with a recommendation to the Tribunal in a manner or form
prescribed.123 In the same way, if the debt intervention applicant does not have sufficient
income or assets to allow for their obligations to be re-arranged, the NCR must refer the
matter to the Tribunal to consider an extension of the period of suspension.124

Where the Tribunal decides to grant the debt intervention order, the Tribunal must limit
the debt intervention applicant’s right to apply for credit contemplated in section 60 for a
minimum of six months or for such period as the Tribunal may deem fair and
reasonable.125 Such limitation must not exceed a period of 12 months.126 If, after granting
the debt intervention order, the Tribunal finds that the debt intervention applicant was
dishonest in his or her application, the Tribunal has the power to rescind or change such
order.127

Against this background, it is submitted that debt intervention fails to be an alternative

debt relief measure mainly because of the earning threshold of R7 500 prescribed by the
Act. This excludes a large number of over indebted debtors whose earnings are more
than R7 500 per month and whose debts could be slightly more than R50 000 but who
cannot service their debt.

2.7 Conclusion

The statutory debt relief measures discussed above were all introduced in consideration
of the natural person debtor. However, as far as debt relief is concerned, the mechanisms
fall short of effective consumer debt relief. One of the major reasons for the failure of
alternative procedures to effectively address debt relief is the fact that the Insolvency Act,
had already set the golden thread of advantage to creditors as far as consumer insolvency

122 S 87A (5)(a) of the NCA.

123 S 87A (5) (b) (i) of the NCA.
124 S 87A (5) (b) (ii) of the NCA.
125 S 87A (8) of the NCA.
126 S 87A (9) of the NCA.
127 S 87A (11) of the NCA.

25
is involved. Whenever supplementary legislation is introduced there is always a risk of
conflict with the Insolvency Act because the insolvency Act was not enacted with the
intention of addressing debt relief.

Furthermore, as seen with the National Credit Amendment Act, lawmakers did not annul
the advantage requirement, but circumvented it by creating the debt intervention
procedure which in turn creates some form of discrimination among low income
earners.128 As such, there is not sufficient relief from the available statutory procedures
and until the Insolvency Act is amended to remove the advantage requirement, there will
continue to be multiple supplementary legislation aimed at addressing debt relief for
natural person debtors.

128 The Act extinguishes debts under R50 000 for debtors earning less than R7 500 per month to the
exclusion of other debtors who could be earning slightly more than the gazetted salary and still have
the same amount of unsecured debt.

26
CHAPTER 3:

ADVANTAGE TO CREDITORS REQUIREMENT

SUMMARY

3.1 Introduction
3.2 Historical background
3.3 Effect on consumer debt relief
3.4 Impact on law reform
3.5 Conclusion

3.1 Introduction
The Insolvency Act was promulgated for the sole purposes of ensuring an orderly winding
up and distribution of a debtor’s estate. 129 Sequestration procedures which are discussed
above are prescribed by the Insolvency Act as vehicles for winding up a debtor’s estate.130
The advantage to creditors requirement is one of the access requirements for both
voluntary surrender131 and compulsory sequestration.132 As observed,133 the advantage
to creditors requirement is a crucial determination in granting an order of sequestration
by the courts. Accordingly, this chapter will comprehensively discuss the concept of
advantage to creditors, where it originated, the effect it has on debt relief mechanisms as
well as its impact on insolvency law reform.

3.2 Historical background

129 Walker v Syfret NO 1911 AD 141.

130 See chapter 2, par 2.2 and 2.3.
131 S 3(1) of the Insolvency Act.
132 Ss 10(c) & 12(c) of the Insolvency Act.
133 Chapter 1, para 1.1.

27
The Insolvency Act does not define the term advantage to creditors. However, the term
inherently implies a financial benefit. Advantage to creditors therefore refers to a financial
advantage.134 As indicated,135 the court in Meskin and Company v Friedman136 explained
the meaning of advantage to creditors as follows:
“the facts put before the court must satisfy it that there is a reasonable prospect,
not necessarily a likelihood but a prospect which is not too remote that a pecuniary
benefit will result to creditors.”

