(1) INTRODUCTION TO INSOLVENCY

“INSOLVENCY”
 The inability of a debtor to pay their debt; or
 The state of having liabilities > assets; or
 The inability of a business or person to pay debts when they are due or in the usual
course of business.

THE LEGAL TEST OF INSOLVENCY

Whether debtor's liabilities objectively exceeds his assets?

Venter v Volkskas Ltd 1973 (3) SA 175 (T) 179

 A person is only declared or treated as an “insolvent” when his estate has been
sequestrated by a court order.
 Sequestration order – a formal declaration that a debtor is insolvent.
 SEE: section 2 of the Insolvency Act.

PURPOSE OF SEQUESTRATION ORDER

1) To secure the orderly and equitable distribution of a debtor’s assets;
2) To assess if the debtor’s assets are sufficient to cover all his debts.

 To ensure that the debtor’s assets are liquidated and distributed amongst all creditors
in accordance with their order of preference.
 ^^ Richter NO v Riverside Estates (Pty) Ltd 1946 OPD 209 at 223.
 The debtor is divested (deprived) of his estate and may NOT continue to burden it
with new debts.
 The order is generally aimed at benefiting the creditors; court will NOT sequestrate a
debtor’s estate unless it is for the advantage of creditors.
 ^^ Mayet v Pillay 1955 (2) SA 309 (N) 311.
 A sequestration order will NOT be granted if the debtor’s assets will be consumed by
sequestration process.
  ^^ Lynn & Main Inc v Mitha NO 2006 (5) SA 380 (N) 383.
 Sequestration relieves the debtor of legal proceedings by creditors and offers him a
chance to be rehabilitated.
 ^^ section 129(1)(b).
 It is not an ordinary judgment that empowers a creditor to execute his claims against
the debtor.
 ^^ Naidoo v Absa Bank Ltd 2010 (4) SA 597 (SCA) 601.

“ESTATE”
 Usually a collection of assets and liabilities of the debtor.
 ^^ Ex Parte Foxcroft 1923 OPD 234 -235.
 Only the debtor’s estate must be sequestrated.
 Includes a joint estate of spouses married IN community of property.
 ^^ Ex Parte Valley 1930 CPD 304.
 Both spouses become insolvent.
 If they divorce after the sequestration order, their estates will separately sequestrated.
 A debtor who is married OUT of community of property will have his estate
sequestrated separately.
 A debtor may acquire a new estate while he is still insolvent via his trustee.
 ^^ Ex Parte Foxcroft 1923 OPD 234 -235.

“DEBTOR”
 A person or partnership or estate thereof, which is a debtor in the ordinary sense of the
word;
 EXCEPT a body corporate, company or other association of persons which could be
placed under liquidation under the law relating to companies.
 The law governing the liquidation of insolvent companies is Chapter 14 (sections
337-426) of the Companies Act 1973.
 These provisions were left in operation and apply to the winding up and liquidation of
companies under the 2008 Act as well.
 The entities that may be placed in liquidation are: a company; external company; and
body corporate.
 An entity or association of persons is a debtor in ordinary sense of the word if it has
an estate or is able to incur debts.
 ^^ Magnum Financial Holdings (Pty) Ltd v Summerly & Another 1984 (1) SA
160 (W) 163.
 a) Natural person;

b) Partnership;

Even those that include juristic persons.

SARS v Hawker Aviation Partnership 2006 (4) SA 292 (SCA) 306).

c) Deceased person;

d) Person incapable of managing his own affairs;

e) External company which does not fall under the definition of “external company” under the
Companies Act 1973.

E.g., a foreign company that has not established a business place in SA.

f) Entity or association of persons that is not a juristic person.

E.g., a trust.
Magnum Financial Holdings.

NOTE:
Although a trust falls within the definition of a “juristic person” in the 2008 Act, it does not
meet the definition of a “company” and, thus, cannot be liquidated under Chapter 14 of the
1973 Act.
A body corporate, as defined under the Insolvency Act, cannot be sequestrated or wound up
for non-payment of debts due to its insolvency.
Reddy v Board Corporate of Croftdene Mall 2002 (5) SA 640 (D) 645-7.

“CREDITOR”
Parties who have a justifiable claim against the insolvent or debtor’s estate.
Includes:
a) An individual
b) A person, partnership, or estate thereof;
c) An entity or association of persons;
d) Deceased person’s estate;
 e) External company as defined in the 2008 Act.

JURISDICTION OF THE COURTS

 ONLY the High Court may hear insolvency matters.
 However, a Magistrate Court may preside over the prosecution of criminal offences
of insolvency matters.

SECTION 149(1)

A relevant court has jurisdiction over the debtor’s estate if:

(1) If the debtor is domiciled or has property within the court's jurisdiction:
On the date when the application for voluntary surrender or compulsory sequestration of the
debtor’s estate is lodged with the Registrar, the debtor is domiciled or owns property within the
jurisdiction of the court (section 149(1)(a));

A personal right (a right to a performance of some kind) is taken to be situated where the debtor
liable to render the performance is domiciled – Nahrungsmittel GmbH v Otto.

(2) Residence or business within court's jurisdiction in preceding 12 months:

At any time within the 12 months immediately preceding the lodging of the application, the debtor
ordinarily resided or carried on business within the jurisdiction of the court (section 149(1)(b)).

Debtor need NOT have ordinarily resided or carried on business for the entire 12 months.

JURISDICTION OF LITIGATION AGAINST THIRD PARTIES:

 Section 149 deals with a debtor and his estate.

 It is NOT relevant where the trustee of an estate litigates against third parties.
 Therefore, a trustee can litigate against third parties in any court with relevant
jurisdiction.
 ^^ Spendiff NO v Kolektor (Pty) 1992 (2) SA 537 (A).
 Ordinary rules of jurisdiction apply and the trustee CANNOT rely on section 149.

CONFLICTING COURTS JURISDICTION:

 A relevant court having jurisdiction over a debtor may refuse or postpone the
surrender or sequestration of his estate if it appears equitable or convenient that his
estate be sequestrated by another court.
  ^^ section 149(1).
 The sequestration may be transferred to another competent court.
 ^^ section 9 of Supreme Courts Act.
 In making this decision, a court must consider, on the facts, in light of all relevant
factors, whether the transferee court should dispose of the matter.
 Relevant factors include: the convenience of parties and the court; and the general
disposition of litigation.
 ^^ Mulder v Beacon Island Shareblock Ltd 1999 (2) SA 274 (C).
 The essential inquiry is NOT where the sequestration order may more conveniently
be granted;
 But where the estate may more conveniently be administered (what the court must
consider is what will happen after the order has been granted).

SOUTH AFRICAN LAW

 Insolvency Act regulates insolvency law in SA.
 Must be consistent with the Constitution.
 Insolvency law poses a threat to some provisions in the Bill of Rights.
 E.g., right to equality; right to freedom & security of person; right to privacy, etc.
 Section 21 was upheld in Harksen v Lane.
 Section 66(3) was declared invalid to the extent that it allows a presiding officer who
is not a judge or magistrate to issue a warrant for imprisonment – De Lange v Smuts.
 The mere fact that an insolvency provision conflicts with a fundamental right does
NOT mean that it is constitutionally invalid.
 The issue of constitutional invalidity involves a twofold inquiry (section 36 inquiry).

1) Does the provision conflict with a fundamental right?

2) If so, is the limitation reasonable and justifiable in an open and democratic
society based on human dignity, equality and freedom?

THE MASTER
Appointed by the High Court in terms of the Administration of Estates Act.

Functions and powers include:

 Exercises custody of all documents relating to insolvent estates;
 Charges prescribed fees for the performance of various functions, payable to DOJCD;

 Master is a creature of statute.

  His powers are given by the legislature – Master v Talmud.
 He cannot act unless empowered by statute either expressly or by necessary
implication – De Lange v Smuts.
 He is NOT a judge or judicial officer and therefore cannot issue court orders or make
judgments.
 Section 151 – any person aggrieved by a decision of the Master may bring it under
review by the court.
 To be reviewable, the decision must be final in effect;
 Moreover, it must have the effect of disposing of at least a substantial portion of the
relief claimed.
 A person is “aggrieved” for these purposes if his legal rights have been infringed or if
he has a legal grievance – Jeeva v Tuck.
 The court has powers of both appeal and review with the additional power, if
required, of receiving new evidence and deciding the whole matter afresh.
 However, it is ONLY if the Master has erred materially, that the court can intervene
and exercise its powers under section 151.

