sequestration Flashcards
Factual and legal Insolvency
Factual:
-Someone is deemed insolvent if they are unable to pay their debts
-Test= Liabilities exceed their Assets
Legal:
A formal sequestration order has been issued as approved
Types of sequestration
- Voluntary
- Compulsory
Voluntary sequestration
Application by:
1. Partnership’s estate - All the partners together
2. Married in Community of Property - Both spouses
3. Estate of a deceased person - Executor of their estate
4. A person unable to look after their affairs(Prodigal or disabled) - curator bonis
Requirements:
1. Estate is actually insolvent- All Assets and Liabilities written down(statement of affairs)
2. Enough assets in the free residue(the part of an insolvent estate, which is not subject to any right of preference) to cover sequestration costs
3. sequestration is advantageous to creditors
4. Formalities
-Post in Gov Gazette and local newspapers(14-30 days before application)
-notice to all creditors
-Statement of affairs- masters office
Compulsory sequestration
Brought by creditors
Requirements:
1. Creditor has locus standi(the right or capacity to bring an action or to appear in a court)
- A claim of R100 or more
1. The debtor has committed an act of insolvency (S 8) OR is insolvent (S 9(1))
2. Reason to believe that the sequestration will benefit the creditors / be to their advantage
S8 of insolvency Act
- Evade payment by leaving home
-Onus is on debtor to prove - Failure to pay judgments debt/ court order
- Nulla bonas return = report in which the sheriff indicates that no sufficient disposal property can be found. - S 8(c): Alienate/transfer / attempt to dispose of assets to benefit one creditor
- S 8(d): Remove/attempt to remove property with intention to prejudice creditors by benefiting another
- Arrangement for creditor to release him from his debts
- Incomplete/ incorrect statement of affairs
- Written notice of inability to pay debts
- Dispose of business – all debts become due & payable & cannot pay debts
- Try to sell assets to get cash to pay assets but still don’t have enough to pay of debts
Consequences of sequestration:
- The sale of debtors assets
-If Assets have already been sold but the person already knew about the sequestration= mala fides- Assets reclaimed and resold
-If bona fides then they keep the assets - A Trustee is appointed during sequestration- S 7(1): Notice may only be withdrawn with the consent of the master
- Notice lapses if
- Sequestration order is not granted
- Notice not properly withdrawn
- If the debtor does not bring his application within 14 days of the date of the sequestration application as published in the notice. - No debts may be incurred during this time.
- Process of Sequestration
The assets of the debtor are liquidated, and the proceeds are distributed among his creditors in terms of a fixed formula and in a particular order.
The sequestration order brings about a meeting of creditors (“CRS”):
Effect: creditors are viewed as a group. Interests of the Group > Interests of the Individual creditor
The insolvents legal position: Contract capacity
-An insolvent may not enter into a contract to dispose of property unless authorized by Trustee (only person who can enforce the contract)
-An insolvent can enter into certain contracts but needs statutory provisions to do so (otherwise trustee enforces
Exceptions:
-If a party sells the property insolvent unaware they are insolvent= valid sale- the property forms part of the insolvent estate
what falls into the insolvent estate
- All movable and immovable property
- All assets obtained during the sequestration process
- All assets inherited by an insolvent (debtor) (regardless of the will)
A term in a will stipulating that an insolvent’s inheritance will not form part of his insolvent estate has NO EFFECT.
What is excluded from the insolvent estate
- Clothing, linen and necessary house hold goods
- Remuneration for work done after sequestration
- Pension benefits
- Damages compensation for defamation or personal injury- RAF
- Benefit from life insurance policy
The insolvents legal position: Capacity to earn a living
- May do any job / follow any profession – certain restrictions are placed on this provision.
S 23(3) Restrictions:
- The insolvent requires the written consent of his trustee to:
- Carry on business as a trader or manufacturer or be employed in such a business or hold a direct or indirect interest in such a business.
Other positions that the insolvent cannot hold:
- Trustee of an insolvent estate;
- Member of parliament; and
- Director of company or management of CC (Requires Court’s consent)
Insolvent spouses estate: out of community of property
Anti-nuptial contrat(ANC):
-married out of community of property
- Spouses each have a separate estate.
- Generally, all assets brought into the marriage or acquired during the marriage will form part of the joint estate.
Exceptions:
- An asset can be excluded in terms of a deed of donation.
- Non-patrimonial damages recovered by a spouse for a delict committed against them are their separate property and will not form part of the joint estate.
- Similarly, damages resulting from a personal injury caused wholly or partly by the other spouse will not form part of the joint estate and belong to the injured spouse.
Insolvent spouses estate: In community of property
- Spouses have one joint estate = both spouses become insolvent.
- And the separate estate of one spouse can also be attached by the trustee (in some instances).
- Burden of proof: solvent spouse must show the assets are theirs.
- Apply to court or trustees to have their assets released. Rationale: prevents collusion between spouses to hide assets
Sale of assets:
- The trustee of the insolvent estate may only sell the assets that purportedly belong to the solvent spouse with the consent of the court if that spouse is in the RSA and the trustee is capable of ascertaining their address **(S 21(3)):
-Notify the solvent spouse of intention
-Wait 6 weeks
-Publish a notice in the Government Gazette and in a paper where the solvent spouse resides or carries on business.
Exceptions:
-Where the solvent spouse owns a separate business (S 21(10))
-The solvent spouse may be prejudiced by the loss of their estate although this loss is not permanent. -Ownership will prove that creditors will not be disadvantaged because it is not the assets of the insolvent spouse.
Insolvent spouses estate: Contracts concluded by the insolvent before sequestration
- Generally, Sequestration does NOT terminate contracts concluded by insolvent before sequestration. All rights & obligations from the contract are transferred to the trustee.
- Trustee has a choice to, Keep or cancel the contract. The decision is made with the creditor’s best interests at heart
- Trustee requests them to complete their performance after sequestration.
Depending on whether performance is severable or not the other party may claim what?:
Severable:
- The other party has a concurrent claim for performance that they rendered prior to sequestration
- Right of preference for the post-sequestration performance
Non-severable:
- The other party has a full claim for his “pre”- and “post”-sequestration performance.
- Exception: some contracts do terminate automatically – E.g. contract of mandate
Lessee Vs Lessor Insolvency:
Lessee:
- S 37(1) - Contract remains. Trustee has an election to continue the lease or not.
- S 37(2) Trustee has 3 months to exercise his choice to cancel or not or the contract will terminate.
- S 37(5) – a provision of automatic termination of lease upon sequestration = void
- If the lessee lapses with their rent payments or is in arrears – then the lessor has a tacit hypothec over the lessee’s movable property.
Lessor:
- Contract remains even if the trustee elects to sell the property.
- If sold: “Huur gaat voor koop”:
This means that the new owner must maintain the lease contract with the lessee except where there is a mortgage bond registered over the property.
- Then the trustee may cancel the contract because the bank in whose benefit the mortgage operates is a secured creditor.
- Lessee’s contract that was canceled, also has a concurrent claim against the insolvent for the damages he suffered.
