INS311

2023
This Photo by Unknown Author is licensed under CC BY-SA

WEEK 4
Compulsory
sequestration
Professor Michel Koekemoer
 TOPICS FOR THIS WEEK
Requirements for the granting of compulsory sequestration.

Types of acts of insolvency.

Actual insolvency.

Petition for sequestration of estate: section 9

The granting/refusal of the application of compulsory sequestration

Provisional sequestration
Service of rule nisi. sequestration or dismissal of application for sequestration.
Applying creditor to prosecute sequestration proceedings until trustee appointed.

Setting aside and appeal procedures (self-study: see Hockly’s pages 28, 52-53)

Friendly sequestration (if we have time during the lecture).

 OUTCOMES FOR THIS WEEK
Name and apply to a case scenario the requirements for
the compulsory sequestration of the debtor’s estate.
Explain the type of claim a creditor must have to apply for
compulsory sequestration.
Name the types of act of insolvency and apply the element
of each to a case scenario.
Explain what is understood under the requirement of
“advantage of creditors” and apply your understanding to a
case scenario.
 OUTCOMES FOR THIS WEEK
Describe the form and content for an application for compulsory
sequestration.
Concerning an application for compulsory sequestration, explain what
the difference in onus of proof is with respect to a provisional order and
a final order for sequestration.
Explain what discretion the court has in respect of applications for
compulsory sequestration with reference to relevant case law.
Briefly explain the concept of friendly sequestration, and form an
opinion on whether such a process should be allowed by courts.
Discuss when an appeal against a sequestration order will be possible.
 Methods of sequestration
of a debtor’s estate
Voluntary surrender (topic for week 3)
– The debtor (or his agent) applies to the court for the acceptance of the surrender of his estate.
– Requirements were: FAIR for the debtor to apply for voluntary surrender.
1. The preliminary formalities were complied with (section 4).
2. The sequestration will be to the advantage of the creditors.
3. The debtor’s estate is insolvent.
4. The debtor owns realizable property, which if sold will be sufficient to pay the
costs of sequestration.

Compulsory sequestration (topic for week 4)

– A creditor or creditors (or his or their agents) apply for the sequestration of the
debtor’s estate.
– This will also include the concept of friendly sequestration.
 Requirements for the sequestration of the
debtor’s estate

The applicant (creditor or the authorised agent) must prove he

has a certain type of claim against the debtor. See section
9(1).
The debtor either committed an act of insolvency or is
insolvent
There is reason to believe that the sequestration will be to the
advantage of the creditors. See section 12(1).
CAR which will be sold during compulsory sequestration.
The onus to prove the above rests on the sequestrating
creditor. There is no onus on the debtor to disprove any of the
above.
 Requirements for the sequestration of
the debtor’s estate

There is a new requirement from 7 March 2020 concerning

referral of the dispute to court annexed mediation. See Hockley,
10th ed at 42.
It is a voluntary process which takes place.
Uniform Rules of Court:
– Rule 41A(2)(a)
– According to this rule with every new action or application proceeding, “the plaintiff or
applicant shall, together with the summons or combined summons or notice of motion,
serve on each defendant or respondent a notice indicating whether such plaintiff or
applicant agrees to or opposes referral of the dispute to mediation”
See what legal practice is saying about such mediation:

https://www.cliffedekkerhofmeyr.com/en/news/publications/2022/Practice/Dispute/d
ispute-resolution-alert-22-february-ignore-mediation-at-your-own-peril-rule-41a-rec
 Requirements for the sequestration of the debtor’s
estate
Type of claim:
Monetary value and it must be a liquidated claim.
Min of R100 if it is 1 creditor, and min of R200 in aggregate with 2 or
more creditors;
What is a liquidated claim?
– Monetary claim.
– Excludes debt which is disputed. The amount due is fixed or determined. It
cannot be subject to an uncertain future event. Crux: certainty of the amount.
– Section 9(2):a liquidated claim which accrued but is not due yet when the
application is heard, is regarded as a liquidated claim.
• Unless the creditor agreed that he will not institute proceedings or wait to sue until
a specified time.
 Requirements for the sequestration of the debtor’s
estate
Acts of insolvency
Why is this included in the Insolvency Act?
Does this mean that the debtor can technically
be solvent, but have his estate sequestrated?
The act can be committed against any creditor.
For example, it could have formed part of
privileged communication.
There are 8 acts of insolvency to remember.
 Requirements for the sequestration of the debtor’s
estate
Act of insolvency or being insolvent
1. Absence from Republic or dwelling. S8(a)
2. Failure to satisfy judgment. S8(b)
3. Disposition prejudicing creditors or preferring one creditor above another.S8(c)
4. Removal of property with intent to prejudice or prefer.S8(d)
5. Makes an arrangement or an offer of arrangement.S8(e)
6. Failure to apply for voluntary surrender.S8(f)
7. Notice of inability to pay.S8(g)
8. Inability to pay debts after notice of transfer of business.S8(h).
DRAFT VIA acts This Photo by Unknown Author is licensed under CC BY