CONDONATION OF ERRORS AND DEFECTS

SECTION 157(1)
Nothing done under the Act will be invalid by reason of a formal defect or irregularity, unless a
substantial injustice has been thereby done, which in the opinion of the court cannot be remedied by
any order of the court.

 If a formal defect (or irregularity) has NOT caused a substantial injustice, the
procedural step in question is valid.
 ^^ Ex parte Cowley.
 The court may condone the defect in these circumstances, but this seems incorrect,
since section 157 does NOT confer on the court the power to condone defects.
 ^^ Ex parte Slabbert.
 If a formal defect has caused a substantial injustice, but the prejudice to creditors can,
in the opinion of the court, be remedied by an appropriate order, then the defect is
NOT fatal;
 Provided, the party concerned complies with the corrective order.
 ^^ Ex parte van Rensburg.
 If a formal defect has resulted in a substantial injustice and the prejudice to creditors
cannot be cured by any order of the court, then the procedural step is INVALID.
 There is some uncertainty as to what is meant by “formal”.
 The correct interpretation is probably that adopted in Ex parte Slabbert.
  Namely, that a formal defect is simply a departure from a prescribed or established
procedure.
 ^^ confirmed in Ex parte Anderson.

Additional grounds for condonation:

a) Where the deviation is so slight as to trigger the applicability of the de minimis rule –
Ex parte Immerman;
b) Where all interested parties have waived compliance with the provisions of the Act –
Ex parte Nel;
c) Where the provision in question is not peremptory and has substantially been
complied with – Ex parte Bosch;’
d) Where it was impossible to have complied with the Act – Ex parte Henri.

If a defect does not qualify as “formal” for purposes of section 157(1), and none of the
grounds for condonation mentioned above is present, then the procedural step in question is
INVALID – Ex parte Foley.

___________________________________________________________________________

(2) VOLUNTARY SURRENDER

There are 2 ways in which a debtor’s estate may be sequestrated:

1) The debtor himself (or his agent) may apply to court for acceptance of the surrender
of his estate (section 3(1)).

→ voluntary surrender

2) A creditor/s (or his agent) may apply to court for the sequestration of the debtor’s
estate (section 9(1)).

→ compulsory sequestration

VOLUNTARY SURRENDER
 Occurs when the debtor himself applies to court for acceptance of the surrender of his
estate.
  Section 3(1).
 It is the debtor himself who gives up his estate to the courts.

WHO ARE THE APPLICANTS?

a) Natural person

 Debtor himself;
 Or his agent.
 Agent must be duly authorised – Ex parte Brown.

b) Executor of deceased debtor’s estate;

c) Curator bonis of prodigal's estate (Ex parte Houston);
d) Members of a partnership (Ex parte Bester);
e) Both spouses of a joint estate, married in community of property.

REQUIREMENTS:
Courts may approve debtor’s voluntary surrender application if:

a) The debtor’s estate is actually insolvent;

b) The debtor owns property of sufficient value to cover the costs of the sequestration
process, payable from the free residue of his estate;
c) Sequestration is to the advantage of creditors (section 6(1)).

FORMALITIES:

(a) Notice of intention to surrender:

 Debtor must publish his intention in the GG and a newspaper which circulates within
the area in which he resides or his place of business is located.
 Publication must done not more than 30 days, but less than 14 days, before the date of
hearing of the application.

The notice must state:

 Full names of debtor;

 His address;
 His occupation;
 Date of acceptance of his application;
  Court which accepted it;
 Where the debtor’s statement of affairs will be inspected.

What is the purpose of the notice?

To alert creditors as to the intended application, in case they should wish to oppose it – R v
Lewin.

(b) Notice to creditors and other interested parties:

 Within 7 days of the publication of notice to surrender, the debtor must furnish copies
of the notice to creditors and other related parties.
 This can be done via an affidavit of the debtor’s attorney – Ex parte Harmse.
 Debtor must furnish the copy of notice of surrender to each creditor – section 4(2)(a);
Ex parte Wassenaar.
 Where a debtor is a juristic person, it may furnish the copy of notice of surrender to
registered trade unions that represent his employees – section 4(2)(b)(i).
 Such notice can also be furnished to the employees themselves, and must be posted
where the employees have access to see it – section 4(2)(b)(ii).
 Debtor must furnish a copy of the notice of surrender to SARS – section 4(2)(b)(iii).

(c) Preparation and lodging of statement of affairs:

Debtor must prepare a statement of his affairs in accordance with Form B.

It must show:
 A balance sheet;
 List of immovable assets and their estimated value;
 List of movable property assets and their estimated value (Ex parte Nel);
 List of debtors with their postal and residential addresses (Ex parte Silverstone; Ex
parte Murphy – merely stating “sundry debtors” cannot be condoned; failure to give
addresses of certain debtors was condoned);
 List of creditors with their postal and residential addresses (Cumes & Co v Sacher);
 List of movable assets pledged, hypothecated, subject to a lien, or under attachment in
execution of a judgment.
 List and description of every accounting book used by the debtor at the time of the
notice of surrender or sequestration;
 A detailed statement of what caused the insolvency;
 Certain personal information about the debtor, including details of any prior
insolvency and rehabilitation;
  Affidavit affirming that the statement of his affairs is correct and complete.

 The statement of affairs with supporting documents must be lodged in duplicate at the
Master’s Office – section 4(3).
 If the debtor resides or carries on business in a magisterial district in which there is no
Master’s Office, he must lodge an additional copy of the statement at the office of the
Magistrate of that district – section 4(5).
 The statement of affairs must lie for inspection by creditors for a period of 14 days
stated in the notice of surrender – section 4(6).
 On expiry of the inspection period, the Master (and Magistrate) issues a certificate to
the effect that the statement has duly lain for inspection, and whether any objections
have been lodged by creditors.
 This certificate must be filed with the Registrar before the application is heard.
 Ex parte Viviers – debtor who has already made an unsuccessful attempt to surrender
his estate may lodge (reuse) the same statement of affairs.

WHEN IS THE DEBTOR INSOLVENT?

 Debtor may only be declared insolvent by the courts if his total liabilities exceeds his
assets.
 Courts usually refer to the debtor’s statement of affairs – Ex parte van den Berg.
 It must verified whether the debtor has more liabilities than assets – Ex parte
Harmse.
 Ex parte Greef – debtor’s statement of affairs showed a surplus of assets, but the
application to surrender was accepted because the value of assets was a mere estimate.

FREE RESIDUE

 Portion of the estate which is NOT subject to a special mortgage; legal hypothec;
pledge or right of retention.
 The surplus that remains after the administrative costs and sequestration costs are
deducted – section 97; Ex parte Van Heerden.
 Goods bought by the debtor on instalments fall under “free residue” to the extent that
their market value exceeds the outstanding balances – Mindel v Shaer.
 Debtor must own sufficient property to defray sequestration costs – Miller v Janks.
 If the free residue is insufficient, the courts may refuse the application – Ex parte
Swanepoel.

ADVANTAGE TO CREDITORS
  A debtor must prove that the sequestration is to the advantage or benefit of creditors.
 Debtor must show that there is a reason to believe that the sequestration is to the
advantage of creditors.
 This onus of proof is more difficult to meet in voluntary surrender than
compulsory sequestration – Botha v Botha 1990 (4) SA 580 (W) 581.
 Debtor may be required to give a detailed account of his own financial position, etc.
 It must be proved whether the sequestration holds little or more benefit to the
creditors.

A successful notice of voluntary surrender has the following effects:

(a) Stay of sales in execution

 Once an insolvent has published a notice of voluntary surrender in the Gazette, it is

unlawful to sell any property in the estate which has been attached;
 Unless the sheriff (person charged with the sale) was unaware of the notice of
voluntary surrender – section 5(1).
However, if the value of the property does not exceed R5000, the court or Master may
order the sale and direct how the proceeds may be distributed – section 5(1).
 The duration of the property sale prohibition is not fixed.
 But it appears that it continues until the voluntary surrender application is adjudicated
by the court.
 Webb v Bergsma – if the Sheriff holds a sale in execution in contravention of section
5(1), the sale is illegal and the debtor can successfully resist proceedings brought by
the buyer to enforce it.
 ^^ even if the application to surrender is subsequently refused.
 However, if ownership of the property is transferred to the buyer pursuant to the
illegal sale, the trustee of the estate CANNOT claim the property, UNLESS he
proves that the buyer acted in bad faith and with knowledge that the sale was unlawful
(Gibson v Iscor Housing Utility).

