KKR 740

Study Theme C:
Insolvency & Business Rescue
Insolvency

Date
“Capitalism without
Bankruptcy is like Catholicism
without Hell.”
― Ziad K. Abdelnour
Economic Warfare: Secrets o
f Wealth Creation in the Age
of Welfare Politics
Meaning of Insolvency
In simple English, a person is considered insolvent or bankrupt when he/she
is unable to pay his debts.

The legal test for insolvency is whether the debtor’s liabilities, fairly
estimated exceed his assets, fairly valued.

A person who has insufficient assets to discharge his liabilities, although

satisfying the test for insolvency, is not treated as an insolvent for legal
purposes unless his estate has been sequestrated by an order of court.
Factual vs Commercial Insolvency
Actual insolvency = debtor’s liabilities exceed his assets.

Commercial insolvency = debtor unable to pay his debt due to a cash flow or
other problem, but is assets still exceed his liabilities.

Inability to pay debts is, at most, merely evidence of insolvency.

See acts of insolvency later.

Terminology
Insolvency of natural persons : Voluntary surrender or Sequestration of the
(separate applications) of the estate of a
debtor. Trusts and partnerships must be
sequestrated
Trustee

Insolvency of juristic persons : Winding up / Liquidation

(Different terminology for the same thing)
Liquidator
South Africa’s insolvency regime is considered creditor friendly
Applicable legislation
 The Insolvency Act, 24 of 1936: The Insolvency Act, 1936; the Insolvency Act; or the Act.

 The Companies Act, 61 of 1973: The Companies Act, 1973; the old Companies Act; or
the Companies Act. mmm

 The Companies Act, 71 of 2008: The Companies Act, 2008; or the new Companies Act.

 The Close Corporations Act 69 of 1984: The Close Corporations Act, 1984; or the Close
Corporations Act.
Applicable legislation cont
Item 9 of Schedule 5 of the Companies Act, 2008 makes chapter 14 of the Companies Act, 1973
applicable to the liquidation of companies. A reference to the provisions of chapter 14 of the Companies
Act, 1973 must therefore always be understood that the reference in question must be read with Item 9 of
Schedule 5 of the Companies Act, 2008. Note also that some of the provisions of chapter 14 of the old
Companies Act do not apply when a solvent company (as opposed to an insolvent company) is being
wound-up, especially if the winding-up is initiated by a special resolution.

The Insolvency Act, 24 of 1936 is regarded as the principle source

of South African insolvency Law

However, when the statutes are silent on any point, recourse must be had to the common law
Applicable legislation cont
Section 339 of the 1973 Companies Act, states that, in the winding up of a
company unable to pay its debts , the provisions of the law relating to
insolvency must in so far as they are applicable , be applied mutatis
mutandis, in respect of any matter not specifically provided for in the 1973
Act.

Other sections of the 1973 Act, make particular area of insolvency law
applicable to the winding up of a company such as Section 340 (voidable
dispositions)
Procedures

Bankruptcy procedure Process Brought by

Sequestration Voluntary sequestration Debtor applies to court
Compulsory sequestration Any creditor
Friendly sequestration Friendly creditor
Winding up/Liquidation Special resolution; special Board of Directors or
majorities apply Shareholders
Court Order Company, Members
(Shareholders) or Creditors
Procedures: Voluntary sequestration
In case of a voluntary surrender the application is made by the debtor, the court issues just one court
order while the Master may appoint a curator bonus to the estate the moment the debtor advertises
his or her intention to surrender the estate.

The applicant, since he or she is assumed to be aware of his or her own financial position, must prove
that the sequestration is to the benefit of the creditors in the sense that they will receive a dividend.

