Study Unit 4 & 5 - Compulsory Sequestration

Question 1

What is the requirements for Compulsory Sequestration?

Answer 1

Requirements for Compulsory Sequestration:

• Is applicant entitled to apply in terms of Section 9(1);
• Did the debtor commit an act of Insolvency or is Insolvent
• Is there reasons to believe that the sequestration will be to the advantage of the creditors ( S12(1) )

Question 2

By whom can Section 9(1) proceedings be instituted?

Answer 2

Section 9(1) proceedings can be instituted by:

• 1 Creditor with a liquidated claim more than R100;
• 2 / More Creditors with a collective liquidated claim not less than R200

Question 3

Can a creditor apply for compulsory sequestration if he has security for his claim?

Answer 3

A creditor may still apply for compulsory sequestration even if he has security for his claim, even if the security exceeds the amount of the claim.

Question 4

What is a liquidated claim?

Answer 4

A Liquidated claim is a monetary claim with a fixed amount for example:

• price of goods sold and delivered;
• claim based on provisional sentence judgment;
• claim for return of price paid under a sale cancelled due to the seller’s repudiation;
• delictual claim for theft of fixed and determinable sum of money.

Question 5

What is an unliquidated claim?

Answer 5

An unliquidated claim gives no locus standi for example:

• Claim for transfer or property;
• Claim for damages for failure to carry out obligations in terms of a consent paper;
• Claim for payment of untaxed attorney-and-client bill of cost

Question 6

Can a claim be regarded as a liquidated even if it is not yet due?

Answer 6

Liquidated doesn’t mean that an amount is already due and payable.

In terms of Section 9(2) a liquidated claim that has accrued but is not yet due must be regarded as liquidated.

Question 7

May a creditor be paid to extinguish / reduce a claim after an estate has been provisionally sequestrated?

Answer 7

After provisional sequestration a debtor may not pay a creditor himself to extinguish or reduce a claim below R100. But a third person (such as surety) may pay on the debtor’s behalf, whereafter the provisional order must be discharged.

Question 8

Can a creditor refuse payment to reduce of extinguish his claim?

Answer 8

A creditor may not refuse a payment in full but may reject a payment in part.

Question 9

May another creditor apply for a further provisional order where another creditor’s locus standi was eliminated?

Answer 9

Where a creditor’s locus standi is eliminated, another creditor may intervene and apply for a further provisional order to be granted.

Question 10

Name the Acts of Insolvency.

Answer 10

An estate may be sequestrated in terms of Section 9(1) if the debtor committed an act of insolvency even if he is solvent:

• Section 8(a) - Absence from the Republic / Dwelling;
• Section 8(b) - Failure to satisfy judgment;
• Section 8(c) - Disposition prejudicing creditors or preferring one creditor;
• Section 8(d) - Removal of property with the intent to prejudice / prefer;
• Section 8(e) - Offer of arrangement;
• Section 8(f) - Failure to apply for surrender;
• Section 8(g) - Notice of inability to pay;
• Section 8(h) - Inability to pay debts after notice of transfer of business.

Question 11

Can an estate be sequestrated when a debtor leaves the Republic or dwelling to evade of delay payments of his debts?

Answer 11

An estate may be sequestrated in terms of Section 9(1) if the debtor commits an act of insolvency.

In terms of Section 8(a) a debtor commits an act of insolvency when he leaves the republic or his dwelling to evade of delay payments of his debts.

The intention may be inferred for example if he makes an appointment to pay and then leave without keeping the appointment.

Question 12

Can an estate be sequestrated when a debtor fails to satisfy judgment?

Answer 12

An estate may be sequestrated in terms of Section 9(1) if the debtor commits an act of insolvency.

In terms of Section 8(b) 2 acts of insolvency are created with judgment:

• if the debtor fails, upon demand (debtor is present), to satisfy or indicate disposable property sufficient to satisfy the debt;
• if it appears from the Sheriff’s return that there is not sufficient disposable property to satisfy judgment. (Only if the debtor was not present when the sheriff arrived).

Question 13

What does “disposable property” mean?

Answer 13

Disposable property means property that may be attached and sold in execution, even if situated in some other locality. It may be immovable, or incorporeal. It does not include immovable property that has been mortgaged, unless the applicant for compulsory sequestration is the first mortgagee.

Question 14

May the Sheriff refuse to attach property if there is not sufficient disposable property?

Answer 14

The Sheriff may refuse to attache property if there is not sufficient disposable property to satisfy the judgment.

He may then make a nulla bona return, where the creditors may then apply for sequestration.