See section 8A. A debtor who has applied for a debt review must not be
regarded as having committed an act of insolvency.
 Requirements for the sequestration of the debtor’s
estate

Act of insolvency or being insolvent This Photo by Unknown Author is licensed under CC BY-SA-NC

Absence from Republic or dwelling. Section 8(a)

In terms of s8(a) if he leaves the Republic; or if he is already out of the Republic, he
remains absent (stays away); or departs from his dwelling or otherwise absents
himself (ie stays in SA but leaves his house and tries to get away/hide from the
creditors), but in any scenario, absents himself with the intention of evading or
delaying the payment of his debts.
 The absence of a person
– Leaving the South Africa, or a persons remains absent if already out of the country.
– Departs from his dwelling (for example, moves to another town).
 But with a specific intention.
 Practically how would you prove this?
– For example, where the debtor withdraw large sums out of his account before leaving the
country or where the debtor started to sell many of its valuable assets.
 Requirements for the sequestration of the debtor’s
estate
Act of insolvency or being insolvent
Non-satisfaction of a warrant (writ) of execution.Section 8(b)
“If a court has given judgement against a debtor and he fails upon demand of the
sheriff to execute the judgement, to satisfy it or to indicate to the sheriff disposable
property sufficient to satisfy it; or it appears by return of service made by the
officer(sheriff) that he has not found sufficient disposable property to satisfy the
judgement”.
The warrant is served personally on the debtor (no specification of where), and
the debtor has an opportunity to pay the debt (satisfy the judgement). If the
debtor fails to pay or the sheriff cannot find the debtor and has a nullla bona
return of service:
Or, the debtor indicates (point out) to the sheriff enough of his assets which, if
sold in execution, would cover the judgement debt (disposable property).
– If he fails, he commits an act of insolvency.
 Requirements for the sequestration of the debtor’s
estate
Section 8(c): Prejudice or prefer a creditor(s) above another
When a debtor prejudices one or some of the creditors or prefers one or
some of the creditors.
An act of insolvency will be committed if: the debtor makes OR attempts
to make any disposition of any of his property which has, or would have,
the effect of prejudicing his creditors or preferring one creditor above
another. There are specific requirements for ‘disposition’.
It is:
 the act of disposing of assets for example by selling them or donating them, etc
 includes actual disposing of property/assets and any attempted disposing of
property/assets.
– Signing a contract to sell your property would also qualify. This Photo by Unknown Author is
licensed under CC BY-NC-ND
 Requirements for the sequestration of the debtor’s
estate
Section 8(c) continued:
The disposition must have been made at the time the estate was already insolvent (so this
now makes the estate ‘more insolvent’) OR the disposition itself must have rendered the
estate insolvent (following the disposition, the estate becomes insolvent).

What is relevant here?:

The EFFECT of the disposition that is relevant. It is an objective test, so
we are not interested in the subjective intent of the debtor, when he
made the disposition.
If there was an attempt: the effect that the disposition would have had,
had it taken place.
 Nature of the creditors claim who can apply
Section 8(d). A debtor removes or attempts to remove any of his
property with intent to prejudice his creditors or prefer one creditor
above another.

