SU11 Flashcards
Composition
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
Two types of compromise
- common law compromise
- statutory compromise (COMPOSITION)
Common law compromise
An insolvent may enter into a written agreement with his creditors and the provisional trustee to pay certain dividends on the creditors’ claims, on condition that he is released from his debts and any provisional order of sequestration is discharged.
**Based on a contract and requires approval of all creditors.
Statutory compromise–Composition
**A section 119 composition is a statutory mechanism under which the decision of the majority of the creditors binds the dissenting minority.
**The disadvantage is that the sequestration order is NOT discharged, and the debtor remains an un-rehabilitated insolvent but can apply for early rehabilitation
Offer of composition in terms of Section 119: Submission of offer to creditors via trustee
- At any time after first meeting, insolvent may submit a written offer of composition to trustee
- If T thinks that the creditors will probably accept, he must post it immediately in a registered letter or deliver it.
- However, If trustee sees no likelihood that they will accept, he must inform insolvent that it is unacceptable and that he doesn’t propose to send it to them.
- Insolvent may then appeal to the Master, who may direct trustee to send it after consideration.
Terms of composition
Generally, 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.
Requirements/restrictions imposed by Act
- Where an offer of composition provides for the giving of security, the nature of the security should be specified fully: who, type, extent?
- An offer of composition may not be accepted if it contains a condition entitling one creditor to obtain a benefit (against another creditor) that they would not have ordinarily been entitled to upon the distribution of the estate
- A condition which makes an offer of composition subject to the rehabilitation of the insolvent is of no effect.
Effect
Acceptance: Majority of creditors bind the minority
The sequestration order is NOT discharged – debtor remains an unrehabilitated insolvent
Consequences of s119 composition
- All concurrent creditors bound
- Restoration of property to insolvent
- Restoration of property to insolvent
- Restoration of property to solvent spouse
- Trustee to frame accounts, administer composition, and report to creditors
- Right to prompt rehabilitation
Consequences of s119 composition: All concurrent creditors bound
*. All concurrent creditors are bound
*. An offer which has been accepted is binding on insolvent and all creditors in so far as their claims aren’t secured or otherwise preferent.
*. Basis of liability is not contractual since creditors may be held bound even though they voted against acceptance or were not able to as their claims haven’t been proved.
*. Composition is best described as a statutory novation which discharges claims of concurrent creditors, whose rights are thereafter determined by the provisions of composition itself.
**General rule: on novation/composition surety’s liability (for a concurrent debt of insolvent) falls away. S 120(3) creates and exception: liability of a surety is not affected by acceptance of a composition.
Consequences of s119 composition: Restoration of property to insolvent
No transfer or delivery is necessary, re-vesting takes place by operation of law if it is a term of the composition (s 120(2)
Consequences of s119 composition: Restoration of property to solvent spouse
*Property of the solvent spouse which vested in the trustee must be restored (s 122). A composition isn’t binding on creditors of solvent spouse.
*Any movable property held as security by a creditor of the solvent spouse when the property vested in the trustee must be restored to that creditor, and the proceeds of any security which has been realized must be paid to the person or persons entitled to them, according to their rights.
Consequences of s119 composition: Trustee to frame accounts, administer composition, and report to creditors
- T is obliged to frame a liquidation account and a plan of distribution of the assets which are, or will become, available for distribution among the creditors under the composition.
- Any moneys to be paid and anything to be done for the benefit of creditors in pursuance of the composition must be paid and done through the T.
- T is under no duty to a creditor who fails to prove his claim before the T has made a final distribution among proved creditors.
- C may recover directly from the insolvent any payment to which he may be entitled under the composition. C must exercise his right of recovery within six months from the confirmation of the account under which the distribution was made.
- T is obliged to investigate the affairs and transactions of the insolvent prior to insolvency and to report on them to creditors in the usual way.
- The report must be submitted within one month of the acceptance of the offer= Reason unclear
Consequences of s119 composition: Right to prompt rehabilitation
General rule: Insolvent must wait for a certain period of time before applying for rehabilitation.
*However, where an offer of composition is accepted, insolvent may be entitled immediately to apply.
*On application the insolvent must provide a certificate by the Master – to the effect that the offer of composition was accepted, that payment was made, security given for payment, of not less than 50 cents in the rand for each claim proved.
Illegal inducement to accept composition
s141- it is a criminal offence for a person to accept a benefit as a consideration for agreeing to, or not opposing, a composition
Illegal inducement to accept composition effect
An undertaking to grant a benefit to a person to induce to accept an offer of composition is void and the person accepting the benefit is liable to pay a penalty to the estate equal to the sum of:
1. the amount of the claim which he proved against the estate
2. the amount or value of the benefit
3. the amount paid or to be paid to him under the composition
NB!! s131- T may recover the penalty. Failure to do so results to any creditor to proceed in his name on indemnifying him against all costs
Rehabilitation
The insolvency of a party comes to an end when he is rehabilitated. The purpose is to enable the insolvent to make a fresh start, free from his pre-sequestration debts and from the restrictions placed on him by the sequestration.
Two ways rehabilitation occurs:
- Automatic, by lapse of prescribed period of time
- Application to the court
Rehabilitation: Automatic after 10 years
An insolvent not rehabilitated by the court within a period of 10 years from the date of sequestration of his estate is deemed to be rehabilitated unless the court, on application by an interested person, orders otherwise prior to expiry of the 10-year period
*The 10 year period runs from the provisional sequestration
*If the court issues an order that an insolvent will not be automatically rehabilitated, the Registrar must send a copy of the order to every Registrar of Deeds.
