SU10 Flashcards
Types of creditors
- Concurrent
- Secured
- Preferent
- Concurrent creditors
a. Do not enjoy any advantage over other creditors of the insolvent.
b. Are paid out of the free residue after any preferent creditors have been paid.
c. All rank equally: should the free residue be insufficient to meet their claims (as it usually is), each receives an equal proportion of his claim by way of a dividend
- Secured creditors
a. Holds security for his claim in the form of a special mortgage, landlord’s legal hypothec, pledge or right of retentio
b. A creditor whose claim is secured by suretyship is not secured for purposes of the Act
c. Entitled to be paid out of the proceeds after payment of certain expenses and any secured claim which ranks before his. If the proceeds are insufficient to cover the secured creditor’s claim= concurrent claim for the balance
d. May, when proving his claim, choose to rely exclusively on his security. In doing this, the creditor waives, by implication, any right to participate in the free residue- s89(2) and cannot be undone.
- Preferent creditors
Refers to any creditor who is entitled to receive payment before other creditors.
a. ranks above the claims of concurrent creditors
b. entitled to payment out of the free residue of the estate, ie, that portion which is not subject to any security interest. B/w themselves, the various categories of preferent creditor rank in a predetermined order of preference laid down by the Act
Preferent creditors: Preferences created
a. funeral and death-bed expenses;
b. costs of sequestration;
c. costs of execution;
d. salary or remuneration of employees;
e. statutory obligations; income tax;
f. claims of holders of general bonds and certain special bonds
NB!! Some of the preferences conferred by the Act are limited to maximum amounts. If a claim exceeds the statutory maximum, the creditor concerned has a concurrent claim for the balance.
Types of security that give preference
a. Special mortgages
b. Landlord’s legal hypothec
c. Pledge
d. Right of retention
e. Installment agreement hypothec
Special mortgages
A mortgage bond hypothecating immovable property- s 2
a notarial bond is excluded
s88- a bond gives no security or preference if:
a. the estate was sequestrated within 6 months after lodging of the bond with the Registrar of Deeds for registration;
b. the debt was incurred more than 2 months prior to lodging of the bond
c. the debt was not previously secured
Landlord’s legal hypothec
The landlord has a secured claim in respect of all movable assets owned by the insolvent which are covered by the hypothec (s85(2)).
s85 – Exclusion or limitation of preference under legal hypothec
Pledge
Constituted where there is delivery of movable property to a creditor on the understanding that it will be retained by him until his claim has been satisfied
Right of retention
A party has a right of retention (or lien) over specific property belonging to another if he has expended labour or incurred expenses in respect of the property and there are two types:
1. Enrichment liens
2. Debtor and creditor liens
Right of retention: Enrichment liens
The holder of an enrichment lien may retain the property until compensated for his expenses and labour, cannot insist on payment of more than the amount by which the owner has actually been enriched
* Salvage liens- person (creditor) incurs expense by preventing a thing from perishing- buys and feeds Koi to keep them alive.
*Improvement liens – creditor made improvements to a property at his expense (eg, replaced engine of a car. But loan agreement with credit provider will rank higher than this lien.)
Right of retention: Debtor and creditor liens
Based on contract and a creditor who holds one is entitled to retain the property as against the debtor until he has paid the amount due in terms of contract.
Installment agreement hypothec
If movable property has been delivered to a debtor under an instalment agreement, the seller acquires, on sequestration, a hypothec over the property which secures his claim for the balance outstanding under the contract (s 84(1))
Ranking of claims
*The act lays down the order in which claims against insolvent estate must be paid.
*The estate consists of proceeds of both encumbered and unencumbered assets. The proceeds of each encumbered asset are applied to pay the claim(s) secured by that asset.
*Any balance remaining after payment of secured creditors is combined with proceeds of unencumbered assets to pay the remaining creditors
*The free residue is then used first to satisfy the preferent creditors in full (in their order of preference) and thereafter to pay the claims of the concurrent creditors
Encumbered assets
- Initial costs: Section 89 – Costs to which securities are subject
- Secured claims: Section 95 – Application of proceeds of securities
Encumbered assets: Initial costs
In terms of s89(1), the proceeds of each encumbered asset must be applied to the payment of certain costs before payment of the claim(s) secured by the asset
Encumbered assets: secured claims
Section 95(1)– After payment of the initial costs, balance of the proceeds of the encumbered asset, including any interest earned on the price obtained for the asset, must be used to pay all the claims secured by the asset, in proper order of preference
Secured claims rank among themselves in the following order:
- Immovable property
*Enrichment lien;
*Special mortgage bond(s) and contract recorded in terms of the ALA in the order in which they were registered or recorded;
*Debtor and creditor lien. - Movable property
*Enrichment lien;
*Pledge;
*Special notarial bonds in the order in which they were registered;
*Debtor and creditor lien;
*Instalment agreement hypothec;
*Landlord’s hypothec.
Unencumbered assets
free residue
Unencumbered assets list
i) Funeral expenses
ii) Death-bed expenses
iii) Costs of sequestration
iv) Costs of execution
v) Salary or remuneration of employees
vi) Statutory obligations
vii) Income tax
viii) Claim secured by general and special bond
ix) Claims of concurrent creditors
Realization of assets of the estate
- T must realize assets for benefit of C
- T must dispose of estate assets for value
- However, C may authorise T to dispose of assets without receiving value in return
Case law: Janse van Rensburg v Muller 1996
In this case one of the insolvent’s assets was a damages claim against JVR arising from a fire on M’s farm. The creditors were not interested in enforcing the claim because of the financial risks. C’s authorised a cession to M’s spouse for no value. Court upheld it
T may not realize certain assets:
i) Wearing apparel & bedding
ii) Household furniture & tools
iii) Essential means of subsistence
*Insolvent debtor may waive this right
*Master may determine that only a portion may be retained by insolvent for his own use
Manner of realisation
*T must realise assets in the manner directed by C’s
*If the C’s have not given directions by the close of the second meeting, the trustee must sell the property by public auction or public tender
