Insolvency and Bank

Law
Presented by Dr K Mpofu
WORD OF THE DAY
• There are six things the LORD hates, seven that are
detestable to him: haughty eyes, a lying tongue, hands
that shed innocent blood, a heart that devises wicked
schemes, feet that are quick to rush into evil, a false
witness who pours out lies and a person who stirs up
conflict in the community. Proverbs 6:16-19
SCENARIO 9
• Mr Wakanda has been placed under compulsory
sequestration, and you have been appointed as trustee
of his estate. The debtor owes the following creditors:
• FNB- for a home-R550 000
• Walter Sisulu University –Tuition R70 000
• Momentum medical insurance: leg operation-R50 000
• Business rental- R12 000 in arrears.
• Markham- accounts- clothes: R15 000
• Provide a clear ranking of these claims.
Lecture objectives
• This lecture covers:
1. Types of creditors.
2. Types of security conferring preference.
3. Estate account and its contents.
 Types of creditors
• 1. Secured Creditors:
• These creditors have a legal claim on specific assets or collateral provided by the
borrower. If the borrower defaults, the creditor can seize the asset to recover the debt.
• Example: Mortgage lenders (claim on property), auto loan lenders (claim on vehicle).
• 2. Unsecured Creditors:
• These creditors do not have any collateral to back their loan. They rely solely on the
borrower’s promise to repay the debt. If the borrower defaults, unsecured creditors
typically have to go through legal processes to recover their money.
• Example: Credit card companies, personal loan providers.
• 3. Preferred Creditors:
• In cases like bankruptcy or liquidation, these creditors have a legal priority to be paid
before others. They are typically entitled to payment before unsecured creditors but
after secured creditors.
• Example: Employees owed wages, tax authorities.
 Types of security conferring
preference
• Mortgages:
• A mortgage gives a creditor a legal claim on a specific
immovable property (such as land or real estate) as collateral
for a loan. In case of default, the mortgage holder can foreclose
on the property to recover the debt.
• Example: Home loans.
• 2. Fixed Charges (Fixed Security):
• A fixed charge is a specific security interest attached to a
particular asset, like land, buildings, machinery, or vehicles.
The debtor cannot sell or dispose of the asset without the
creditor's consent. The creditor has a legal right to seize and
sell the asset if the debt is not repaid.
• 4. Pledges:
• In a pledge, the borrower transfers possession of an asset (movable
property) to the creditor as security for the loan. If the borrower
defaults, the creditor can sell the pledged asset to recover the debt.
• Example: Pawnshop loans (pledge of jewelry or valuables).
• 5. Liens:
• A lien gives a creditor the right to retain possession of an asset until the
debtor satisfies the underlying obligation. This right is often implicit in
many commercial transactions.
• Example: Mechanic’s lien, where a repair shop retains possession of a
vehicle until the repair bill is paid.
• 6. Hypothecation:
• In hypothecation, a borrower pledges an asset as collateral without
transferring possession to the creditor. If the borrower defaults, the
creditor can seize and sell the asset to recover the debt.
• Example: landlord hypothec or instalment agreement
Ranking of claims
• Encumbered assets:
• 1. Initial costs
• 2. Secured claims
• 3. Immovable property (enrichment lien, special
mortgage)
• 4. Movable property (pledge, special notarial bond)
Unencumbered assets: (free
residue)
• (i) Funeral expenses:
• The residue must be applied, in the first place, in
defraying the expenses of the funeral of the insolvent ,
funeral of the spouse
• (ii) Death bed expenses:
• After payment of funeral expenses, (not exceedings
R300), any balance of free residue must be applied to
payment of death bed expenses.
• (iii) Cost of sequestration
THE ESTATE ACCOUNTS
• An estate account refers to a detailed accounting
report prepared during the insolvency or liquidation
process of an individual or company.
• It provides a transparent record of the financial
transactions involved in winding up the insolvent estate,
including the realization and distribution of assets to
creditors
Key Aspects of an Estate Account
• Preparation:
• The trustee (in the case of personal insolvency or
sequestration) or the liquidator (in the case of company
liquidation) is responsible for preparing the estate
account.
• It must be compiled after all assets of the insolvent
estate have been realized (sold or liquidated) and the
claims of creditors have been assessed.
 CONTENT OF THE ESTATE ACCOUNT
• The estate account contains a comprehensive report of:
• Assets realised: A list of all assets sold and the amount received.
• Liabilities: A list of all debts and claims against the estate, including
secured, preferred, and concurrent creditors.
• Costs and expenses: The costs associated with administering the
estate, including trustee/liquidator fees and other expenses.
• Distributions: Details of the amounts distributed to various classes of
creditors (secured, preferred, and unsecured) in the order of priority.
• Surplus/deficit: Any remaining balance after creditors are paid or a
shortfall if the estate lacks sufficient assets to cover all debts
 Types of Accounts:
• First and Final Liquidation and Distribution Account:
• This account is prepared when the entire estate has been realized ,
and all creditors have been paid, signalling the end of the insolvency
process.
• Interim Account: If the process is ongoing and assets have been
partly realized, interim accounts may be prepared to make
distributions to creditors on a provisional basis.
• Filing and Inspection:
• Once prepared, the estate account must be filed with the Master of
the High Court.
• The account is then made available for inspection by creditors,
interested parties, and the public.
• This period is usually 14 days, during which objections can be raised
• Approval:
• After the inspection period, if no valid objections are raised,
the estate account is approved by the Master of the High
Court.
• Once approved, the trustee or liquidator can proceed with
distributing the proceeds of the estate according to the
account.
• Objections:
• Creditors or interested parties can file objections to the
estate account if they believe it has been improperly
compiled or if they dispute any claims or distributions.