The estate must be able to pay all administrative costs applicable

 Procedures: Voluntary sequestration cont
The voluntary sequestration procedure requires several provisional steps, set out in section 4 of the Insolvency Act:

 Under section 4(1) the applicant debtor needs to publish his or her intent to surrender the estate in the

Government Gazette and in a newspaper circulating in the district where the applicant did business or where he or

she resided. The publication of this notice stays any individual debt collection proceedings against the debtor. For

this reason, should the debtor decide not to continue with the proceedings he or she should publish a notice to

withdraw the application in the same manner as the section 4(1) notice was published;

 The debtor applicant must send a copy of the section 4(1) notice to all known creditors, trade unions representing

the debtor’s employees, the employees themselves, and the South African Revenue Services. The notice to

employees may be given by putting up a copy of the notice on a notice board on the business premisses or on the

door of the business premises;

 Procedures: Voluntary sequestration cont
The voluntary sequestration procedure requires several provisional steps, set out in section 4 of the Insolvency

Act:

 The debtor applicant must lodge a copy of his or her statement of affairs (essentially a statement of assets and

liabilities) with the Master and the Magistrate in whose area of jurisdiction he or she resides or did business;

 The debtor applicant must obtain a certificate from the Master stating that the statement of affairs was

available for inspection by creditors. The inspection period is 14 days starting from date stated in the

advertisement published under section 4(1).

 If the statement of affairs was lodged with the Master after the commencement date or not at all, some

Masters refuse to issue the certificate while others will mention on the certificate that the statement of affairs

was lodged after the advertised date.

 Procedures: Compulsory sequestration
In the case of a compulsory sequestration a creditor applies to court to have the estate of a debtor sequestrated.

Since the debtor may not be aware of the application and natural justice demands that everyone has a say in
matters that affect them personally, the court usually gives two orders during the compulsory proceeding:

A provisional order calling on the debtor to come to court on a later date and supply the court with reasons why a
final order should not be made, and then

A final order either confirming the provisional order or setting aside the provisional order.
Procedures: Compulsory sequestration cont
The Master may appoint a provisional trustee after the provisional order was given. Because it is
unlikely that the applicant will be completely familiar with the respondent’s financial position, the
elements that the applicant must prove is different from those of a voluntary application.

The applicant must, amongst other elements, prove that the respondent owes the applicant an amount
of money and that the respondent committed an act of insolvency.
Procedures: Compulsory sequestration cont
Acts of Insolvency
(a) If he leaves the Union or being out of the Union remains absent
therefrom, or departs from his dwelling or otherwise absents himself, with
intent by so doing to evade or delay the payment of his debts; Petition for
sequestration of estate.
(b) If a Court has given judgment against him and he fails, upon the demand
of the officer whose duty it is to execute that judgment, to satisfy it or to
indicate to that officer disposable property sufficient to satisfy . it, or if it
appears from the return made by that officer that he has not found
sufficient disposable property to satisfy the judgment;
(c) If he makes or attempts to make any disposition of any of his property
which has or would have· the effect of prejudicing his creditors or of
preferring one creditor above another
Procedures: Compulsory sequestration cont
Acts of Insolvency cont
d. If he removes or attempts to remove any of his property with intent to prejudice his
creditors or to prefer one creditor above another;
e. If he makes· or offers to make any arrangement with any of his creditors for
releasing him wholly or partially from his debts ;
f. If, after having published a notice of surrender of his estate which has not lapsed
or. been withdrawn in terms of section six or seven, he fails to comply with the
requirements of sub-section (3) of section jour or lodges, in terms of that sub-
section, a statement which is incorrect or incomplete in any material respect or fails
to apply for the acceptance of the surrender of his estate on the date mentioned in
the aforesaid notice as the date on which such application is to be made;
g. If he gives notice in writing to any one of his creditors that he is unable to
pay any of his debts ;
h. (h) if, being a trader, he give notice in the Gazette in terms of sub-section (1) of
section thirty-four, and is thereafter unable to pay all his debts.
Procedures: Friendly sequestrations
The difference in elements that need to be proven when applying for a voluntary surrender
and for a compulsory sequestration, gives an opportunity to persons who believe that their
application to surrender their estate may be rejected, to arrange for a compulsory
sequestration of their estate.