The court also extended the definition to explain the meaning of creditors in this context
to mean that there must be an advantage to the general body of creditors and not
advantage to one creditor. The same assertion was also made in the case of Peyke v
Nathoo.137

The advantage to creditors’ requirement has been part of natural person insolvency and
traces of this requirement can be found in Roman law under the doctrine of missio in
possessionem.138 This was a means of execution against a debtor’s property and as such,
the debtor’s estate would be sold and would be wholly transferred to the person who
offered the creditors the largest dividend to their claims.139

The advantage to creditors’ requirement can be traced back to the Cape Ordinance140
which provided for a debtor “surrendering his estate for the benefit of his creditors.” 141
The requirement has survived several amendments to the Act and is also found in the
present Act. The advantage to creditors’ requirement in a voluntary surrender is found in
section 6(1) and provides that the court may accept the surrender of the debtor’s estate
and grant a sequestration order when it is satisfied that:

134 Evans 2001 SA Merc LJ 488.

135 Chapter 1, para 1.1.
136 1948 (2) SA 555 (W).
137 1929 50 NLR 178,185.
138 Visser “Romeinsregtelike Aanknopings-punte van die Sekwestrasieproses in the Suid-Afrikaanse
Insovensiereg” 1989 De Jure 41.
139 Bertelsmann et al (2019) 7.
140 Act 6 of 1843.
141 Evans 2001 SA Merc LJ 488.

28
 a) the estate of the debtor in question is indeed insolvent;
b) the debtor owns realisable property of 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
c) it will be to the advantage of creditors of the debtor if his estate is sequestrated.

Moreover, the advantage to creditors is also found in section 10 of the Insolvency Act
which deals with provisional sequestration. In terms of that section, a court will grant a
provisional sequestration order if there is reason to believe that it will be to the advantage
of creditors if his estate is sequestrated.142 Finally, the advantage to creditors’
requirement is also provided for in section 12 of the Insolvency Act, which states that a
court will grant a final sequestration order if there is reason to believe that it will be to the
advantage of creditors of the debtor if his estate is sequestrated.143

It is submitted that it cannot be a mere coincidence that the Insolvency Act mentions the
advantage to creditors’ requirement three times in three places. The repetition of the exact
same wording goes to amplify the seriousness of the lawmakers in requiring advantage
to creditors in sequestration proceedings. The courts have also done a great deal of
religiously applying and enforcing the advantage requirement in sequestration
proceedings.144

3.3 Effect on consumer debt relief

In voluntary surrender applications, a greater onus of proof is placed on the debtor to
prove that the surrender of his estate will be to the advantage of creditors.145 The burden
of discharging this onus coupled with other formalities results in sequestration as a whole

142 S 10(c) Insolvency Act.

143 S 12(c) Insolvency Act.
144 See Ex Parte Pillay: Mayet v Pillay 1955(2) SA 309 (N) 311. See also Amod v Khan 1974 2 SA 432
(N) 438 where Hathorn JP stated that “a debtor knows all about his own affairs and can easily prove
advantage to creditors.”
145 S 6(1) Insolvency Act.

29
not being a viable option for debt relief for the harassed debtor.146 The debtor has to prove
actual advantage.147

The South African Law Reform Commission148 submits that the advantage to creditors’
requirement causes difficulties to overburdened debtors in proving such advantage. The
advantage to creditors requirement therefore aggravates the burden which consumers
already have in fulfilling other requirements for sequestration.

According to Smith,149 “there is a recurrent motif or dominant thread (if thread is used in
the sense of something that runs a continuous course through anything) and that is the
advantage to creditors, not one creditor, or some creditors but the creditors as an entity
or the concursus creditorium.” Notwithstanding the trouble that debtors face in proving
advantage in sequestration proceedings, the Insolvency Act is replete with other subtle
advantage to creditors requirements which, although not specifically mentioned, are
designed to benefit creditors.150 For example, the provision that an insolvent spouse
whose separate estate has not been sequestrated must deliver his business records and
lodge a statement of affairs with the master. 151 It is therefore clear that this provision made
to cater for voidable dispositions and ultimately be to the advantage of creditors.

Section 19 of the Act deals with the attachment of property by a deputy sheriff. Although
the provision does not specifically state that it is for the benefit of creditors, when read in
context of the Act as a whole, it becomes apparent that the attachment of books of
accounts, invoices, vouchers, cash, share certificates, bonds, bills of exchange,
promissory notes and other securities152 is actually for the benefit of creditors.

146 Ex Parte Swanepoel 1975(2) SA 367.

147 Boraine et al ‘The Pro Creditor Approach in South African Insolvency Law and the possible impact of
the Constitution’ 2015 NIBLeJ 79.
148 See Explanatory memorandum 46-47.
149 Smith ‘The Recurrent Motif of Insolvency Act – advantage of creditors’ 1985 MBL 28.
150 Ibid.
151 See s 16 of the Insolvency Act.
152 S 19(1)(a) of the Insolvency Act.