(b) A curator bonis may be appointed:

 A Master appoint a curator bonis to avoid the debtor from selling or disposing of all
his assets before the voluntary application is adjudicated – section 5(2).
 The curator bonis is obliged to take control of the debtor’s estate – Moosagee v
Bhyat.

(c) Potential compulsory sequestration:

If, after having published a notice of surrender, a debtor:
  Fails to lodge a statement of his affairs; or
 Lodges an incorrect or incomplete statement in a material respect; or
 Fails to make an application to the court on the appointed day, and the notice is not
properly withdrawn…

He commits an act of insolvency which allows a creditor to apply for compulsory

sequestration against him – section 8(f).

(d) No withdrawal of notice without consent of the Master:

 Once a notice of voluntary surrender has been published, it may not be withdrawn or
cancelled without the consent of the Master – section 7(1).
 A debtor who wants to withdraw his initial notice or application for voluntary
surrender must apply to the Master for his consent.
 Master may give such consent if the initial notice was published in good faith and
there are objectively good reasons for its withdrawal – section 7(2).
 A publication of a notice of withdrawal, together with the Master’s consent, must be
made in the Gazette and in the newspaper, in which the initial notice was published –
section 7(2).

(e) Lapse of notice of surrender:

 A notice of surrender only lapses if the court does not accept the surrender;
 Or if such notice is properly withdrawn; or
 If the debtor fails to make the application for surrender within 14 days of the date
advertised as the date of that application hearing.
 Section 6(2).
 Ex parte Viviers – court rejected the debtors’ withdrawal contentions because their
initial notice had lapsed due to the expiry of the 14-day period.
 If a court had appointed a curator bonis to a debtor’s estate, the control of the estate
must be restored to the debtor upon the lapse of the notice of surrender.

THE COURT’S DISCRETION

Courts have discretion to reject the voluntary surrender application if:

a) Debtor displayed gross negligence or extravagance, and pretended to have debts (Ex
parte Logan);
 b) Debtor’s creditors are not pressing him for payment, or are willing to give him more
time, or to allow him to pay in instalments (Ex parte Kruger);

c) Debtor has an ulterior motive in applying for voluntary surrender (Naidoo v

Matlala);

d) Debtor failed to give a detailed account of his financial position;

e) Debtor’s application papers were materially defective (Ex parte Harmse);

f) Debtor’s insolvency can be dealt with under the NCA – section 86(7) of this Act; Ex
parte Ford;

g) Costs of sequestration process have been paid from the debtor’s estate, and no surplus
is left – section 97(3).

Costs of surrender:
Costs of an unsuccessful creditor’s opposition of a voluntary surrender are paid by the
creditor concerned – Ex parte Bellairs.

SETTING ASIDE A SEQUESTRATION ORDER

 There is NO APPEAL against a court’s refusal to accept a voluntary surrender
application.
 Nonetheless, any party aggrieved by a court order accepting a voluntary surrender
application may appeal – section 150(1) & (5).
 The lodging of an appeal does NOT suspend the execution of the relevant court order
to accept a voluntary surrender application.
 No property of the debtor’s estate may be realised without the debtor's consent –
section 150(3).
 Section 149(2) empowers a court to cancel or vary any of its previous orders only if
the initial application was defective.
 ^^ Ex parte Mavromati.
 OR if there were other factors that warrant the court to cancel or vary the order in
question.
 ^^ Naidoo v Matlala.
 Cancelling or varying of a previous sequestration order does NOT release the debtor
from his debts.
 Section 149(2) does NOT empower courts to suspend their initial orders.
 ^^ Mondi v Rhodes.
  Where a creditors meeting failed to elect a trustee, the Master or the insolvent may
apply to court to have the sequestration order set aside – section 54(5).

CURRENT DEBTOR'S LIABILITY v CONSTITUTION:

Coetzee v Government of The Republic of South Africa.

 A judgment debtor who has failed to satisfy the judgment debt within 10 days of the
date of the judgment was required to attend a hearing;
 At which an enquiry will be conducted by a Magistrate into the financial position of
the debtor, his ability to pay and his failure to do so.
 Sections 65A to 65M of the Magistrates Courts Act – provided for the
imprisonment of judgment debtors.
 These provisions violated the right to freedom and security, as contained in section
12(1) of the Constitution.
 It was considered that to put someone in prison is a limitation of that person's right to
freedom.
 To do so without any criminal charge being levelled or any trial being held is a radical
encroachment on that right.
 Although, imprisonment was ostensibly aimed at the debtor who will not pay, the
committal or continuing imprisonment of any judgment debtor (who fails to pay) in
terms of section 65F or 65G of the Magistrates Courts Act was declared INVALID.
 This took effect from the date of the court's order.

 A debtor who conceals, or destroys books and/or assets is liable to imprisonment for a
period not exceeding 3 years;
 At any time before or after sequestration of his estate.
 This suggests that a debtor might not be directly imprisoned for his debts, but he may
still go to jail for other criminal activities that relates to his insolvency.
 Section 132.

___________________________________________________________________________

(3) COMPULSORY SEQUESTRATION & FRIENDLY

SEQUESTRATION
 When creditor/s apply to court to have the estate of a debtor surrendered, and to have the
insolvent party declared bankrupt.

The court may grant a compulsory sequestration order if:

a) The applicant has established a claim which entitles him to apply for the
sequestration of the debtor's estate – section 9(1);

b) The debtor committed an act of insolvency or is insolvent;

c) There is reason to believe that it will be to the advantage of creditors; onus of proof
rests with the applicant – section 12(1).

THE APPLICANT IS ENTITLED TO APPLY FOR THE

SEQUESTRATION OF THE DEBTOR'S ESTATE IN TERMS OF
SECTION 9(1), AND SUCH APPLICATION MUST:

a) Be instituted by a creditor (or his agent) who has a liquidated claim against the debtor
for not less than R100; or

b) 2+ creditors (or their agents) who have liquidated claims against the debtor for not
less than R200;

 A creditor who has security for his claim may also apply – R v Hohls.
 If an agent applies on behalf of the creditor, he must be authorized to do so prior to
bringing the application.
 Once the application has been made, an agent’s lack of authority CANNOT be
rectified by ratification.
 The applicant must have a liquidated claim.
 Section 9(2) provides that a liquidated claim “which has accrued but which is not yet
due” by the time the application is heard, must be regarded as liquidated.
 A contractual claim cannot be considered to have “accrued” for these purposes, until
the creditor has performed any reciprocal duty resting on him.
 Sanddune v Catt – claim for rent cannot be relied upon until the lessor has made the
leased premises available to the lessee for the relevant period.
 Liquidated claim – e.g., claim for money for goods sold and delivered to the buyer.
  Unliquidated claim – e.g., claim for damages for failure to carry out contractual
obligations.
 A claim for the transfer of property does NOT give locus standi to apply.
 The applicant must have a liquidated claim of not less than R100, both when he
applies for a provisional order of sequestration AND when he asks for the order to be
made final.
 After the debtor’s estate has been provisionally sequestrated, the debtor himself
cannot make a payment to the creditor to extinguish the latter’s claim or reduce it
below R100.
 BUT a third person (e.g., a surety) may make payment on the debtor’s behalf.
 If the payment extinguishes the claim or reduces it to less than R100, the provisional
order must be discharged.
 A creditor is not entitled to refuse payment in full (but may reject part payment) by a
third person – Paizes v Phitides.
 Where the creditor’s locus standi is eliminated by a payment, another creditor may
intervene and apply for a further provisional order of sequestration to be granted on
discharge of the first order.

THE DEBTOR COMMITS AN ACT OF INSOLVENCY OR IS

INSOLVENT IF HE OR SHE:

(a) Fails to satisfy judgment:

 Debtor failed to comply with a previous court judgment;

 Including a provisional sentence (Meskin v Arnold);
 Passed against him in his own name;
 Or that he failed to indicate disposable property to satisfy such judgment or to satisfy
the Sheriff that he has sufficient property to comply with the judgment – section 8(b).
 However, if the Sheriff neglects to ask the debtor to satisfy the writ and later finds
insufficient or no property, NO act of insolvency can be levied against that debtor
(Nedbank v Norton).

(b) Absent from the Republic or dwelling:

 If a debtor leaves or remains absent from the Republic;

 Or departs from his dwelling;
 With the intention to delay or evade the payment of his debts, he commits an act of
insolvency.
 Section 8(a).

Estate Salzmann v Van Rooyen

 The debtor, a company director, left for CPT ostensibly for the purpose of visiting his wife
who had fallen ill there. However, prior to his departure, he appointed another person as co-
director to run the business; disposed of his office equipment; and terminated the lease of his
residence. He gave no address at which he could be contacted in CPT and, immediately on
arriving there, resigned as director and ignored letters relating to business matters addressed
to him. Court held that it could be clearly inferred that the debtor intended to evade payment.