These so called “friendly sequestrations” are usually characterised in the first place by the
fact that there is some relationship (usually a family relationship) between the applicant and
the respondent, and secondly by the act of insolvency the applicant relies on, which is
always a notice in writing to the applicant to the effect that the debtor is not able to pay the
debt in question
 Procedures: Compulsory sequestrations: What
the applicant must prove
In terms of section 9(3) of the Insolvency Act, the applicant must provide the following information to succeed with the

sequestration:

 The full names and date of birth and identity number of the debtor;

 The marital status of the debtor, and, if married, the full names and date of birth and identity number of the debtor’s

spouse;

 The amount, cause, and nature of the claim on which the applicant rely;

 Whether the claim is secured or not and, if it is secured, the nature and value of the security; and

 The act of insolvency upon which the application is based or evidence to proof that the debtor is in fact insolvent.
Sequestration Procedures: The main aim of the
Insolvency Act
The main aim of the Insolvency Act is to provide for a collective debt collection instrument
that will ensure an orderly and fair distribution of the debtor’s assets in circumstances
where these assets are insufficient to satisfy the creditors claims.

It is generally accepted that a concursus creditorum comes into being once a sequestration
order is made.
• This is regarded as one of the key concepts of the South African law of Insolvency
Sequestration Procedures: Concursus creditorum
This concept entails that the rights of the creditors as a group are preferred to the rights of
individual creditors

For example, an individual creditor can no longer by means of execution obtain full payment
of his claim at the expense of others.

Neither can the creditors attach assets acquired by the debtor after sequestration

Because the debtor’s capacity to act is limited until his rehabilitation, he may no longer
alienate or burden his assets.
Sequestration Procedures: Debt relief?
• However, one of the Act’s consequences is that debt relief is granted to the to the
individual debtor because rehabilitation ito the Act results in discharge of all pre
sequestration debts
• For this reason the sequestration process is, in practice, used as a debt relief measure in
the form of an application for a so-called friendly sequestration.
• It is however, essential to note that the Act lays down advantage to creditors as a
prerequisite for sequestration proceedings, and in so doing places a stumbling block in
the way of debtors wishing to use the sequestration process as a dent relief measure.
Sequestration Procedures: Disposal without
value
Dispositions without value (Section 26)

(1) Every disposition of property not made for value may be set aside by the Court if such disposition
was made by an insolvent:

(a) more than two years before the sequestration of his estate, and it is proved that,
immediately after the disposition was made, the liabilities of the insolvent exceeded his assets;

(b) within two years of the sequestration of his estate, and the person claiming under or
benefited by the disposition is unable to prove that, immediately after the disposition was made, the
assets of the insolvent exceeded his liabilities:
Sequestration Procedures: Disposal without
value
Dispositions without value (Section 26)

(1) Every disposition of property not made for value may be set aside by the Court if such disposition
was made by an insolvent:

(a) more than two years before the sequestration of his estate, and it is proved that,
immediately after the disposition was made, the liabilities of the insolvent exceeded his assets;

(b) within two years of the sequestration of his estate, and the person claiming under or
benefited by the disposition is unable to prove that, immediately after the disposition was made, the
assets of the insolvent exceeded his liabilities:
Sequestration Procedures: Voidable
preferences
Voidable preferences (Section 29)

Every disposition of his property made by a debtor not more than six months before the sequestration
of his estate or, if he is deceased and his estate is insolvent, before his death, which has had the
effect of preferring one of his creditors above another, may be set aside by the Court if immediately
after the making of such disposition the liabilities of the debtor exceeded the value of his assets,
unless the person in whose favour the disposition was made proves that the disposition was made in
the ordinary course of business and that it was not intended thereby to prefer one creditor above
another
Sequestration Procedures: Undue preferences
Undue preferences (Section 30)

Every disposition of his property made by a debtor not more than six months before the sequestration
of his estate or, if he is deceased and his estate is insolvent, before his death, which has had the
effect of preferring one of his creditors above another, may be set aside by the Court if immediately
after the making of such disposition the liabilities of the debtor exceeded the value of his assetsunless
the person in whose favour the disposition was made proves that the disposition was made in the
ordinary course of business and that it was not intended thereby to prefer one creditor above another
Sequestration Procedures: Affect of
sequestration
As soon as a sequestration order has been granted by the court, the insolvent loses control
of his estate.

His estate vets in the Master until the appointment of a trustee whereafter the estate vests
in the trustee

The granting of the sequestration order has important consequences with regard to the
insolvents person, pending legal proceedings, contracts entered into before sequestration
and the insolvents legal position during sequestration
Sequestration Procedures: Process
After the appointment of the trustee, the administration of the insolvent estate commences.