30
Similarly, section 20 which deals with the effects of sequestration on an insolvent’s
property is also without doubt an advantage to creditors’ provision. It states that an
insolvent’s estate shall divest from the insolvent and shall vest in the master153 and also
orders a stay of proceedings which may have been instituted against the insolvent.154
Another provision which speaks to the benefit for creditors is found in section 26. It
provides for the setting aside by the court of dispositions made without value by the debtor
if it was made within two and half years of the sequestration.155 There are other numerous
provisions156 in the Act which speak to the benefit for creditors. These all point out to the
fact that the advantage to creditors’ requirement is indeed central to the Insolvency Act in
more places than where it was specifically spelt out.157

3.4 Impact on law reform

The advantage to creditors requirement causes inequality in the treatment of debtors.158
Many debtors are left without statutory relief in the form of statutory a discharge. The
exclusion of many overburdened consumer debtors from a discharge procedure infringes
their basic constitutional right to equality under the South African Constitution.159

The advantage requirement is a major limitation for law reform in natural person
insolvency law. The heavy burden of proof required from applicants in sequestration
proceedings makes it difficult for many debtors to succeed in obtaining a sequestration
order.160 The advantage requirement has, as such, led to desperation among debtors and
it can be argued that it is one of the reasons why the phenomenon of friendly
sequestration arose. When considering friendly sequestrations, it is obvious that all other
formalities for sequestration are met except for the one requirement which is the
advantage to creditors’ requirement.

153 S 20 of the Insolvency Act.

154 S 20(1)(b) of the Insolvency Act.
155 S 26 (10 (b) of the Insolvency Act.
156 See ss 29, S30, S31, S65, S115, S152 of the Insolvency Act.
157 Smith 1985 MBL 84.
158 Harksen v Lane 1998 (1) SA 300 CC.
159 Boraine et al 2015 NIBLeJ 91.
160 South African Law Commission Project 63 Review of the Law of insolvency 41.

31
3.5 Conclusion
Roestoff and Coetzee161 submit that sequestration is an expensive process and should
only be resorted to when it is cost effective do so. Sequestration is an expensive
procedure to follow as it involves a costly High court process and costly administrative
procedure. Unlike all other formalities which are easy to comply with and prove, the
advantage to creditors’ requirement is difficult to prove and most debtors fail to satisfy this
requirement as it has to do with proving liquidity.

Boraine et al162 refer to the insolvency Act as “antiquated” which in simple terms means
old fashioned and outdated. One could not agree any less since the Insolvency Act is the
main statutory instrument dealing with natural person debtors. Real change will have to
start with the amendment of this crucial piece of legislation specifically the relaxation of
the advantage requirement in sequestration proceedings.

The South African Commission in the Draft Insolvency Bill163 has retained the advantage
to creditors’ requirement, meaning the same challenges of a daunting onus of proving
advantage in sequestration proceedings will continue to confront over-indebted debtors.
The advantage requirement is an obstacle to accessing the formal sequestration
procedure and statutory discharge from debt. It also hinders law reform.

Finally, it can be seen from the above that the advantage to creditors’ requirement is not
only essential to sequestration order proceedings, but it changes the outlook and
application of the Insolvency Act as a whole. From a debt relief perspective, the
Insolvency Act would be the wrong instrument for over indebted debtors as it was clearly
crafted to protect the interest of creditors.

161 Reostoff & Coetzee 2012 SA Merc LJ 59.

162 Boraine et al 2015 NIBLeJ 89.
163 Cl 7(1)(b) and 8(1)(c) of the Insolvency Bill 2015.

32
CHAPTER 4:

INTERNATIONAL TRENDS IN CONSUMER INSOLVENCY

SUMMARY

4.1 Introduction
4.2 Australia
4.3 United States of America
4.4 Conclusion

4.1 Introduction
Insolvency is an ever-evolving practice and regulation of natural person insolvency is in
the best interest of every economy and society. 164 The stringency of policy and regulation
of insolvency often has socio economic effects.165 This chapter will look at the trends in
Australia and the United States of America where natural person insolvency is referred to
as bankruptcy. Comparisons will be drawn with the South African system particularly with
regards to access requirements for formal insolvency procedure in the selected
jurisdictions.