 Nonetheless, proof of departure or absence, by itself, is NOT sufficient.

 A debtor may be absent or depart from the Republic or his dwelling for other reasons
not connected with the payment of his debts.
 Abell v Strauss – the debtor, a taxi driver, was called away frequently and at irregular
times.

(c) Fails to apply for surrender:

 A debtor who initially published a notice of surrender;

 That has NOT lapsed or been withdrawn;
 And who:

a) Failed to lodge a statement of his affairs with the Master;

b) Filed an incomplete or incorrect state of affairs in a material respect;
c) Failed to apply for acceptance of the surrender on the specified date…

… commits an act of insolvency.

Section 8(f).

(d) Commits disposition prejudicing creditors or preferring one creditor:

 If a debtor makes, or attempts to make, any disposition of any of his property;

 Which has, or might have, the effect of prejudicing his creditors;
 Or of preferring one creditor above the other;
 He would have committed an act of insolvency.
 Section 8(c).
 An actual disposition of property AND an attempted disposition of property.
 If there is an actual disposition, it must have the effect of prejudicing the debtor’s
creditors or preferring one creditor above another.
 If there is an attempted disposition, it must be such that it would, if completed, have
the same effect.
  “Disposition” is wide enough to include both a contract in which the debtor
undertakes to dispose of property AND the actual subsequent delivery of the property
(Nahrungsmittel).
 ONLY the effect of the disposition need be considered.
 The debtor’s state of mind in making the disposition is irrelevant!
 It is NOT sufficient for the applicant to state baldly that the disposition has had the
effect of prejudicing creditors: he must explain how it has had this effect.
 ^^ seems to not be a requirement where the disposition is prima facie prejudicial.

(e) Removes property with the intention to prejudice or prefer creditor/s:

 If a debtor removes or attempts to remove his property;

 With the intention to prejudice his creditors or to prefer one creditor above the other;
 He commits an act of insolvency.
 Section 8(d).
 Mere removal of such property is sufficient.
 Hence, the intention of the debtor, and NOT the effect of the removal, is important.
 De Villiers v Maursen Properties – the test for determining whether the debtor had
the requisite intention is a subjective one, and may be inferred from the
circumstances surrounding the removal.

(f) Offer of arrangement:

 If a debtor makes, or offers to make, any arrangement with any of his creditors;
 For releasing him wholly or in part from his debts;
 He commits an act of insolvency.
 Section 8(e).

Joosub v Soomar
An arrangement qualifies in terms of this subsection only if it is indicative of the debtor’s
inability to pay his debts. This criterion was satisfied in casu where the debtor offered to pay
his creditors 50c and intimated that, if the offer was not accepted, he would consider
surrendering his estate.

 The object of the arrangement must be to release the debtor from liability.
 Therefore, any offer or arrangement to pay a certain amount in order for the debtor to
be allowed more time to pay, does NOT amount to an act of insolvency (Mackay v
Cahi).

(g) Give notice of inability to pay:

  If a debtor gives a notice in writing;
 To any of his creditors;
 Indicating that he is unable to pay any of his debts;
 He commits an act of insolvency.
 Section 8(g).
 Patel v Sonday – debtor does NOT commit this act of insolvency by informing the
creditor orally that he cannot pay his debts, although he does provide evidence of
actual insolvency.
 Usually, the debtor must have intended to give a notice of his inability to pay
(Barlows v Bouwer).
 Court has regard as to whether a reasonable person in the position of the receiver and
having knowledge of the relevant circumstances would have interpreted the document
to mean that the debtor cannot pay his debts.
 Objective test, not subjective.
 Unless the receiver of the notice knew or ought to have known, that the notice did not
reflect the intention of the debtor, the debtor will be deemed to have given that notice
intentionally.
 ^^ Du Plessis v Tzerefos.

(h) Inability to pay debts after notice of transfer of business:

 If a debtor, who is a trader;

 Issues a notice in a Gazette in terms of section 34(1) read with subsection (2);
 Of his intention to transfer his business;
 And thereafter, fails to pay all his debts;
 He commits an act of insolvency.
 Section 8(h).
 Section 34(2) provides that, as soon as a notice is published in terms of section 34(1),
every liquidated liability of the trader in connection with his business which would
become due at some future date, falls due forthwith, if the creditor concerned
demands payment.
 Inability to pay one debt may be accepted as proof that the debtor is unable to pay all
his debt.
 However, any evidence that the debtor has refused or is unwilling to pay a particular
debt will NOT suffice as an act of insolvency.

REASON TO BELIEVE THAT SEQUESTRATION WILL BE TO THE

ADVANTAGE OF CREDITORS
 Section 12(1)(c).
 Courts will examine whether the majority of the creditors will benefit from the
compulsory sequestration order.
 Fesi v Absa – whether a “substantial portion” of the creditors will derive advantage
from sequestration?
 To be to the creditors’ advantage, the sequestration order must yield some dividend
towards creditors.
 At the least, not a negligible dividend i.e., not small, trivial or insignificant.
 If, after payment of sequestration costs, there will be nothing or insufficient dividend
towards creditors, there will be NO advantage to such creditors.
 Ex parte Ogunlaja – court held that for voluntary surrender and compulsory
sequestration in the North Gauteng High Court, the dividend must be at least 20c.
 The mere fact that there is a surplus left after the sequestration costs have been paid
does NOT mean that the sequestration will be to the advantage of creditors.
 It is necessary to compare the position of the creditors if there is no sequestration;
 With their position if there is a sequestration.
 Sequestration will only be to the advantage of creditors if it will result in a greater
dividend to them than would otherwise be the case;
 OR if it will prevent an unfair division of the proceeds of the assets or some
creditors being preferred to others.
 If there is no change in the position of the creditors before and after the sequestration,
there will be no advantage to creditors.

Gardee v Dhanmanta
A debtor’s only creditor applied to sequestrate his estate on the basis of a nulla bona (no
property to seize for execution) return. The court held that the creditor had to satisfy it that
there was reason to believe that, after the costs of sequestration had been paid, he would
recover an amount that was not negligible.

Furthermore, he had to demonstrate some reasonable expectation that the amount would
exceed the likely proceeds of ordinary execution. As he had given no information other
than that he had obtained a nulla bona return, he had failed to show that sequestration would
be to his advantage.

 A prospect of advantage to creditors must be reasonable, and not be too remote.

 Generally deemed that when a debtor does not have assets, there is no advantage to
creditors.
 However, proof of assets is NOT necessary where it can be shown that a debtor has
an adequate free residue that is likely to cover his debts.
 Onus of establishing the advantage to creditors remains with the affected creditors.
 Lotzof v Raubenheimer
It was unsuccessfully contended that creditors would not benefit from sequestration because
the debtor had no assets. The debtor had been a farmer immediately prior to the application,
and he admitted ownership of a motor car claimed by his wife as her property.

The court held that it was inconceivable that the debtor could have carried on farming
operations, albeit unsuccessfully, without any assets and, accordingly, that there was a
reasonable prospect of an inquiry revealing assets. Furthermore, an investigation might show
that the motor car was available for the benefit of creditors.

FORMALITIES FOR THE APPLICATION FOR SEQUESTRATION

(a) Form and content of the application:

 The full names; status; occupation; and address of the sequestrating creditor.
 The full names; date of birth; ID no.; marital status of the debtor.
 And, if the debtor is married, the full names; date of birth; and ID no. of his spouse.

Section 17(4)(b) of the Matrimonial Property Act – separate sequestration application must
be made against each spouse if they are married in community of property.
Detkor v Pienaar – this section is peremptory and, hence, the creditor has to ascertain in
advance which matrimonial regime applies.

The amount; cause; the nature of claim; and a statement as to whether a claim is
secured.
 Acts of insolvency committed by the debtor and/or his de facto insolvency.
 An averment that the sequestration will be to the advantage of creditors.
 Any other relevant facts must be stated.
 A statement that security will be furnished to the Master and his certificate obtained –
section 9(3).
 A statement that copies of the papers will be lodged with the Master – section 9(4).
 A statement confirming that copies of the application will be furnished to interested
parties – section 9(4A)(a).

(b) Steps prior to adjudication:

(i) Security for costs:

 Creditors who institute sequestration proceedings must provide security or a deposit

with the Master for all the sequestration costs – section 14(1).
  Master must then provide creditors with a certificate confirming that security has been
obtained, 10 days before the date of application – section 9(3).
 Date of application: date of signature of the of notice motion.
 It is not necessarily the date of hearing – Thomas v Cakebread.