The trustee realises the assets of the insolvent estate and distributes the proceeds amongst
the creditors in the order od preference provided for in terms of the Act.

The Act provides for creditor participation in the administration of the insolvent estate by
containing detailed provisions regarding meetings of creditors and voting powers of
creditors.

At these meetings, directions are given t the trustee regarding any matter concerning the
administration of the estate.

Creditors also approve their claims against the estate at meetings of creditors
Sequestration Procedures: Process cont
The Act also provides for the interrogation of the insolvent and other witnesses at meetings
as well as private interrogations by the Master in order to enable the trustee and creditors to
gain information regarding the true state of affairs regarding the insolvents’ estate.
Sequestration Procedures: Rehabilitation after
sequestration
The insolvency of a party comes to an end when he/she is rehabilitated.

Although the person’s estate is sequestrated, his/her person is rehabilitated.

Rehabilitation enables the insolvent to make a fresh start, free from pre sequestration debts
and from the restrictions placed on him by sequestration.

Sequestration may take place automatically, by lapse of a prescribed period of time (usually
10 years), but the insolvent usually asks the court to rehabilitate him/her before he expiry
of the prescribed period.

The 10 year period runs from the date of provisional sequestration

 Procedures: Voluntary winding up

An insolvent company may be would up voluntarily if it has adopted a special resolution to that effect
and if the resolution has been registered Companies and Intellectual Property Commission in
accordance with the required formalities

A special resolution to wind up a company must state whether the winding up is a members voluntary
winding up or a creditors voluntary winding up.
Procedures: Winding up by the court
Initiated by an application to court.

The application is usually brought by a creditor in the case of an insolvent company and the
shareholders in the case of a solvent company
 Procedures: Winding up by the by the court: Insolvent
Companies (Chapter 14 of the 1973 Companies Act)

When is a company insolvent (Section 345)

 A demand for payment was made, and in the case of a body corporate not incorporated under the
Companies Act, the debtor has failed for three weeks to pay the sum;

 The sheriff or messenger of the court has failed to find sufficient assets to attach to satisfy a judgment
debt; or

• The court is satisfied that the company is unable to pay its debt

Some commentators take it that the 3-week period applies to all companies, not only to body corporates not
incorporated in terms of the Companies Act. The typography of the section does not support this
interpretation, but it makes a lot of sense to have such a period within which a debtor should respond.
 Procedures: Winding up by the by the court: Insolvent
Companies (Chapter 14 of the 1973 Companies Act)
Who may apply (Section 346(1))

 The company itself;

 One or more of its creditors (including contingent or prospective creditors);

 One or more of its shareholders, or in case of a non-profit company, one or more of its members; or

• The Master if a company has already been liquidated by special resolution.

The section uses the term “members” and in the context of the 1973 Act the term included shareholders but also
other persons who, though not shareholders, must be inscribed in the registers of the company as a member
(section 103 of the Act). The 2008 Act do not use the term member for commercial companies, only when referring to a non-
profit company.
 Procedures: Winding up by the by the court: Insolvent
Companies (Chapter 14 of the 1973 Companies Act)
Who may apply (Section 346(1))

 The company itself;

 One or more of its creditors (including contingent or prospective creditors);

 One or more of its shareholders, or in case of a non-profit company, one or more of its members; or

• The Master if a company has already been liquidated by special resolution.

The section uses the term “members” and in the context of the 1973 Act the term included shareholders but also
other persons who, though not shareholders, must be inscribed in the registers of the company as a member
(section 103 of the Act). The 2008 Act do not use the term member for commercial companies, only when referring to a non-
profit company.
 Procedures: Winding up by the by the court: Insolvent
Companies (Chapter 14 of the 1973 Companies Act)
On what grounds can an insolvent company be liquidated (Section 344)

(a) the company has by special resolution resolved that it be wound up by the Court;

(b) the company commenced business before the Registrar certified that it was entitled to commence business;

(c) the company has not commenced its business within a year from its incorporation, or has suspended its
business for a whole year;