Question 15

Can an estate be sequestrated due to a disposition prejudicing creditors or preferring one creditor?

Answer 15

An estate may be sequestrated in terms of Section 9(1) if the debtor commits an act of insolvency.

In terms of Section 8(c) a debtor commits an act of insolvency when a disposition prejudicing creditors or preferring one creditor takes place.

Only the effect of the disposition need to be considered. It does not matter if the debtor acted on purpose or recklessly. The intention of the debtor is irrelevant.

Question 16

How does a debtor commits a disposition prejudicing creditors or preferring one creditor/

Answer 16

Debtor commits this by:

• Refusing to pay one debt while paying another in full;
• Selling assets deliberately below market value while failing to meet debts;
• Passing mortgage over immovable property to secure debt to one creditor, while his business ventures are in financial difficulties an he is not paying his creditors.

Question 17

Can an estate be sequestrated due to the removal of property with the intent to prejudice of prefer?

Answer 17

An estate may be sequestrated in terms of Section 9(1) if the debtor commits an act of insolvency.

In terms of Section 8(d) a debtor commits an act of insolvency when property are removed with the intent to prejudice or prefer a creditor.

The intent of the debtor is very important and not the effect of the removal. For example if the debtor sends money or goods to another country so that the money / goods are not available for settlement of the creditor’s claim.

Question 18

How does the act of insolvency in terms of Section 8(c) en 8(d) differs?

Answer 18

The act of insolvency in terms of Section 8(d) differs from 8(e) since the disposition of property is not required, removal alone is sufficient.

Question 19

Can an estate be sequestrated due to an offer of arrangement?

Answer 19

An estate may be sequestrated in terms of Section 9(1) if the debtor commits an act of insolvency.

In terms of Section 8(e) a debtor commits an act of insolvency when he indicates his inability to pay his debts.

Question 20

Can an estate be sequestrated due to the debtor’s failure to apply for surrender?

Answer 20

An estate may be sequestrated in terms of Section 9(1) if the debtor commits an act of insolvency.

In terms of Section 8(f) a 3 acts of insolvency are created when a debtor published a notice of surrender which did not lapse or are not withdrawn when he does one of the following:

• Fails to comply with the Requirements of Section 4(3) by lodging the statement of affairs with the Master;
• Lodges a statement that is incorrect or incomplete in a material respect;
• Fails to apply for acceptance of surrender on the specified date.

Question 21

Can an estate be sequestrated due to the debtor’s notice of inability to pay?

Answer 21

An estate may be sequestrated in terms of Section 9(1) if the debtor commits an act of insolvency.

In terms of Section 8(g) a debtor commits an act of insolvency when he gives notice of his inability to pay any single debt.

The content of the notice determines if it is an act of insolvency and not the debtor’s intention. It must be reasonable interpreted that the debtor can not pay any single debt and not mere the unwillingness to pay.

From remarks in Du Plessis en ‘n ander v Tzerefos it appears that the notice will still be an act of insolvency even if the creditor has obtained the document by means of fraud. But the court will take this fact into account when exercising its discretion to sequestrate the estate.

Question 22

Can an estate be sequestrated due to the debtor’s inability to pay his debts after a notice of transfer of business?

Answer 22

An estate may be sequestrated in terms of Section 9(1) if the debtor commits an act of insolvency.

In terms of Section 8(h) a trader commits an act of insolvency when he is unable to pay his debts after notice of transfer of business, even if it is debts that bears no relation to his business.

In terms of Section 2 of the Act a farmer is excluded from the definition of a trader.

As soon as the notice is published, every liquidated liability of the trader in connection with his business which would become due at a future date, falls due if the creditor demands payment.

Question 23

How can factual insolvency be established?

Answer 23

Factual insolvency can be established:

• Directly - by evidence of the debtor’s liabilities and market value of assets;
• Indirectly - by the evidence of facts and circumstances from which conclusion of insolvency is fairly and properly derivable.

Question 24

How does the court decide if the sequestration will be to the advantage of the creditors?

Answer 24

The court need to ask the question if a substantial portion of the creditors will get advantage from the sequestration.

There is no advantage if there is no / minimal payment to the creditors.

The court compares the position of the creditor if no sequestration order is granted as well as the position of the creditor where a sequestration order is granted. There is only an advantage to the creditors if it results in a greater dividend if there is a sequestration order granted.

The onus of establishing the advantage remains on the creditor, even if the debtor committed an act of insolvency.

Question 25

On who rest the onus to establish if there is an advantage towards the creditors?