(ii) Search of Master’s records:

 Applicant must file an affidavit with the court;

 That he has checked the Master’s records to confirm that the debtor was not already
sequestrated;
 Or has published a notice of intention to surrender.
 In re Hugo.

(iii) Actual filing of application:

 Applicant must file the notice of motion and founding affidavit + supporting
documents with the Registrar;
 Before the hearing date.

(iv) Master's report:

 The notice of motion and founding affidavit + supporting documents must be lodged
with the Master or any other specified person – section 9(4).
 Master or specified person must write a report to the court on facts that were
presented to him, which would appear to him to justify the court in postponing the
hearing or in dismissing the application.
 Master must furnish a copy of such report to the sequestrating creditor, who may file
an answering affidavit if he wishes – section 9(5).

(v) All filed papers must be furnished to the debtor and other interested parties:

 Applicant must furnish the debtor and other interested parties with a copy of his
application – section 9(4A)(a)(iv).
 However, the Master or the Court has discretion to dispense with this requirement if
the creditor has provided adequate motivation in this regard.
 Berrange v Hassan – since this section does not use the term ‘serve’, but rather the
word ‘furnish’, which is not a term of general application in civil procedure, it seems
clear that the legislature intended that informal service would suffice.

Applicant to furnish a copy of the application to:

a) Every registered trade union that represents the debtor's employees;

 b) Debtor's employees themselves;
c) SARS.

^^ sections 9(4A)(a)(i) – (iii)

This done by:

a) Affixing a copy on the debtor’s notice board at his premises;

b) Affixing a copy on the debtor’s gate of the premises;
c) Affixing a copy at the debtor’s front door of his premises.

^^ sections 9(4A)(a)(ii)(aa) – (bb)

 The applicant is obliged, before or during the hearing, to file an affidavit by the
person who furnished copies of the application to the debtor and other parties
mentioned above;
 Setting out the manner in which he complied with the requirements of the Act –
section 9(4A)(b).
 Standard Bank v Sewpersadh – court held that the requirements of giving of notice
to all interested parties and filing an affidavit detailing what has been done are
peremptory and, therefore, must be complied with.

(c) Provisional Sequestration:

 A provisional sequestration order is usually granted when the court is satisfied that
there is prima facie proof that all the requirements for the sequestration process are
met.
 It is an initial order that is made before a final sequestration order.
 A provisional sequestration order is usually granted after a creditor has approached a
court twice, in order to:

a) Obtain a provisional order of sequestration (section 10); and

b) Have such order confirmed and made final (section 12).

 Provisional stage – court is satisfied that there is prima facie proof that all the
requirements for the sequestration process are met.
 Final stage – court must be satisfied that those requirements are proved of a balance
of probabilities.
 ^^ Sacks Morris v Smith.
  A final sequestration order CANNOT be granted without the provisional
sequestration order.
 Therefore, if a provisional sequestration order is a nullity = final sequestration order is
also a nullity.
 ^^ Moch v Nedtravel.

The following must be present before an application for a provisional order is

successful:

a) Notice of motion (including a draft of the desired provisional sequestration order) and
founding affidavits;
b) Master’s confirmation that security has been granted;
c) Affidavit of the search made by the creditor’s attorney;
d) Master’s report or proof of his receipt of the service papers;
e) Affidavit of the person who provided the copies of the application to the debtor and
other interested parties – section 9(4A)(a).

 After considering the documents placed before it, the court may make an order
sequestrating the estate of the debtor provisionally;
 Or it may dismiss the application;
 Or it may postpone the hearing;
 Or it may make any other order it deems just (section 9(5)).
 On making a provisional sequestration order, the court must simultaneously grant a
rule nisi.
 I.e., an order calling upon the debtor to show cause, on a day mentioned in the rule,
why his estate should not be finally sequestrated – section 11(1).
 A provisional sequestration order empowers the creditor to preserve the debtor’s
estate and to enforce his claim.
 Building Society v Du Bois.
 Depending on whether or not the debtor has put some facts in the dispute, the
establishment of the prima facie case of sequestration may be interpreted and
applied differently.

Kalil v Decotex

“Where the application for a provisional order is not opposed or where, though it is opposed,
no factual disputes are raised in the opposing affidavits, the concept of the applicant having to
establish a prima facie case seems wholly appropriate; but NOT so where the application is
opposed, and real and fundamental factual issues arise on the affidavits. For it can hardly be
suggested that, in such a case, the court should decide whether or not to grant an order
without reference to respondent’s rebutting evidence.”
(d) Service of Rule Nisi:
An interim order granted by a court, often in the absence of the person against whom the
relief is being sought, calling upon such person to give reasons on (or before) a date
specified why a final sequestration order, as specified in the rule, should NOT be granted.

 Rule nisi is often used in urgent applications – e.g., interdicts.

 Rule nisi and other relevant documents must be served to the debtor in accordance
with the Rules of Court.
 If the debtor has been absent from his usual residence or place of business, the rule
nisi must be attached at the door of the court room;
 And published in the Government Gazette – section 11(2).
 Rule nisi is usually permissive, and NOT peremptory – Asmal Wholesalers v
Dawood.
 Courts must choose the most practical way of bringing rule nisi to the debtor.

A copy of the rule nisi must be furnished to:

a) Every registered trade union that represents the debtor's employees;

b) Debtor's employees themselves;
c) SARS.

^^ sections 11(2A)(a) – (c)

This done by:

a) Affixing a copy on the debtor’s notice board at his premises;

b) Affixing a copy on the debtor’s gate of the premises;
c) Affixing a copy on the debtor’s front door of his premises.

^^ sections 11(2A)(a) – (c) read with section 11(4)

(e) Opposition to application:

 Rule nisi may be opposed by the debtor or any other interested parties;
 Who must furnish their reasons or grounds for opposition to the Registrar.
 Smith & Walton v Holt – if a provisional trustee obtains information which has a
bearing on the matters arising for determination on the return day, he may place the
information before the court by way of affidavit – although, he is under no statutory
duty to do so.

(f) Anticipation of return day:

  On application by the debtor, the court may anticipate a return date for the rule nisi for
the purposes of discharging the provisional order.
 Provided that 24-hours’ notice has been given to the sequestrating creditor – section
11(3).
 Anticipation is done if ALL creditors have been given the notice, and there has been
no valid objection by them;
 Or if it is obvious that the creditors will not oppose the discharge of the rule.

(g) Intervention by another creditor:

 Fullard v Fullard.
 A creditor is entitled to intervene at any stage;
 Either to have the provisional order set aside;
 Or, where the sequestrating creditor withdraws his application or drags his feet, to
obtain a fresh sequestration order in his own right and name.
 In the latter event, the existing sequestration order cannot be confirmed at the instance
of an intervening creditor.
 It must be set aside and a fresh order issued with the intervening creditor as the
applicant.
 He then becomes the dominus litis and the original applicant drops out of the picture.
 The intervening creditor must make out a case for sequestration, furnish security for
 costs, etc. as though he were the original applicant.
 BUT he does NOT have to restate facts which appear from the record in the existing
proceedings.
 Courts take a practical view of all facts, before granting an intervention order.

(h) Final Sequestration:

A final sequestration order is a court order which is granted against the insolvent person’s
estate, only after a provisional sequestration order.

Before a final sequestration order is granted, the court must have:

a) The sheriff’s return of service of the rule nisi;
b) Any opposing affidavit of the debtor and/or other interested parties;
c) The replying affidavit of the applicant;
d) Any affidavit by the provisional trustee.

 The applicant or his counsel must appear in court to apply or ask that a provisional
sequestration order be made final.
  In turn, the insolvent or his counsel may file or apply to the court opposing the
granting of the final sequestration order.
 Nonetheless, if the court is satisfied that the applicant has established, on a balance of
probabilities, the requirements for sequestration, it may grant the final sequestration
order.
 If the court is NOT satisfied, it may dismiss the creditor’s application or grant him a
postponement for further proof to be sought – section 12(2).
 Ganes v Telecom – court may allow such further proof in a replying affidavit, subject
to the debtor’s being allowed to deal with the new matter.
 It is said that a court cannot grant a final sequestration order if there are serious
disputes of the facts and the given evidence (Mahomed v Malk).
 When a provisional sequestration order is made final, the date of the sequestration
shall be deemed to be the date on which that provisional sequestration order was
initially made.