(d) in the case of a public company, the number of members has been reduced below seven;
 Procedures: Winding up by the by the court: Insolvent
Companies (Chapter 14 of the 1973 Companies Act)
On what grounds can an insolvent company be liquidated (Section 344) cont

( (e) seventy-five per cent of the issued share capital of the company has been lost or has become useless for the
business of the company;

(f) the company is unable to pay its debts as described in section 345;

(g) in the case of an external company, that company is dissolved in the country in which it has been incorporated,
or has ceased to carry on business or is carrying on business only for the purpose of winding up its affairs;

(h) it appears to the Court that it is just and equitable that the company should be wound up. ‘
 Procedures: Winding up by the by the court: Solvent
Companies (Section 81 of the 2008 Companies Act)
A solvent company may be wound up by a court order on application of:

 The company on the grounds that:

 The company resolved, by special resolution, that it be wound up by the court; or

 The company’s voluntary winding-up by special resolution should be continued by a liquidation by court
order.
 Procedures: Winding up by the by the court: Solvent
Companies (Section 81 of the 2008 Companies Act)
A solvent company may be wound up by a court order on application of:

 The company, its directors, or shareholders on the ground that

 A deadlock exists between the managers of the company while:

- The shareholders cannot break the deadlock; AND

- Irreparable injury to the company resulted or may result from the deadlock OR

- The deadlock prevents the company from conducting business to the benefit of the shareholders.

 A deadlock exists between the shareholders of the company resulting in the inability to elect successors to the directors whose
terms have expired. This deadlock must have existed for a period that includes at least two annual general meetings of the
shareholders (this should be at least a year if the period starts at the commencement of the first annual general meeting and ends at
the closing of the second annual general meeting);

It is just and equitable for the company to be wound up

 Procedures: Winding up by the by the court: Solvent
Companies (Section 81 of the 2008 Companies Act)
A solvent company may be wound up by a court order on application of:

 The shareholders on the grounds that

 The directors, prescribed officers, or other persons in control of the company are acting in a manner that is
fraudulent or otherwise illegal;

 The company’s assets are being misapplied or wasted; or

Note that this application by shareholders may only be made with leave from the court.
 Procedures: Winding up by the by the court: Solvent
Companies (Section 81 of the 2008 Companies Act)
A solvent company may be wound up by a court order on application of:

 The business rescue practitioner on the ground that there is no reasonable prospect of the company being rescued;

 The creditors on the grounds that business rescue proceedings have ended, and it is otherwise just and equitable for the
company to be wound up. The section refers to three specific manners on which the business rescue proceedings must
have ended:

 The practitioner has filed a notice of the termination with the commission;

 A business rescue plan was proposed and rejected while no affected party took any steps to extend the business
rescue procedure; or

 The business rescue plan has been adopted and the practitioner filed a notice of substantial implementation with
the Commissioner.
 Procedures: Winding up by the by the court: Solvent
Companies (Section 81 of the 2008 Companies Act)
A solvent company may be wound up by a court order on application of:

 The business rescue practitioner on the ground that there is no reasonable prospect of the company being rescued;

 The creditors on the grounds that business rescue proceedings have ended, and it is otherwise just and equitable for the
company to be wound up. The section refers to three specific manners on which the business rescue proceedings must
have ended:

 The practitioner has filed a notice of the termination with the commission;

 A business rescue plan was proposed and rejected while no affected party took any steps to extend the business
rescue procedure; or

 The business rescue plan has been adopted and the practitioner filed a notice of substantial implementation with
the Commissioner.
 Procedures: Winding up by the by the court: Solvent
Companies (Section 81 of the 2008 Companies Act)
A solvent company may be wound up by a court order on application of:

 The business rescue practitioner on the ground that there is no reasonable prospect of the company being rescued;

 The creditors on the grounds that business rescue proceedings have ended, and it is otherwise just and equitable for the
company to be wound up. The section refers to three specific manners on which the business rescue proceedings must
have ended:

 The practitioner has filed a notice of the termination with the commission;

 A business rescue plan was proposed and rejected while no affected party took any steps to extend the business
rescue procedure; or

 The business rescue plan has been adopted and the practitioner filed a notice of substantial implementation with
the Commissioner.
 Procedures: Winding up by the by the court: Solvent
Companies (Section 81 of the 2008 Companies Act)
A solvent company may be wound up by a court order on application of:

