STUDY UNIT 11: COMPOSITION

Question 1

ACCORDING TO MOHAMED v LOCKHAT BROTHERS:

Answer 1

According to Mohamed v Lockhat Brothers, a debtor who is in financial difficulty or whose estate has been provisionally sequestrated can avert insolvency by entering into a compromise with his creditors.

Question 2

TWO FORMS OF COMPROMISE:

Answer 2

1. Common law compromise
2. Statutory compromise, also known as the section 119 composition

Question 3

1. COMMON LAW COMPROMISE:

Answer 3

the insolvent enters into a written agreement with his creditors and provisional trustee to pay certain dividends on the creditors, on condition that he is released of all his debts and any provisional order of sequestration is discharged.

Question 4

2. STATUTORY COMPROMISE/ SECTION 119 COMPOSITION:

Answer 4

a section 119 composition is a statutory mechanism under which the decision of the majority of the creditors binds the dissenting minority
-the main advantage is that it does not depend on the participation of all the creditors.
-the disadvantage is that the sequestration order is not discharged, and the debtor remains an unrehabilitated insolvent but can apply for early rehabilitation in certain circumstances.

Question 5

TERMS OF THE COMPOSITION:

Answer 5

an offer may contain any terms the insolvent wishes, including terms to the effect that he should immediately be reinvested with his assets and that he should be released from further liability in respect of his debts.

Question 6

REQUIREMENTS OR RESTICTIONS IMPOSED BY THE ACT:

Answer 6

1. where an offer of composition provides for the giving of security, the nature of the security should be specified fully: who, type, extent?
2. an offer of composition may not be accepted if it contains a condition entitling one creditor to obtain a benefit that they would not have ordinarily been entitled to upon the distribution of the estate.
3. a condition which makes an offer of composition subject to the rehabilitation of the insolvent is of no effect.

Question 7

WHAT CONSTITUTES A VALID ACCEPTANCE OF THE OFFER:

Answer 7

-the offer must be accepted by creditors whose votes amount to not less that 3/4 in value and 3/4 of the number of votes of all proved creditors.
-payment in terms of the composition must have been made or security is given.
- the Master provides a certificate to the insolvent that the offer has been accepted.
ZULUMAN CASE- accepting a compromise without honest belief amounts to the acceptance being invalid.

Question 8

WHO IS BOUND BY THE ACCEPTANCE OF THE COMPOSITION?

Answer 8

• All concurrent creditors
  -the insolvent and all creditors in so far as their claims are not secured or preferent
  -concurrent creditors who have not proved their claims.