4.2 Australia
The Australian bankruptcy regime entails a legal process enabling debtors with
unmanageable debt to obtain a release from their obligations and start afresh after a
period of three years.166 Providing debtors with the chance to start afresh is popularly
regarded as one of the key objectives of bankruptcy legislation.167 Accordingly, there are

164 World Bank Principles for Effective Insolvency and Creditor Rights System (2001).
165 Calitz “Some thoughts on state regulation of South African Insolvency Law” 2011 De Jure 310.
166 Ali et al “The Incidence and causes of personal bankruptcy in Australia” 2016 JASSA FJAF 27.
167 Howell “The fresh start goal of the Bankruptcy Act: Giving a temporary reprieve or facilitating debtor
rehabilitation?” 2014 QUT LR 29.

33
a number of references in legal, policy and political documents that support the existence
of a fresh start goal for the Australian Bankruptcy Act 1966.168 In particular, debt discharge
is an integral element of the Australian bankruptcy law idea of the fresh start.169 More
specifically, section 153 of the Bankruptcy Act provides that from the date of the
conclusion of or discharge from their bankruptcy, the debtor is ‘discharged’ or released
from their contractual obligations to pay the debts proved in the bankruptcy.170

Under the Australian bankruptcy regime, a debtor can enter into voluntary bankruptcy
which is also called a debtor’s petition.171 By lodging a debtor’s petition with the regulator,
Australian Financial Security Authority (AFSA), a debtor can initiate his or her bankruptcy
without seeking the consent of creditors of the approval of a court.172 The requirements
for a debtor to file for bankruptcy are firstly, that the debtor must show that he is not able
to pay his debts when they are due173. Secondly, the debtor must be present in Australia
or have a residential or business connection to Australia. 174 Once a debtor can satisfy
these formalities, he becomes a candidate for bankruptcy proceedings.175

Alternatively, when a creditor is unable to recover a debt of more than $5000 or more,
they can file a petition for the liquidation of a debtor.176 The court may then appoint a
trustee to manage the assets of the debtor and the court will grant an order for bankruptcy
which is similar to a sequestration order.177 However, before such order can be made, the
court must be satisfied that the debtor has committed an ‘act of bankruptcy’ such as failing
to pay a debt or travelling with an intention to evade creditors.178

168 Bankruptcy Act 1966 (CTH). See also Howell 2014 QUT LR 30.
169 Howell 2014 QUT LR 35.
170 S 153 of the Bankruptcy Act.
171 S 55 of the Bankruptcy Act.
172 O’Brien et al “More to lose: The Attributes of Involuntary bankruptcy” 2019 EP 16.
173 The debtor must have committed an Act of Bankruptcy in terms of s 41 of the Bankruptcy Act.
174 S 43(1)(i) of the Bankruptcy Act.
175 S 43 of the Bankruptcy Act.
176 Ss 43 and 44 of the Bankruptcy Act.
177 S19 of the Bankruptcy Act.
178 S 40 of the bankruptcy Act. See also O’Brien 2019 EP 16.

34
When compared with access requirements for sequestration in the South African context,
The Australian system is debtor friendly. The formalities for accessing formal insolvency
measures are less stringent. There is no requirement for advantage to creditors when
applying for bankruptcy. In the South African context on the other hand the advantage to
creditors’ requirement poses the greatest challenge to debtors who desire to access
formal insolvency procedures.179

In the 2018 the Australian Bankruptcy Act saw a significant amendment which favours
debtors when the Bankruptcy Amendment Bill180 was passed into law. Part 23 thereof
reads ‘that an Official Receiver can refuse a debt agreement proposal for processing if
the Official Receiver reasonably believes that complying with the debt agreement would
cause undue hardship to the debtor.’ The amendment goes to show the consideration
that Australian lawmakers had towards debtors.

Bankruptcy in the Australian context last for a period of 3 years181 and discharges the
debtor from all debts. The debtor becomes automatically rehabilitated a day after the
expiry of the 3-year period,182 whereas in South Africa rehabilitation will only take effect
after a period of 10 years.183 The American legislative system overall does not require the
advantage to creditors as is the case in South Africa.

4.3 United States of America

The American Bankruptcy Code184 regulates natural person insolvency in the United
States of America.185 In Local Loan Co v Hunt,186 the United States Supreme Court held
that one of the primary purposes of the Bankruptcy Act was that “it gives to the honest
but unfortunate debtor who surrenders for distribution the property which he owns at the

179 See chapter 3, para 3.3.

180 Bankruptcy Amendment Bill 2018.
181 S149 of the Bankruptcy Act.
182 S149 of the Bankruptcy Act.
183 S127A of the Insolvency Act.
184 Bankruptcy Reform Act of 1978.
185 Bankruptcy Reform Act of 1978- Title 11, 11 and 13 of United States Code. Generally Known as the
Bankruptcy Code or Code.
186 292 US 234, 244 (1934).