 The Companies and Intellectual Property Commission or the Takeover Regulation Panel on the grounds that:

 The directors, prescribed officers, or other persons in control of the company are acting or have acted in a
manner that is fraudulent or otherwise illegal, while the Commission or the Panel has issued a compliance
notice in respect of that conduct, and the company has failed to comply with the notice;

 Enforcement procedures were taken against the company regarding conduct within the previous five
years, and now the company, its directors, prescribed officers, or other persons in control of the company
has acted in substantially the same manner, resulting in an administrative fine, or conviction for an offence.
 Procedures: Winding of a company
Consequences:
[Link] divested of control

[Link] proceedings instituted against or by the company are suspended until the appointment of a Liquidator;

[Link] attachment or execution of a Judgment against the assets of the company is deemed void;

[Link] suspension of legal proceedings by operation of the liquidation shall be revived by, after 4 weeks of the Liquidator’s appointment,
notifying the Liquidator by giving 3 weeks’ notice and failure to do so will render the proceedings as abandoned;

[Link] of the company shall be deemed to be in the custody of the Master during the time a Liquidator is yet to be appointed or cannot
perform responsibilities;

[Link] Liquidator will effectively act as the contracting party where the sequestrated company concluded contracts prior to going under the
liquidation procedure;

[Link] agreements where the company is a lessee are not automatically terminated but within 3 months of appointment the Liquidator
must decide on whether to proceed or terminate the lease and if no determination is made, they are deemed as terminated;

[Link] of a company suspends the employment contracts of its staff and during this time they are not entitled to render services or
receive salaries save for unemployment benefits. Should the Liquidator not terminate the suspended contracts, the contracts will
automatically terminate after 45 days from date of appointment of the Liquidator.
 Procedures: Winding of a company
Uncompleted contracts

Particularly in relation to contracts, the consequences of the winding up or liquidation of a company

are the same as the consequence’s insolvency of an individual.

One difference is that the effect of insolvency is to divest the insolvent of his estate and to vest it in the
Master until a trustee has been appointed, whereupon the state vests in the trustee. In the case of the
liquidation of a company, the property does not vest in the liquidator but is nonetheless deemed to be
in the custody and control of the liquidator.
 Procedures: Winding of a company
Uncompleted contracts continued

In the absence of an express statutory provision to the contrary, a contract is in general not automatically
terminated by the sequestration of the estate of one of the parties.

The only effect is that the trustee who steps into the shoes of the debtor cannot be compelled to render specific
performance, as he has to act in the interests of the general body of creditors, the so-called concursus creditorum.
The contract is not modified by sequestration with the consequence that the other contracting party is not
prevented from exercising his right to cancel or continue with the contract after sequestration.

The trustee must decide within a reasonable time whether he will perform in terms of the contract or not.

It has been said that what is really terminated is the creditors right to demand specific performance.

If the trustee, intends to abide by the contract, he must tender all complete performance of the insolvent’s
obligations, i.e. he steps into the shoes of the insolvent and is bound by all the terms of the contract such as
penalties for delay or submission of disputes to arbitration.
 Procedures: Winding of a company
Uncompleted contracts continued
In a situation of multiple contracts, such as the position of the main construction contract and one or more
subcontracts, the question arises whether an election to perform the main contract automatically means an
election to perform the other.

In Du Plessis and Another NNO v Rolfes Ltd1, the then Appellate Division noted that the test is whether the
contracts are so inextricably interlinked so as to form one contract housed in two documents. If not, there is no
automatic assumption that election to perform one will mean an election to perform another.
 Procedures: Winding of a company
Voidable preferences

It is very important to note, that contractual provisions (as are often encountered in standard form
contracts) which purport to vest the property owned by the insolvent in someone other than the
trustee, such as the employer could be attacked as a voidable preference in terms of Section 29 of the
Insolvency Act.

Similarly, provisions which authorise an employer to pay subcontractors directly on the insolvency of
the contractor could be attacked by the trustee as preferring one creditor over others.
 Important concepts
Preference

The Insolvency Act defines “preference” as a right to be paid first (the right to be paid in preference to other claims). This
right to be paid first derives from a contract, such as a mortgage agreement or an agreement to give a movable as a pledge,
or it derives from the operation of law, such as the landlord’s hypothec.