COURT'S DISCRETION
 The court has discretion to NOT grant a final order, even if it is satisfied on a balance
of probabilities that all the requirements have been met.
 ^^ Berrange v Hassan.
 In each case, it has an overriding discretion, to be exercised upon a consideration of
all the circumstances.
 The fact that the debtor has committed an act of insolvency is an important
consideration in the decision whether his estate should be sequestrated.
 It places the sequestrating creditor in a ‘much stronger position’ than a mere general
allegation of insolvency.

SETTING ASIDE OF A SEQUESTRATION ORDER

 Any person aggrieved by final compulsory sequestration order;
 Or an order setting aside a provisional sequestration;
 May obtain a leave to appeal from a relevant court.
 Sections 150(1) & 20(4) of the Supreme Court Act.
 NO APPEAL is allowed against a decision to grant or not to grant a provisional
sequestration order – Gottschalk v Gough.
 Courts have discretion to grant the leave to appeal.

FRIENDLY SEQUESTRATION
Occurs when a debtor agreed to have estate sequestrated by an amicable creditor.
  Smith v Porrit – in practice friendly sequestrations (or friendly liquidations of
companies) are common and, in such cases, the motive of the creditor instituting
proceedings is more often than not simply to assist the insolvent.
 E.g., a debtor may arrange with a friend, who he owes a debt and is unable to pay, that
the debtor will commit an act of insolvency so that his creditor friend may apply for
compulsory sequestration on the basis thereof.
 The mere fact that a compulsory sequestration application was made by a creditor
who is willing to co-operate with the debtor does NOT necessarily amount to friendly
sequestration nor preclude the granting of a sequestration order.
 Esterhuizen v Swanepoel – a sequestration order should NOT be refused simply
because there is goodwill between the parties.
 However, courts must be careful of malpractice and collusion between the parties
(Kuhn v Karp).
 Friendly sequestration may be abused by the parties concerned to avoid civil
proceedings.
 It is also a way by which a debtor can release himself from his debts.

Courts must verify:

a) The locus standi of creditor;
b) If the debt is unsecured loan, an explanation for lack of security must be given;
c) Documentary evidence provided by the creditor;
d) Full details of debtor’s realisable assets;
e) Affidavit stating reasons the need for extension of return date of rule nisi (if required
by the creditor);
f) Where another creditor attached the debtor’s property, proof that prior notice of the
application has been given to the creditor concerned must be given

___________________________________________________________________________

(4) EFFECTS OF SEQUESTRATION

(PART 1)

EFFECTS OF THE SEQUESTRATION ORDER ON THE LEGAL

RIGHTS AND OBLIGATIONS OF THE INSOLVENT
  All property acquired by the insolvent belongs to his estate – sections 23 and 24.
 Contracts entered into by an insolvent shall be deemed valid;
 UNLESS such contract was meant to dispose the assets of the insolvent without the
consent of the trustee.
 An insolvent may follow any profession/occupation or enter into any employment;
 BUT he may NOT, during sequestration process, carry on or be employed in any
capacity or have any direct or indirect interest in:

a) General trading dealership;

b) Manufacturing business…

… without the consent of the trustee.

 Where a trustee has given consent for the insolvent to enter into business or
employment, a copy of such consent must be sent to the Master.
 The insolvent must keep a detailed record of all assets received by him and
disbursements made by him during his occupation or employment;
 And submit it to the trustee when required.
 The trustee is entitled to receive any moneys (except pension and compensatory
damages) received by the insolvent in the course of employment;
 Which are deemed by the Master NOT to be necessary for the support of the
insolvent and his dependents.
 The insolvent may be sued in his own name, and NOT in the name of the trustee.
 The insolvent will be liable for any delict he committed during the sequestration
process.
 The property claimable by the trustee may be claimed by the trustee from the
insolvent’s estate.
 The insolvent must keep the trustee informed of his residential and postal addresses.

INSOLVENT'S RIGHTS AFTER SEQUESTRATION

 Any contract to alienate the insolvent’s property acquired after the sequestration;
 Or to give any rights to a third party who was unaware of his insolvency;
 Without the trustee's consent, shall be VALID.
 When the insolvent has acquired property, such property shall be deemed to belong
his estate if claimed by a trustee;
 UNLESS the contrary is proved.
 A sequestration order limits or imposes some restriction on his status (capitis
diminutio);
 Which affects his capacity to conclude contracts; earn a living; litigate; and hold any
office.
  ^^ Spencer v Standard Building.
 The debtor is not entirely deprived from contracting or forming binding agreements
generally, but the Act places some restrictions on him – section 23(2).

(a) Prohibited contracts:

 Insolvent may NOT make a contract to dispose his insolvent estate property – section
23(2).
 He may also NOT enter into any contract which may affect his estate or any
contribution in terms of his estate – section 23(2).
 The contribution referred to here is that claimable by the trustee in terms of section
23(5) from moneys earned by the insolvent in the course of his employment.
 The contribution becomes due to the trustee only once the Master has confirmed that
the moneys are not necessary for the support of the insolvent and his dependants.
 It follows that, prior to the Master’s assessment of a contribution, the insolvent need
NOT obtain the trustee’s consent to enter into the contract.

Mervis Brothers v Hanekom

M sued H (insolvent) for a debt incurred prior to sequestration. The action was based on an
undertaking given by H after sequestration, that he would pay the full amount of the debt. The
trustee had not consented to H’s giving this undertaking. The MC held that the undertaking
was likely to affect adversely any contribution which H would be
obliged to make, if called upon to do so, and, in the absence of the trustee’s consent, was not
binding.

On appeal, the court held that, as the Master had not assessed a contribution, H was not
obliged, at the time of contracting, to make a contribution. Accordingly, the
trustee’s consent had not been required and H’s undertaking was binding.

 The contract entered into by the insolvent to dispose of his estate property is
VOIDABLE, at the option of the trustee.
 The same position applies if the contract was concluded by the insolvent without the
trustee’s consent.
 Ex parte Olivier – should the trustee choose not to set aside the contract, it remains
binding on the parties.
 The same position applies to a person/partnership/estate thereof, which is a debtor in
the ordinary sense of the word.
 If a trustee sets aside the contract that was concluded by the insolvent, he may recover
the performance rendered by the insolvent and must restore the benefits to the affected
third parties.
  Section 24(1) provides some protection to third parties who contracted with the
insolvent, ignorant of his insolvency.
 This section provides that if an insolvent purports to alienate, for valuable
consideration and without the consent of the trustee, property or any right thereto;
 Which the insolvent acquired AFTER the sequestration (and which thereby became
part of the estate);
 To a person who proves that he was not aware and had no reason to suspect that the
estate of the insolvent was under sequestration;
 The alienation is nevertheless VALID.
 The section applies only to new assets which came into the insolvent’s possession
AFTER sequestration.
 And NOT to assets acquired by the insolvent in exchange for, or in replacement of,
property in the estate at the time of sequestration.

Wessels v De Klerk

The insolvent sold immovable property that formed part of his insolvent estate at the time of
sequestration, and received 2 promissory notes in part payment of the purchase price. He
subsequently endorsed the notes to a bona fide purchaser.

The court held that the sale of the notes was not validated by section 24(1) and, therefore, was
voidable at the option of the trustee.

 Onus on the third party to prove that, at the time he received the property, he was not
aware nor had reason to suspect that the debtor was insolvent – Fey v Mackay.
 If a person claims that a particular contract with an insolvent was invalid, he must aet
out the facts on which his allegation is based – Cowan v Toffee.

(b) Unprohibited contracts:

 The trustee’s consent is NOT necessary;

 Or, where it is given, such contract is binding on the parties involved.
 Section 23(2).
 However, the insolvent may NOT enforce performance in his favour, unless the Act
gives him the right to do so (De Polo v Dreyer).
 The insolvent may, however, enforce payment for work after sequestration in terms
of section 23(9), which expressly gives him the right to recover this remuneration for
his own benefit – Ex parte Van Rensburg.
INSOLVENT’S RIGHTS AND OBLIGATIONS WHEN INSTITUTING
AND DEFENDING LEGAL PROCEEDINGS

(a) Proceedings which may be defended or brought by the insolvent personally:

 Section 23(6)-(10).

An insolvent may sue or be sued in his own name on matters relating to:

a) Status (e.g., divorce);

b) A right which does not affect the insolvent estate (e.g., right to receive
maintenance);
c) Claim to recover remuneration for professional services;
d) Claim for pension;
e) Claim for compensatory damages;
f) A delict committed by the insolvent.