35
time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered
by the pressure and discouragement of pre-existing debts.”

Chapter 7 of the Bankruptcy Code is entitled ‘liquidations’ and contemplates an orderly,

court-supervised procedure.187 Under Chapter 7 proceedings, a truste e is appointed by
the court to collect non-exempt asserts from the debtor and distributes them to the
creditors.188 For a debtor to qualify for chapter 7 he has to own property, run a business
or reside in the United States of America as well as show an inability to pay off debts or
pass a means test.189 Filing for Bankruptcy under chapter 7 has the result that it
discharges the debtor of all debts and gives the debtor a fresh start.190

Alternatively, chapter 13 provides another method of applying for bankruptcy which

consists of a payment plan between the debtor and the creditor. 191 It usually applies to
large debts such as mortgage bonds.

The requirements for chapter 13 applications are that the application must be made in
good faith, the plan must also meet the “best interest” of creditors test and the debtor
must satisfy the best efforts test which requires that unsecured creditors be paid a certain
amount.192

4.4 Conclusion
As seen from the above overview, the American Bankruptcy system is debtor friendly,
especially when one looks at chapter 7. It is clear that the requirements for access to
statutory debt relief are less stringent. As a result, more debtors file for bankruptcy and
are discharged of their debts. They obtain a fresh start without much harm to their socio-

187 Kanamugire “The Requirement of Advantage to creditors in South African Insolvency Law – A critical
Appraisal” 2013 MJSS 31.
188 S701-704 of the Bankruptcy Code.
189 S109 of the Bankruptcy Code.
190 S727 of the Bankruptcy Code.
191 S1325 of the Bankruptcy Code.
192 Ibid.

36
economic standing. In South Africa on the other hand, due to the advantage to creditors’
requirement, most debtors are not able to access statutory relief.

The chapter also revealed that Chapter 13 of the US Code now incorporates a
requirement for “best interest for creditors”. Although worded as such, in practice the
requirement is less stringent than the South African requirement for advantage to
creditors. This is because a debtor in the United States does not have to show substantive
evidence to be declared bankrupt filing a petition.

The research further indicated that the Australian system is debtor friendly and access to
formal statutory Bankruptcy is easy for debtors. The system also provides a shorter period
of 3 years before a debtor can be rehabilitated.

South African natural person insolvency could be greatly enhanced if lawmakers could
repeal the advantage requirement for access to sequestration proceedings. A look at the
Australian and the American reveal that these systems place value on assisting the debtor
to obtain a fresh start than in enforcing payment of debts.

37
CHAPTER 5

CONCLUSION

SUMMARY

5.1 Introduction
5.2 Recommendations

5.1 Conclusion

The main objectives of this research were: to evaluate the natural person insolvency
system as a whole, with particular attention to sequestration, debt review and
administration; to specifically evaluate the advantage to creditors’ requirement and
whether it should be retained; to compare the advantage to creditors requirement in South
Africa with international trends as regards access requirements in Europe and the United
States of America; and to look at international guidelines specifically on access to formal
sequestration or debt relief measures.193

In this regard, the research discussed the sequestration as a process that provides for a
procedure to sequestrate an insolvent debtor’s estate.194 In particular, the research
revealed that in South Africa, the process of sequestration takes three forms namely:
voluntary surrender,195 compulsory sequestration196 and friendly sequestration.197 Under
voluntary surrender, a debtor who wishes to surrender his estate may do so by publishing
a notice of surrender in the government gazette and in the newspaper circulating in the

193 Chapter 1, para 1.1.

194 Chapter 1, para 1.1.
195 Chapter 2, para 2.2.1.
196 Chapter 2, para 2.2.2.
197 Chapter 2, para 2.2.3.

38
district in which he resides, or in which his principle place of business is located.198
However, the court can only surrender such estate where the debtor has proved that their
liabilities exceed their assets, that they have sufficient assets in the free residue to defray
the costs of the sequestration and that the sequestration will be to the advantage of the
creditors.199