A creditor may have a preference on a security, or the creditor may have a preference on the free residue.

Assets

The Insolvency Act divides the assets in an estate into two categories: secured assets and free residue.
 Important concepts continued
Secured assets

Security is defined by the Insolvency Act as that part of the estate that is subject to a preference based on a mortgage,
pledge, hypothec, or a right of retention.

The trustee’s dealing with security is reflected in a separate part of the liquidation account, known as an encumbered asset
account.

The trustee must draw a separate encumbered asset account for every single security.
 Important concepts continued
Free residue

Free residue is that part of the estate that is not encumbered by a mortgage, pledge, hypothec, or a right of retention.

All free residue assets are treated in a single free residue account.

Preferent creditors have a right to be paid first from the proceeds of the free residue account.

Concurrent creditors are also paid from the free residue, though they have no preference to it (they must wait for payment
until all preferent creditors are paid in full).
 Important concepts continued
Creditors

Voting rights, the selling of assets, dividend payments and even contributions are based on or affected by the class the creditor
belongs to.

Depending on the nature of their claim, a creditor may belong to one or more of the following classes:

 Secured creditor;

 Preferent creditor; and

 Concurrent creditor.

Administrative creditors are creditors who contracted with the trustee or liquidator during the administration of the estate,
such as brokers, auctioneers or estate agents who sold assets on behalf of the trustee. These creditors are always paid in full.
If the trustee does not have sufficient funds to pay them, he or she may demand a contribution from creditors to make all the
administrative expenses good. An insolvent is expected to refund the contribution paid before he or she may apply to court for
rehabilitation.
 Important concepts continued
Secured creditors

Secured creditors have a preferent right (a right to be paid first) from the proceeds of security or a secured item (or asset)

Secured creditors may also be concurrent creditors if the value of their claims exceeds the value of the security and they do
not rely on their security.

Secured creditors’ voting rights are restricted, since they are protected by their security and are not exposed to the risks of
the administration process as concurrent creditors are
 Important concepts continued
Secured creditors continued

A person, A borrowed money from a bank, B to purchase a house. The loan is secured by a mortgage bond. The loan is for
R2 million. After a few years, A’s estate is sequestrated. By that time, she has reduced the balance of the loan to R750 000.
If the trustee sold the property for R500 000, B is a secured creditor for R500 000 (the value of the property) and a
concurrent creditor for R250 000 (the difference between the claim and the value of the security). If B wants to vote at a
meeting of creditors, the value of their vote is limited to R250 000, the amount at risk by the decision taken. Before the
property is sold, B has no way of knowing what the real proceeds will eventually be, and they are expected to put an
estimated value on the security.
 Important concepts continued
Preferent creditors

Preferent creditors have a preferent right (a right to be paid first) from the proceeds of the free residue.

The preferent right is granted by section 96 to 102 of the Insolvency Act.

Preferent creditors are mostly government institutions such as SARS or the Workmen’s Compensation Commissioner (the
WCC), although claims by non-government creditors such as funeral and death bed expenses, salaries, wages, and other
employment benefits as well as the costs of administering the estate are included in the list.

Though administrative expenses are listed as preferent creditors they are always treated different from other preferent
creditors and are always paid first, in encumbered assets accounts even before the secured creditor Provided for in section
97 of the Insolvency Act. Note that administrative creditors are by custom paid in the liquidation account and not,
like other preferent creditors, in the distribution account. The only preferent creditor who has a higher preference
than administrative creditors (funeral and death bed expenses up to R300) are also paid in the liquidation account.
 Important concepts continued
Concurrent creditors

Concurrent creditors are creditors without any preferent right.

They are therefore only paid from the free residue and then only when all preferent creditors are paid in full with interest.

A creditor may be a secured creditor for part of a claim and a concurrent creditor for the difference.
Since some preferent creditors’ claims are limited, they may also be preferent for a part of their claim and be concurrent
creditors for the difference.

An undertaker’s claim is preferent up to R300; for the difference, the undertaker rank as a concurrent creditor.