 The insolvent is divested of his estate, but he retains a reversionary interest in it;
 And may litigate to ensure that is properly administered (Kuper v Stern & Hewitt).
 The insolvent may apply for an interdict to prohibit the trustee from realising his
assets, if those assets already sold have yielded enough funds to meet all the claims of
the creditors (Jacobs v Hessels).
 The insolvent may sue the trustee for maladministration of the estate;
 BUT this does NOT mean he can dictate how the estate should be administered
(Ecker v Dean).

(b) Security for costs:

 The insolvent is liable for the security for the costs of all the actions that may be
brought up by the interested parties.
 If the insolvent fails to give such security, the defendant may apply for the action to
be dismissed.
 MCR 62(1)(b).

(c) Entitlement to costs:

 Where an insolvent sues or was sued personally, and obtains some damages or reward
in respect thereof;
 He may dispose his judgment costs or such reward as he likes (Schoeman v
Thompson).
  Nevertheless, damages for maladministration accrues to the insolvent’s estate;
 But an award against a trustee accrues for the insolvent personally.

(d) Holding office:

An un-rehabilitated insolvent is disqualified from holding several offices such as:
a) Trustee of an insolvent estate – section 55(a);

 If he was already a trustee when his estate was sequestrated, he must vacate
that office.
 Section 58(a).

b) Member of Parliament, NCOP or provincial legislature;

c) Unless otherwise granted permission by court, director of a company;
d) Part of a close corporation management;
e) Business rescue practitioner.

EFFECTS OF THE SEQUESTRATION ORDER ON THE INSOLVENT’S

CONTRACTS

(a) Contracts not completed or performed fully by an insolvent:

(i) Continuance of the contract:

A general rule is that sequestration does NOT suspend a contract.

(ii) Trustee's election:

 A trustee/provisional trustee may elect to perform in terms of a contract or not.

 The ONLY ‘power’ which the trustee’s office gives him is to exclude the right of the
other party to invoke the remedy of specific performance.
 The trustee is given this power so that he may act in the interests of the concursus
creditorum.
 Concursus creditorum means that all creditors who have claims against the insolvent
estate must be treated equally in the distribution of assets.
 It follows that the trustee must obtain and abide by the instructions of the general
body of creditors on the matter, and that he may not adopt a course that is prejudicial
to the interests of the concursus (Ward v Barrett).
 Whether or not the trustee must elect to abide by a contract is dependent upon the
facts of each case.
  Once a trustee has elected to abide or repudiate a contract, he may NOT later change
his mind.

(iii) Statutory controls on the exercise of trustee's election:

Contract to acquire immovable property:

 Where the insolvent contracted to buy immovable property;

 A trustee must elect to uphold or repudiate the contract within 6 weeks after receiving
notice from the other party.
 If the trustee fails to make his election and notify the other party, the other party may
apply for a cancellation order and sue the insolvent’s estate for non-fulfillment of
performance.
 Section 35.

Hire of property:

 Where an insolvent hired property by lease, a trustee may ONLY repudiate the lease
by giving a notice in writing to the lessor – section 37(1).
 Failure to do so within 3 months;
 Or failure to notify the lessor of trustee’s decision to continue with the contract;
 Is deemed to constitute REPUDIATION – section 37(2).
 Repudiation of lease under section 37 deprives the insolvent’s estate of any right to
compensation for improvements.
 EXCEPT those listed in section 37(4).

(iv) Consequences of repudiating contract:

 If a trustee elects to REPUDIATE a contract, the other party is precluded from

obtaining an order for specific performance;
 Even if he performed his part in full.
 However, he may exercise OTHER remedies for breach of contract.
 If the aggrieved party chose to ignore the repudiation and keep the contract alive, he
may prove a concurrent claim for damages in lieu of performance.
 He then remains liable for, and must render, his own counter-performance.
 However, if he chooses to accept the repudiation, he may recover any property handed
over in performance of his obligations and still owned by him.
 He is obliged to make restitution.
 He has a concurrent claim in respect of property which he has transferred + payments
which he has made to the debtor, and for loss which he has suffered because of the
breach.
(v) Consequences of abiding by contract:

 If trustee elects to carry on and complete the contract, he will act on behalf of the
insolvent.
 Trustee may recover performance owed by another party.
 Trustee becomes liable to perform only what is reciprocally due to the other party.
 By taking over the insolvent’s rights under the contract, the trustee automatically
takes over any defect in those rights.
 Thus, the other party is entitled to raise against the trustee any defences he could have
raised against the insolvent.
 It follows that if the other party, prior to the sequestration, acquired the right to cancel
the contract on account of breach, he may exercise that right vis-à-vis the trustee.
 ^^ accrued right of cancellation is limited if it’s a cash sale of movable property.

(vi) Contracts which are suspended or terminate on sequestration:

Employment contract:

 Sequestration of the employer’s estate suspends the employment contract between

him and his employees.
 Section 38(1).
 During suspension, employees are NOT required to render services or get a salary –
section 38(2)(a);
 But may claim damages for any loss suffered – section 38(10)(a).
 During suspension, no employment benefit accrues to the employee – section 38(2)
(b).

Mandate contract:

 Agreement between the principal (mandator) and agent (mandatary) to render specific
services for another person.
 It terminates on insolvency of the agent.
 If the mandate does not require special skill and can be performed by a trustee, he
may enforce the mandate contract (Natal Law Society v Stokes).

(vii) Contracts a trustee cannot be repudiate:

a) Lease of immovable property;
b) Sale of land on instalments;
c) Sale of goods on instalments;
d) Resale of immovable property not yet acquired.
(viii) Purchase of goods in terms of an instalment agreement:

 Where an insolvent returns property to the seller within 1 month before sequestration;
 A trustee may demand that the seller deliver to him the property or its value at the
date of return.
 Section 84(1) provides that on sequestration, the seller automatically acquires a
hypothec over the property, whereby the balance outstanding under the agreement is
secured.
 Since no one may have a hypothec over his own property, ownership passes from the
seller to the insolvent estate.
 Effect is that seller loses ownership and instead becomes a creditor with a hypothec
over the property.
 The trustee must, if required by the seller, deliver the property to him, and thereafter
the seller is deemed to hold it as security for his claim.
 Section does NOT apply if the agreement was cancelled prior to sequestration due to
the buyer’s default.

(ix) Transaction on exchange:

 An exchange or market participant may terminate the transaction in respect of

obligations owed to him.
 A trustee is bound by such termination – section 35A(2).
 The claim thereafter is limited to the amount due upon termination in terms of the
exchange rules – section 35A(3).

(x) Agreement on informal market:

 All unperformed obligations arising from this agreement terminate on sequestration.

 Sections 35(B)(1) & (2).

(xi) Provisions that protect a solvent party:

a) Clause that reserves ownership of movable property until the owner has been paid
from the insolvent's estate;

b) Clause providing for cancellation on insolvency – section 37(5);

c) Clause that allows continued use of insolvent's property – occurs if it is agreed by the
parties;

d) Clause that allows the direct payment to sub-contractors of the insolvent;

 e) Clause providing for set-off upon insolvency.

LEGAL PROCEEDINGS COMMENCED BEFORE INSOLVENCY

 Criminal proceedings are NOT affected by sequestration.
 Civil proceedings that may be instituted by or against the insolvent in his own name
are stayed until a trustee is appointed – section 20(1)(b).
 A party who wishes to continue with stayed proceedings against the insolvent’s estate
must give his intention within 3 weeks to the trustee (or Master if no trustee).
 Execution of any judgment against the insolvent is stayed the moment a sequestration
order is granted against that insolvent – section 20(1)(c).

___________________________________________________________________________

(5) EFFECTS OF SEQUESTRATION

(PART 2)

EFFECTS OF THE SEQUESTRATION ORDER ON THE ASSETS OF

THE INSOLVENT
 A Registrar may deliver the sequestration order to the Sheriff to attach the insolvent's
property – section 17.
 A trustee may be appointed to take control of the debtor's estate – section 18 read
with 18A and 18B.
 Hobson v Abib.
 The debtor is divested from his estate, which is vested in the Master first, and later in
the trustee – section 20(1)(a) read with 54(5).

The estate remains vested with the trustee until:

a) The discharge of the sequestration order by the court;

b) The acceptance by creditors of an offer of composition made by the insolvent, which

provides that insolvent's property will be restored to him;

c) An order for rehabilitation of the debtor is granted.

  If the trustee resigns; vacates his office; or dies, the insolvent's estate revests in the
Master until a new trustee is appointed – section 25(2).
 The trustee must collect the assets, realise them and distribute the proceeds to the to
the creditors.