Moreover, as observed from the above discussion, compulsory sequestration is another

way in which a debtor’s estate may be sequestrated.200 This process is initiated by
creditors.201 Then there is a friendly sequestration where a debtor’s estate is sequestrated
by an amicable creditor.202 This process is not explicitly provided for by the Insolvency
Act but it has been developed in practice. Central to the process of sequestration is the
requirement for advantage to creditors which entails that the sequestration of a debtor’s
estate should be to the advantage of creditors. 203 As discussed above, the advantage to
creditors requirement is a crucial determination in granting an order of sequestration by
the courts.204

In Ex Parte Ogunlaja,205 the court stated that “unless and until the Insolvency Act is
amended, the South African insolvency law requires that advantage to creditors be met
before the estate of an individual can be sequestrated.” The court went further to stipulate
that as much as the troubled economic times might have engendered sympathy for
debtors whose financial burden became too much to bear, the aim of the insolvency law
is to protect the interests of creditors to the extent that a minimum advantage is ensured
for the concurrent creditor when the hand of the law is laid on the insolvent estate.206This
was the remark by Bertelsmann J, with regards to the advantage to creditors in the
Insolvency Act.

198 Chapter 2, para 2.2.1.

199 Ibid.
200 Chapter 2, para 2.2.2.
201 Ibid.
202 Chapter 2, para 2.2.3.
203 See Chapter 3 for a comprehensive discussion of this requirement.
204 Chapter 1, para 1.1.
205 Ex Parte Ogunlaja [2011] JOL 27129.
206 Ibid.

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According to Boraine,207 several insolvency authorities agree with the court’s assertion
and I also agree. The advantage to creditors’ requirement plays a pivotal role in the
exercise of the court’s discretion in sequestration applications.208 It is on this basis that a
court will, more often than not, decline to accept a voluntary surrender application or grant
an order for the compulsory sequestration of an estate even though all the other
requirements for the granting of a sequestration order have been satisfied.209

Based on the above assertion, it is clear that the courts’ discretion as far as sequestration
proceedings are concerned is guided by the Insolvency Act. Therefore, it is submitted that
this is a double jeopardy for the debtor as he cannot easily obtain recourse from both the
statute and the courts. Boraine et al further submit that as a result of the advantage to
creditors’ requirement in the Act, courts have a tendency of being extremely
unsympathetic to debtors.210

Apart from sequestration, the research revealed that there are alternative measures for
insolvent debtors under the insolvency law and those are rehabilitation,211
administration,212 debt review213 and the recently established debt intervention.214 As
discussed, rehabilitation allows the insolvent to make a fresh start, free from his pre
sequestration debts.215 According to the Insolvency Act, rehabilitation put an end to the
sequestration process and relieves the insolvent of every disability resulting from
sequestration as well as discharges all his debts, which were due or the cause of which
arose before sequestration.216

207 Boraine et al 2015 NIBLeJ 78.

208 Ibid.
209 Ibid.
210 Ibid.
211 Chapter 2, para 2.2.4.
212 Chapter 2, para 2.4.
213 Chapter 2, para 2.3.
214 Chapter 2, para 2.6.
215 Chapter 2, para 2.2.4.
216 Ibid.

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The research also discussed debt review as an alternative to sequestration.217 As alluded,
a debt relief process allows a consumer to apply to a debt counsellor to be declared over
indebted.218 However, as discussed, debt review offers temporary relief to over indebted
debtor.219 Furthermore, the research discussed administration order which basically
involves a relatively simple and inexpensive procedure whereby the Magistrate’s court
reschedules overcommitted debtor’s obligations.220 However, as seen from the
discussion, the courts do not view the administration order procedure as a debt relief
mechanism, but rather as a way for a debtor to obtain a temporary moratorium, which if
the debtor fails to pay off the debt in full they may still be sequestrated.221

Last but not least, the research discussed the newly implemented debt intervention
process which was introduced by the National Credit Amendment Act. 222 This process
was introduced as a measure to assist identified consumers for whom existing natural
person insolvency measures are not accessible in practice.223 It remains to be seen
whether this newly implemented measure will indeed deliver on its objectives or not.

As stated in the objectives of this study, a comparative study of Australia was undertaken.
The study revealed that the Australian system is debtor friendly and therefore, the
formalities for accessing formal insolvency measures are less rigorous.224 This means
that there is no burden placed on the debtor when applying for bankruptcy. 225 Another
comparative study was carried out on the United States of America, which study revealed
that Chapter 13 of the US Bankruptcy Code now incorporates a requirement for “best
interest for creditors”.226 However, unlike in South Africa, a debtor in the United States
does not have to show substantive evidence to be declared bankrupt.227

217 Chapter 2, para 2.3.

218 Ibid.
219 Ibid.
220 Chapter 2, para 2.4.
221 Ibid.
222 Chapter 2, para 2.6.
223 Ibid.
224 Chapter 4, para 4.2.
225 Ibid.
226 Chapter 4, para 4.3.
227 Ibid.