NB!! Each Registrar must enter a caveat (which remains in force until the insolvent is rehabilitated) against the transfer of all immovable property, or the cancellation or cession of any bond, belonging to or registered in the name of the insolvent.
Rehabilitation: By court within 10 years
The Act sets out the circumstances and procedures however the decision is vested in the court’s discretion
Circumstances where rehabilitation can be sought- s 124
- Composition of not less than 50 cents in the rand
- Lapse of the prescribed period after confirmation of the first account
- No claims proved after 6 months
- Full payment of all the proved claims
Circumstances where rehabilitation can be sought: Composition of not less than 50 cents in the rand
If he has obtained a certificate from the Master that creditors accepted an offer of composition in which payment has been made, or security has been given for payment, of not less than 50 cents in the rand for every concurrent claim proved or to be proved against the estate.
If less than 50 cents in the rand, the insolvent may apply for rehabilitation only on the basis of the lapse of the prescribed period
Circumstances where rehabilitation can be sought: Lapse of the prescribed period after confirmation of the first account
An insolvent may apply for his rehabilitation after 12 months have lapsed from the confirmation by the Master of the first account in the estate.
If sequestrated before= wait 3-years for rehabilitation
**If convicted of a fraudulent act or offence under ss 132, 133, or 134= wait 5 years for rehabilitation
**Master has recommended that he be rehabilitated= wait 4 years
-Refusal to recommend rehabilitation constitutes a decision which is subject to review- matter de novo
Circumstances where rehabilitation can be sought: No claims proved after 6 months
Can apply for rehabilitation after 6 months if:
a. @t.t of making the application no claim has been proved against his estate
b. has no been convicted of any fraudulent act in relation to his insolvency
c. has not been sequestrated before
Circumstances where rehabilitation can be sought: Full payment of all the proved claims
M must have confirmed the plan of payment as it is not enough to simply state that there is no objection to the liquidation and distribution of the account
case law: Ex parte Oostuizen
Preliminary steps which must be taken…
- Notice of intention to apply
- Security for costs
Preliminary steps which must be taken: Notice of intention to apply
-Composition: not less than 3 weeks before making application, give notice of his intention by advertisement in the Gazette and by delivering or posting by registered post a copy of that notice to the trustee
-Lapse of the prescribed period after confirmation of the first account: 6 weeks notice
-No claims proved: 6 weeks notice
- Full payment: not less than 3 weeks in writing to the Master and the trustee
Preliminary steps which must be taken…Full payment
*Advertisement in the Gazette must be in the prescribed form, i.e. Form 6 and must include the ff info:
1. no. of the estate
2. full details and description of the insolvent
3. date of sequestration of the estate
4. date and time of the application for rehabilitation and the name of the court
5. ground of the application(CLNF)
Court can: condone omissions and errors but only if no prejudice to interested parties
Ex parte Sedeman: no disclosure of name of court= re-advertised
Ex parte Anderson: notice contained wrong info= rejected
Ex parte Minnie et Uxor: omission of ID of applicants= omission did not invalidate appl.
: condone short notice and will generally do so where the relevant party is the
Master/trustee
Preliminary steps which must be taken: Security for costs
*Insolvent must provide a security, to the amount of R500, for the payment of the costs of any opposition to the application not less than 3 weeks before the hearing
**Purpose: encourage creditors to place before the court facts relevant to the application
Application for rehabilitation
- Notice of motion
- Form and content of application
- Master’s report
- Opposition to application
Application for rehabilitation: Form and content of application
Application is brought by way of notice and supported by affidavit setting out the following:
1. Full details of the insolvent, details of the sequestration order = reason, insolvent’s assets and liabilities and claims…
2. An allegation that the insolvent made a complete surrender of his estate
3. Insolvents assets and liabilities at date of application
4. An allegation establishing the basis on which the application is brought and that the required circumstances exist:
a. Composition: Particulars of the composition, stating whether there are creditors claims which have not been proved + Master’s certificate.
b. Lapse of time: Affidavit must show that the insolvent is not barred from applying by s124(2) -sequestrated before? Convicted of fraud?
c. No claim proved: No claim proved? sequestrated before? Convicted of fraud?
d. Full payment: The affidavit must state that the Master has confirmed a plan of distribution providing for payment as required by s 124(5) and any details which might influence the court in making its decision
Application for rehabilitation: Form and content of application… Full payment case law
Greub v The Master 1999 (1) SA 746 (C):
The applicant sought an order setting aside the Masters refusal to recommend rehabilitation.
The applicant failed to explain various matters in his papers.
He mentioned he had ‘funds available’ to him overseas, but did not state how much or where, he did not explain the circumstances that led to his sequestration, he failed to deal with all the proved claims other that to say he objected to ‘certain’ claims and was not ‘indebted to these persons in these amount’.
The court held that the applicant had not been frank with it
Application for rehabilitation: Masters report
The rehabilitation application must also include the Masters report
Application for rehabilitation: Opp to application
S127(1): The Master, a trustee, a creditor or any other person interested in the estate may oppose the granting of a rehabilitation application
Opposing affidavits must be filed with the Registrar and served on the applicant (who can then respond in a replying affidavit)