The distinction is that it is about the removal (the debtor still

owns it) not actual disposition.
The debtor must have removed the property with the intention of
prejudicing or preferring creditors above another.
–A subjective factor (ie the thoughts in the debtor’s mind)
–How to know what the intention was? It is difficult to ascertain so his
intention must be inferred by looking at the circumstances surrounding
the removal.
This Photo by Unknown Author is licensed under CC BY-SA
 Act of insolvency
Section 8(e): the debtor makes an arrangement or
offers to make an arrangement with any of his
creditors for releasing him wholly or in part from his
debts.
There are two elements present:
In the arrangement or offer, the debtor admits liability to the full
amount of the debt AND
the arrangement must indicate that the debtor is unable to pay the
debts from which he seeks to be released (even if this is not done
expressly but tacitly).
 Act of insolvency
Section 8(f).Failure to apply for surrender
Three acts of insolvency are embodied in s8(f):
The debtor fails to comply with s4(3) which requires him to lodge a
statement of affairs with the Master
The debtor lodges his statement of affairs with the Master, but the
statement of affairs is incomplete or incorrect in a material
respect. Test for material? EFFECT it would have on creditors.
– Preference or prejudice resulting from the incomplete or incorrect
content.
The debtor fails to make an application to the court for the
voluntary surrender of his estate on the date that indicated in the
notice of surrender.
 Act of insolvency
Section 8(g)
The debtor gives notice in writing (not orally) to any one of
his creditors that he is unable to pay any of his debts (can
be a single debt).
Consider the interaction with the debt review.
Objective test:
Whether a reasonable person in the position of the creditor, having the same knowledge
of the relevant circumstances, would have interpreted (understood) the notice (words) to
mean that the debtor cannot pay his debts? See Court v Bester 1995 (3) SA 123 (A).
So, if a reasonable person in the position of the creditor, being aware of the same
circumstances, would have interpreted the notice to mean that the debtor cannot pay,
then the notice would amount to an act of insolvency.
Also, it is not that he is unwilling, but he must be unable to pay his debts.
 Act of insolvency
Section 8(h): Trader notice of transfer of business
The debtor is a trader and he gives notice in the Government
Gazette in accordance with section 34(1) of his intention to transfer
his business and is thereafter unable to pay all his debts.
Specific consequence when this notice is published:
 According to s34(2) as soon as the notice is published, every liquidated liability (ie debt sounding in a
fixed amount of money) of the trader in connection to the business which becomes due at some
future date shall fall due immediately, if the creditor concerned demands such payment of the debt.
 Thus, a trader who publishes a notice that he intends to transfer his business, a creditor can demand
payment of a future debt, due to the implication of s34(2). The trader is unable to pay these debts
now as a result.
 Act of insolvency
Practical discussion:
During your tutorial you are going to get case scenarios and you must
match which acts of insolvency in each instance. You only learn if you do
this practically.

Things to remember when you answer a question concerning act of

insolvency:
 There are many to remember, each with its own elements. DRAFT VIA acts

 Consider the role that intention of the debtor plays in the various acts of
insolvency.
 Actual insolvency
There is the alternative that the creditor can attempt to prove
that the debtor is actually insolvent.

 How? By providing evidence the court can use to make a fair and proper
deduction of insolvency
 Proving actual insolvency could be difficult for the creditor:

– He does not have access to the debtor’s financials

– It is unlikely that the debtor would disclose financial information to his creditors.
 Advantage of creditors
Section 10(c) there is reason to believe that it will be to the
advantage of the creditors of the debtor if his estate is
sequestrated.

The Act does not require the applicant (creditor) to prove that the
sequestration will be to the benefit of the creditors [the requirement
under voluntary surrender]. The applicant must only to show that
there is reason to believe that it will be to the creditors’ advantage.
Why the different requirement?
– It would be difficult for him to obtain detailed information regarding the debtor's
financial position.
 Advantage of creditors
 NOT only one creditor or some of the creditors, but the general body of creditors (see Fesi v
ABSA Bank Ltd).
 When determining if the 'general body of creditors' will derive an advantage the courts put
emphasis on the amount or portion of a creditors claim. See also Fesi v ABSA Bank Ltd where
the court held that a single creditor who was owed 96% of the total debt of the estate
represented the 'general body of creditors’.
Monetary benefit will result to the creditors, and there must be a reasonable
prospect of this occurring.
Practically: using the ‘tools’ in the Insolvency Act will cause that some assets will be
revealed or discovered for the benefit of the creditors.
Set dividends disapproved by the Constitutional Court (see Stratford v Investec Bank)

Remember: different level of proof for voluntary surrender and compulsory

sequestration.
 Advantage of creditors
Practically, the court will examine the position the
position of creditors if there was regular execution,
i.e. not execution taking place following
sequestration.
Will the ‘tools’ contained in the Insolvency Act
reveal assets which can be sold?
Will an investigation reveal a simulated transaction
or an impeachable disposition perhaps?
 Advantage of creditors
Will an investigation reveal an impeachable disposition perhaps?
Stratford v Investec Bank Ltd 2015 (3) SA 1 (CC)
Meaning of advantage to be ‘broad and should not be rigidified.’(para 44)
It is not in specifying cents in the rand or a ‘not negligible’ benefit.
The court would rather be interested in whether (see para 45):
– the sequestration would result in some payment to the body of
creditors
– there was substantial estate from which creditors could not get
payment , unless they went the sequestration route
– some pecuniary benefit would result for the creditors.
In this instance there existed the possibility of an impeachable transaction which
could be to the advantage of the creditors (R37 million).
 Form and content for an
application
Notice of motion and affidavit.
–See the examples in Hockley, Appendix 1, items 2.1 and 2.2
See the list of information to include as per section 9(3)(a).
– s9(3)(a)(i)_relates to jurisdiction and locus standi (legal standing) of the creditor