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As seen from the discussion, despite the alternative debt relief measures being available
in the South African natural person insolvency framework, administration and debt review
procedures do not provide any discharge from debt.228 It is only sequestration that
provides a discharge through rehabilitation. However, proof of advantage to creditors is
required.229 The advantage to creditors’ requirement has survived several amendments
to the Insolvency Act despite most academics suggesting that it should be repealed.230
The South African Law Reform Commission in its proposed Insolvency Bill,231 has also
retained the advantage to creditors requirement. That being said it would be safe to
conclude that the Insolvency Act was not intended as a debt relief measure and debtors
who require a discharge do not really have recourse in the Insolvency Act.

5.2 Recommendations
There is urgent need for insolvency law reform in South Africa, particularly in respect of
the Insolvency Act. The Insolvency Act has become archaic and Boraine et al232 refer to
it as antiquated. When considered in light of the South African Constitution and the Bill of
Rights, the Insolvency Act is outdated. This is largely because it was enacted before the
advent of the Constitution.233

In this regard, it is submitted that a unified Insolvency Act could go a long way in the
regulation of natural person insolvency. Currently there are several legislative
instruments234 which seem to cause conflict with the interpretation and application of the
Insolvency Act. It is submitted, therefore, that having a unified Insolvency Act would
reduce the need for numerous amendments and supplementary legislation.

228 Boraine et al 2015 NIBLeJ 78.

229 Ibid.
230 Boraine et al 2015 NIBLeJ 88.
231 Draft Insolvency Bill and explanatory memorandum by the South African Law Reform
Commission, entitled The review of the Law of Insolvency; Draft Insolvency Bill and explanatory
memorandum working paper 66, Project 63.
232 Boraine et al 2015 NIBLeJ 89.
233 Boraine et al 2015 NIBLeJ 61.
234 Insurance Act 27 of 1943, The Long-term Insurance Act 52 of 1998.

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It is also submitted that there is an urgent need for adoption of the proposed amendments
into law to prevent prejudice of debtors. For instance, the proposed Draft Insolvency Bill
by the South African Law Reform Commission was first mooted in 2000. However, nine
years later it still has not been passed and some of the propositions contained therein are
already in need of amendments because of the constantly changing consumer trends.

Lastly, I recommend that law makers consider international trends in insolvency. As much
as South African Insolvency law has its foundations in the Anglo-American system, it is
of uttermost importance that it remains abreast with the developments in those
jurisdictions to avoid a situation where the law is out of touch with reality as most
consumer trends are constantly evolving.

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BIBLIOGRAPHY
BOOKS
Bertelsmann et al
Bertelsmann E, Evans R, Harris A, Kelly-Louw N, Loubster A, Roestoff M, Smith A,
Stander L & Steyn L. 2019 Mars: The law of Insolvency in South Africa (10th edition) Cape
Town: Juta 919 pages.
Kelly-Louw et al
Kelly-Louw M., Nehf JP & Rott P. 2008. The Future of Consumer Credit Regulation:
Creative Approaches to Emerging Problems: Markets and the Law. Ashgate Publishing
Ltd. 238 pages.

JOURNAL ARTICLES
Ali et al
Ali P., Anderson M., O’Brien L & Ramsay I. 2016. The Incidence and causes of personal
bankruptcy in Australia. JASSA FJAF, Issue 4, pages 27-35.
Boraine et al
Boraine A, Evans RG, Roestoff M and Steyn. 2015. The Pro Creditor Approach in South
African Insolvency Law and the Possible Impact of the Constitution. NIBLeJ, pages 59-
92.
Calitz
Calitz J. 2011. Some thoughts on state regulation of South African Insolvency law. De
Jure pages 290-318.
Coetzee
Coetzee H. 2016. ‘Does the proposed pre-liquidation composition proffer a solution to the
No Income No Asset (NINA) debtor’s quandary and if not, what would? THRHR, Volume
79, pages 18-43.
Davis
Davis. 2000. Step-by-Step Voluntary Surrender: Application for the voluntary surrender
of a debtor’s estate. De Rebus, Volume 2000, Issue 390, pages 34-37.
Evans