Answer 25

The onus of establishing the advantage remains on the creditor, even if the debtor committed an act of insolvency.

The onus rests on the creditor to satisfy the court on the requirements. There is no onus on the debtor to disprove any element.

Question 26

What is Friendly Sequestration?

Answer 26

An application for compulsory sequestration brought by a creditor who is not at arm’s length (friend) is generally referred to as a “friendly” sequestration.

Question 27

What is the Legal position with regards to friendly sequestration?

Answer 27

Legal position with regards to friendly sequestration:

• Creditor’s co-operation or motivation to assist debtor doesn’t preclude granting of sequestration;
• The court must be mindful of the proceedings not at arm’s length since there might be a potential collusion and malpractice.
• In Mthimkhulu v Rmapersad an example of abuse are illustrated. The debtor seeks attorney and write a letter to a creditor where after the creditor brought an application. The debtor disappears before the service of the court order. This results in the return date being extended numerous times until the genuine creditors lost interest.
• May be brought with the sole purpose to stay civil proceedings or sales in execution. Here the debtor uses it to free himself from debts because where a sequestration order is granted and the free residue doesn’t cover the costs of sequestration any creditor that proved a claim must contribute towards the costs. The creditors are made to believe there is a risk to contribute and thus refrain from proving their claims. Where no claim is proved within 6 months after sequestration, the debtor apply for rehabilitation and are released from his debts.
• The courts must scrutinize friendly sequestration to ensure the requirements of the Act aren’t undermine and the interests of the creditors aren’t prejudiced.

Question 28

Why must the court be mindful of the proceedings not at arm’s length?

Answer 28

The court must be mindful of the proceedings not at arm’s length since there might be a potential collusion and malpractice.

Question 29

How can a debtor abuse friendly sequestration?

Answer 29

In Mthimkhulu v Rmapersad an example of abuse are illustrated.

The debtor seeks an attorney and write a letter to a creditor in order for them to proceed with friendly sequestation. Where after the creditor brought an application.

The debtor disappears before the service of the court order. This results in the return date being extended numerous times until the genuine creditors lost interest.

Question 30

How can a debtor use friendly sequestration to stay civil proceedings or sales in execution?

Answer 30

May be brought with the sole purpose to stay civil proceedings or sales in execution.

Here the debtor uses it to free himself from debts because where a sequestration order is granted and the free residue doesn’t cover the costs of sequestration any creditor that proved a claim must contribute towards the costs.

The creditors are made to believe there is a risk to contribute and thus refrain from proving their claims.

Where no claim is proved within 6 months after sequestration, the debtor apply for rehabilitation and are released from his debts.

Question 31

What must the court require from the sequestrating creditor in order to ensure that the requirements of the Act are not undermined and that the interests of the creditors are not prejudiced.

Answer 31

The court must require the following from the sequestrating creditor:

• Full details of the claim;
• Documentary evidence establishing that he has actually performed as alleged;
• Full details of the debtor’s realizable assets, including convincing evidence of likely realization;
• If another creditor has already attached the debtor’s property in execution, proof that prior notice of the application has been given to that creditor;
• If he requires an extension of the return date of the rule nisi, an affidavit setting out proper reasons for the extension.

Question 32

What is the difference with regards to the requirements for granting of a compulsory sequestration vs the granting of an application for voluntary surrender?

Answer 32

Differences of requirements for granting compulsory sequestration vs voluntary surrender:

1. An applicant for compulsory sequestration must prove a certain type of claim against a debtor;
2. An applicant for compulsory sequestration does not need to prove specifically that there are sufficient assets to cover the costs of sequestration. But the absence of these assets will often lead to the conclusion that sequestration will not be to the advantage of creditors.
3. An applicant for compulsory sequestration does not necessarily have to prove that the debtor is indeed insolvent. It is sufficient if he can prove an act of insolvency.
4. The onus of proof with respect to the requirement of advantage to creditors is lighter in the case of compulsory sequestration than in the case of voluntary surrender.

Question 33

Is a conditional claim a liquidated claim?

Answer 33

A conditional claim (the enforce-ability depends on the happening of an uncertain future event) is not a liquidated claim.

Question 34

Can the judgment of a Small Claims Court give rise to the act of insolvency?

Answer 34

Section 2 provides that the word “court” in Section 8 means a division of the High Court or a magistrate’s court.

On face value it seems that a judgment of a small claims court can’t give rise to the act of insolvency.