In terms of s9(4) before an application of compulsory sequestration

is presented to the court a copy of the application and the affidavit(s)
must be lodged with the Master.
Different steps which form part of the process:
–Provisional order (remember the requirements)_Rule nisi
–Final order (or dismissal) (remember the requirements)
–Determine the burden of proof at provisional and final order stages.
 Form and content for an
application
Preliminary steps prior to adjudicating on application (self-study).
Security for costs
–How?
Search for Master’s records
–Rule in Western Cape: affidavit that Master’s record confirm debtor’s estate
not under sequestration/no notice of intention to surrender published.
Filing of application at court
Master’s report
–Copy of notice of motion and founding affidavit filed with the Master.
Copies of papers to debtor and other parties
 Form and content for an
application
Provisional sequestration (sections 10 and 11)
This is the initial stage.
Court must be of opinion that prima facie requirements are met.
Purpose of this preliminary stage is to afford the creditor a simple and speedy remedy
for preserving the debtor's estate and enforcing his claim.
When granting a provisional sequestration order, the court simultaneously grants a rule nisi .
What is this?
– the debtor must on a specified day to appear (referred to as 'the return day') and show cause (ie give an explanation as
to why / defend himself) as to why his estate should not be sequestrated finally.
– Specific rules about service for ‘absent debtor’ and service on employees, trade unions and SARS.
On this day, the court whether to make the order final or to dismiss the provisional
sequestration order.
Please read section 11(3) which allows that the debtor to apply to the court and make
this return day at an earlier date (self-study).
 Form and content for an
application
Provisional sequestration (sections 10 and 11)
Service of rule nisi
Served on the debtor
Specific rules in place if debtor absent from his residence or business.
– Court allowing service via e-mail, Whatsapp and publication in a newspaper.
See section 11(2) that a court may direct an alternative method of service.
Opposing affidavits
Filed with the Registrar and copy served on sequestrating creditor.
Provide sequestrating creditor with sufficient time to reply.
Intervention from another creditor
Intervention to either set aside provisional order or when there is delay, obtain fresh
sequestration order.
 Form and content for an
application
Final sequestration
The court will have the following before it when deciding to grant the
final sequestration order:
Sheriff’s return of service of rule nisi
Opposing affidavit of debtor and other interested parties.
Replying affidavit of applicant.
Affidavit from provisional trustee.
 Form and content for an
application
Final sequestration
Section 11 2(1).
At the hearing on the return day of the rule nisi, if the court is satisfied that the
three requirements have been met (on a balance of probabilities) it may
sequestrate the debtor.
Can you remember what these 3 requirements are?

Section 12(2), informs you what the court can do at the hearing on
the return day of the rule nisi.
 Dismiss the application for sequestration of the debtor's estate and set aside the order of provisional sequestration
 Sometimes the court may ask the applicant(creditor) to furnish the court with further proof of any of the facts
mentioned in the application and postpone the hearing.
 Discretion of the court
Same as with voluntary surrender, even if all the
requirements are met, the court has the discretion to not
grant the final order.
Consideration of all the circumstances.
 Friendly sequestration
A creditor is he is sympathetic or favourably disposed towards his debtor.
The debtor and creditor usually arrange that the debtor will commit an act
of insolvency and on this basis, the creditor applies for the debtor's
sequestration.
The agreement between the debtor and creditor to sequestrate is not
objectionable per se, but the creditor must have a genuine claim and
sequestration must be legally justifiable in the circumstances.
However, friendly sequestration is often collusive in nature, being a
manoeuvre by the debtor to stave off creditors and gain time to free
himself from his financial difficulties.
 Friendly sequestration
Epstein v Epstein 1987 (4) SA 606 (C)
 Friendly sequestration allowed if requirements of section 10(a)-(c) complied with.
 However, the court should scrutinise such applications to determine that the
requirements are genuinely met.
 Application for the relief of the debtor, which is not the object of the Insolvency Act.
 In case of an act of insolvency in terms of section 8(g) being used, it must be clear
that the general body of creditors must benefit.
‘The correct test to be applied is whether the facts placed before the Court show that
there is a reasonable prospect - not necessarily a likelihood, but a prospect which is
not too remote – that some not negligible pecuniar.y benefit will result to
creditors.’(609C-D)
 The court entertained the reliance on s 65A(1) of the Magistrates' Courts Act ,
where respondent can be committed to prison in case of non-payment of this
debts. It was not really relevant to the question at hand.
 Preparation for next week
Week 5
Please read:
 Hockley Chapters 4 and 5.
 Vorster v Steyn NO en Andere 1981 (2) SA 831 (O)_Afrikaans judgment. Only study translation to be
provided.
 Wessels NO v De Jager en ’n Ander NNO 2000 (4) SA 924 (SCA)_ Afrikaans judgment. Only study
translation to be provided.
 Du Plessis v Pienaar NO and Others 2003 (1) SA 671 (SCA)

There are no questions this week for your group assignment.

There are tutorials for week 5. Remember that this will be an assessment period.
Bring along your tutorial answer to be marked and
handed in.
Thank You.

Questions?