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Evans RG. 2001. Friendly Sequestrations, the Abuse of the Process of court, and
Possible Solutions for Overburdened Debtors. SA Merc LJ, Volume 13, page 485.
Howell
Howell N. 2014. The fresh start goal of the Bankruptcy Act: Giving a temporary reprieve
or facilitating debtor rehabilitation? QUT LR, Volume 14, No 3, pages 29-52.
Kanamugire
Kanamugire JC. 2013. The Requirement of Advantage to creditors in South African
Insolvency Law – A critical Appraisal. MJSS, Volume 4, Issue 13, pages 19-35.
Mabe
Mabe Z. 2019. Alternatives to Bankruptcy in South Africa That Provides for a Discharge
of Debts: Lessons from Kenya. PER, Volume 22, pages 1-34.
O’Brien et al
O’Brien L., Anderson M., Ramsay I. and Ali P. 2019. More to lose: The Attributes of
Involuntary bankruptcy. EP, Volume 38, No 1, pages 15-26.
Roestoff & Boraine
Roestoff M & Boraine A. 2013. Body Corporate Palm Lane v Masinge: Discretion and
powers of the court in applications for sequestration. De Jure pages 206-226.
Roestoff & Coetzee
Roestoff M and Coetzee H. 2012. Debt Relief for South African NINA debtors and what
can be learned from the European approach” CILJSA, pages 251-274.
Roestoff et al
Roestoff M, Haupt F & Coetzee H. 2009. The Debt Counselling Process – Closing the
Loopholes in the national Credit Act 34 of 2005. PER, Volume 12, Issue 4, pages 247-
306.
Smith
Smith CH. [Link] Recurrent Motif of Insolvency Act – advantage of creditors. MBL,
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Visser
Visser “Romeinsregtelike Aanknopings-punte van die Sekwestrasieproses in the Suid-
Afrikaanse Insovensiereg” 1989 De Jure 41.

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LEGISLATION
Constitution of the Republic of South Africa Act 108 of 1996
Draft Insolvency Bill 2015
Insolvency Act 24 of 1936 Insolvency Bill 2015
Insurance Act 27 of 1943
Long-term Insurance Act 52 of 1998
National Credit Act 34 of 2005
National Credit Amendment Act 7 of 2019
Magistrates Courts Act 32 of 1944
National Credit Amendment Bill 30 of 2018
Unified Insolvency Act of 2003
Bankruptcy Act of 1966 (CTH).
Bankruptcy Amendment Bill 2018
Bankruptcy Reform Act of 1978

CASELAW
African Bank Ltd v Weiner 051/2004
Amod v Khan 1947 (2) SA 432 (N)
Bafana Finance Mabopane v Mokwakwa 2006 (4) SA 581 (SCA)
Braithwaite v Gilbert 1984 SA 717 (W)
Ex Parte Harmse 2004 1 ALL SA 626 (N)
Ex Parte Matthysen et Uxo 2003 2 SA 308 (T)
Ex Parte Ford 2009 3 SA 376 (WCC)
Ex Parte Ogunlaja 2001JOL 27023 (GNP)
Ex Parte Pillay: Mayet v Pillay 1955 2 SA 309 (N) 311
Ex Parte Swanepoel 1975 2 SA 367
Gardee v Dharmanta Holdings and Others 1978 (1) SA 1066 (N) 1068-7
Harksen v Lane and Others 1997 11 BCLR1489(CC)
Jhatam v Jhatam 1958 4 SA 36 (N)
Local Loan Co v Hunt 292 US 234, 244 (1934)
London Estates (Pty) Ltd v Nair 1957 (3) SA 591 (N).

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Meskin and Co v Friedman 1948 2 SA 555 (W)
Peyke v Nathoo 1929 50 NLR 178
Trust Wholesalers and Woolens (Pty) Ltd v Mackan 1954 2 SA 109 (N)
Van Rooyen v Van Rooyen (Automutual Investments (EC) (Pty) Ltd, Intervening creditor
(2002) (1) SA 689 (C)
Walker v Syfret NO 1911 AD 141

REPORTS
South African Law Reform Commission, Project 63 Review of the Law of Insolvency: Draft
Bill and explanatory memorandum Working Paper 66 (1996).
World Bank Principles for Effective Insolvency and Creditor Rights System (2001).

THESIS AND DISSERTATION

Coetzee H A comparative reappraisal of debt relief measures for natural person debtors
in South Africa (LLD Thesis 2015 University of Pretoria).

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