But according to Section 41(2) of the Small Claims Court Act the judgment of a small claims court is executed as though it were a judgment of the magistrate’s court. So it seems that such a judgment may also give rise to an act of insolvency in terms of Section 8(b).

Question 35

What is the main purpose of an act of insolvency?

Answer 35

The main purpose served by an acto fo insolvency is that the creditor wishing to apply for the compulsory sequestration of the debtor’s estate need not prove that the debtor is in fact insolvent.

Question 36

What is the significance of a telephone call from the debtor to the creditor to say he can’t pay his debt?

Answer 36

The telephone call doesn’t constitute an act of insolvency under Section 8(g). Although the debtor gives notice to the Creditor that he is unable to pay the debt, the telephone call is not written notice. The importance of the Debtor telling the creditor that he can’t pay the debt is that proof of inability to pay this debt may serve as proof that he can’t pay all his debts and therefor the debtor has committed an act of insolvency under Section 8(h).

Question 37

What is the basic principle with regards to the debtor’s salary?

Answer 37

The basic principle from SS23(9) and (5) is that an insolvent may retain for his own benefit the income that he earns from his own work after the sequestration of his estate. It does not fall into his insolvent estate. But the Master may determine that a part of that income which is not required for the maintenance of the insolvent and his dependents must be paid over to the trustee for the benefit of the creditors.

Question 38

How does the debtor avoid complying with the preliminary formalities for an application for voluntary surrender with “friendly” sequestration?

Answer 38

The creditors other than the “friendly” creditor do not get advance notice of the application. Neither can they take notice of the debtor’s financial position, because there is no statement of affairs that lies for inspection.

Question 39

What is the relationship between the applicant and the respondent in Epstein v Epstein?

Answer 39

The applicant was the respondent’s mother.

Question 40

What is the unwelcome prospect that the applicant mentioned in the letter of 21 September 1986 and what was the decision of the court on this point in Epstein v Epstein?

Answer 40

The respondent said that he was desperate because several creditors had threatened to have him committed to prison by issuing a court process against him for the nonpayment of his debts.

The court summarized aspects of Section 65:
* If a judgment debtor could show that he genuinely could not pay his debts because he lacked the means to do so, he would not be liable to imprisonment for contempt of court of failure to pay his debt.

The court rejected the argument that the respondent would be imprisoned if his estate were not sequestrated. he would not be imprisoned if he showed a genuine inability to pay his debts. Further, the risk of his imprisonment was not an indication that the sequestration of his estate would benefit the creditors.

The provisions of the Magistrates’ court Act in terms of which a judgment debtor could be imprisoned if he failed to pay his judgment debt have since been declared unconstitutional and invalid by the Constitutional Court.

Question 41

What is the requirements for the granting of a provisional order of sequestration that were satisfied in the Epstein case, also state the requirement that presented a problem to the court.

Answer 41

The first two requirements for the granting of a provisional order of sequestration were satisfied:

1. The applicant had filed papers which prima facie established a liquidated claim entitling her to apply for the sequestration of the respondent’s estate.
2. The respondent’s letter to her was an act of insolvency under section 8(g) of the Insolvency Act.

The third requirement presented a problem to the court:
3. Whether on the facts there was reason to believe that it would be to the advantage of the creditors in the respondent’s estate were sequestrated.

Question 42

Which 2 ways should the court guard against the abuse of proceedings for “friendly” sequestration as seen in the Epstein case.

Answer 42

The court quoted Holmes J in R v Meer and others, who laid down 2 ways of guarding against the abuse of proceedings for sequestration:

1. The court should pay more attention to the element of advantage to creditors, particularly if the facts of the case suggest that it is a friendly sequestration based on section 8(g).
2. The court should refuse to grant repeated adjournments of the rule nisi, unless satisfied, on affidavit, that it would be to the advantage of the creditors.

Question 43

Describe the not very wholesome “carrot” which was dangled in front of the court in Epstein v Epstein.

Answer 43

The respondent’s father in law had undertaken to pay into the trust account of the applicant’s attorney the sum of R2500 for distribution among the respondent’s creditors after the sequestration costs had been met. The aim was to prevent the respondent’s imprisonment. The sequestration costs being estimated at R1500, a sum of R1000 would remain for distribution.

It was held that in a friendly sequestration the court should be reluctant to approve a family member’s offer of a small contribution as the “price” for granting of a sequestration order.

That procedure conflicted with the principles underlying the Act and the role which it assigned to the court.

It amounted to confronting the court with a not very wholesome “carrot” to induce it to grant relief if it could not, and would not, otherwise do so.

The court should resist such inappropriate cajolery.