In a nutshell, under section 20, the following effects may occur:

a) The debtor shall be divested from his estate, which will be vested in the Master until
the trustee is appointed – thereafter the assets will be vested in the trustee;

b) Any civil proceedings or claims instituted by or against the debtor may stay until a
trustee is appointed, provided that such claims were proved or filed against the
debtor's estate;

c) Empowers the debtor to apply to the court for his release from prison, after a notice to
the affected creditor;

d) A Sheriff or messenger to stay or delay the execution of any other judgment against
the debtor as soon as a sequestration order is granted.

EFFECTS OF THE SEQUESTRATION ORDER ON THE ASSETS OF

THE SOLVENT SPOUSE
 The estate of the solvent spouse may be vested in the Master until the trustee is
appointed if the spouses were not separated at the time of the insolvent's sequestration
– section 21.
 If the solvent spouse is in SA, a trustee shall NOT (without leave of the court);
 Realise her property until expiry of 6 week’s written notice of intention to do is given
to that spouse.
 The solvent spouse may apply for an order to release her property from the trustee’s
custody if such property has not already been sold.
 The solvent spouse's assets may be protected from being vested with the trustee or
Master if the court deems it be prejudicial or unfair to that spouse – section 21(10).
 If the creditor has failed to prove any claim against the property of the solvent, he
shall be barred from doing so later.
 The solvent spouse’s creditors who prove their claims shall be allowed to share the
proceeds with the insolvent spouse’s creditors – section 21(5).

Sequestration of a joint estate makes both spouses insolvent debtors.

PROPERTY WHICH FALLS PART OF THE INSOLVENT’S ESTATE
a) All property of the insolvent at the date of sequestration (including assets in the hands
of the Sheriff under a writ of attachment);

b) All property which the insolvent acquires during the sequestration;

c) Property inherited in the spouse’s marriage in community of property forms part of

the insolvent’s estate;

d) Property inherited by the insolvent during his insolvency falls into his insolvent
estate, notwithstanding a contrary provision in the testator's will. However, if the
insolvent refused to accept property bequeathed to him or an insurance benefit, then
such property does not form part of his estate;

e) The assets of the insolvent’s spouse, where the marriage is out of community of
property, also vests with the trustee until it is released by that trustee.

PROPERTY WHICH DOES NOT FALL PART OF THE INSOLVENT'S

ESTATE
a) Clothing, bedding, etc.;
b) Remuneration for work done;
c) Pension;
d) Compensation for defamation or personal injury;
e) Compensation for occupational injuries/diseases;
f) Benefits payable to a minor;
g) Unemployment insurance benefits;
h) Insurance policies;
i) Share accrual;
j) Trust property/funds;
k) A right of a labour tenant to land or a right in land;
l) Friendly society moneys and assets;
m) Property bought with money from the above sources.

DISPOSAL OF ESTATE PROPERTY BY INSOLVENT

Insolvent CANNOT dispose assets that belong to his estate – section 25(3).
Sections 25(3) & (4) – if an insolvent disposes his property unlawfully, a trustee is entitled to
recover the proceeds in respect thereof :
a) Insolvent;
b) The person who knowingly acquired the assets or rights from the insolvent's estate;
 c) The person who unknowingly acquired the assets or rights from the insolvent's estate,
and who acquired such assets or rights without giving sufficient value in return.
The trustee can therefore claim the property or rights on the basis that the disposal was
invalid.

ACQUISITION OF NEW ESTATE DURING INSOLVENCY

Where an insolvent acquired a new estate adverse to his trustee during his insolvency, that
new estate may also later be sequestrated.

MEANING OF “SOLVENT SPOUSE”

 Section 21 was introduced to avoid collusion between spouses to the detriment of
creditors.
 Spouse – wife or husband, married according to any law or custom; or a person living
with a member of opposite sex, even if not married to him.
 Parties of same sex marriages also qualify.
 Section 21 only applies where there is a solvent spouse.
 Does NOT apply when all spouses are insolvent.
 Section 21 also applies where there is an existing relationship between spouses.
 Solvent spouse has a duty to lodge statement of her affairs with the Master within 7
days of being served with a copy of the sequestration order – section 16(3).
 If she can’t prepare a statement of his affairs, Master may charge a reasonable fee to
find someone who will prepare such statement.

POSTPONEMENT OF VESTING:

 A court may postpone the vesting if such vesting is going to prejudice the solvent
spouse – section 21(10).
 Conditional postponement may also be granted if the court is satisfied that the solvent
spouse will make arrangements to protect the insolvent’s estate.
 To obtain postponement, the solvent spouse must provide a detailed account of her
statement of affairs.
 Ex parte Vogt – includes: nature and value of the assets claimed; nature and origin of
her title to those assets; prejudice which she will suffer if the postponement is not
granted; and the arrangements she intends and is able to make to safeguard the interest
of the insolvent estate.

PROPERTY OF THE SOLVENT SPOUSE WHICH MUST BE RELEASED

INCLUDES:
 a) Have been assets of the solvent spouse immediately before her marriage to the
insolvent or October 1926;
b) Have been bought by the solvent spouse under a marriage settlement;

c) Have been bought by the solvent spouse during the marriage by a title valid as against
creditors of the insolvent (e.g., proceeds of a secured loan);

d) Be safe-guarded in favour of the solvent spouse in terms of section 28;

e) Have been acquired with any such property referred to in (d) or with the proceeds
thereof.

 The onus is on the solvent spouse to prove that the property must be released
(Maudsley v Maudsley's Trustees).
 The Act does NOT state any particular procedure for the release of property.
 However, the trustee usually requires an affidavit setting out the nature and title of the
solvent spouse's property.

EFFECT OF RELEASE:

 When a trustee has released the property claimed by the solvent spouse, he is not
barred from proving later that it belongs to the insolvent estate – section 21(4).
 The trustee may apply to court to have an interdict prohibiting the solvent spouse
from selling or disposing of her property;
 Or to have solvent spouse’s application or transactions in which he acquired the
property, set aside.

RELEASE OF PROPERTY OF SOLVENT SPOUSE BY COURT:

 This occurs when a trustee refuses to release the property.

 The solvent spouse bears the onus to apply and prove that the property in question
must be released – section 21(4).
 If the property was sold, and the proceeds not yet distributed, the solvent spouse may
apply to court to have proceeds in respect thereof (Hawkins v Cohen).
 The court may make whatever decision which is just.

RIGHTS OF CREDITORS OF THE SOLVENT SPOUSE:

 Creditors are entitled to prove their claims against the insolvent estate.
 By so doing, they will be entitled to share the proceeds of the solvent spouse's
property – section 21(5).
  The mere fact that the solvent spouse’s creditors proved their claims does NOT entitle
them to share in the proceeds.
 If the property of the solvent spouse has been released, separate creditors will ONLY
share in the proceeds if they have excussed any property acquired by the solvent
spouse since the sequestration – section 21(6).

SEQUESTRATION OF THE SOLVENT SPOUSE ESTATE:

 Solvent spouse CANNOT surrender his estate while it is still vested with the trustee.
 BUT civil proceedings against him are NOT stayed.
 If she commits an act of insolvency, her estate will be sequestrated.
 The court may postpone the application for sequestration if it is satisfied that the act
of insolvency was caused by vesting;
 Or where the proceedings will be taken to obtain an order releasing the property;
 Or where the property was released since the making of the sequestration order, and
the solvent spouse is now able to discharge his liabilities – section 21(11).

___________________________________________________________________________

(6) EFFECTS OF SEQUESTRATION

(PART 3)

MEANING OF “DISPOSITION”
Means any transfer or abandonment of rights to property.
Includes:
a) A sale;
b) Lease;
c) Mortgage;
d) Delivery;
e) Payment;
f) Release;
g) Compromise;
h) Donation;
i) Any other contract.

^^ but EXCLUDES disposition in compliance with a court order.

  “Property” means movable or immovable property.
 Includes contingent interest in property, other than that of a fideicommissary heir or
legatee.
 Includes foreign assets – this implies that that our insolvency law has extra-territorial
application (Proudfoot).
 A repudiation of an inheritance or insurance benefit does NOT mean that the
beneficiary has abandoned his rights to property – such repudiation does not
amount to disposition (Wessels v De Jager).
 A nomination of a third party merely gives him power, but does not transfer or
abandon any right to an insurance policy (Love v Santam Life).
 Disposition includes a contract providing for the alienation or abandonment of rights
to property (Jager v Whittaker).
 This is also known as uncompleted disposition – section 26(2).
 A suretyship contract is a disposition since it provides for the payment of the debtor.
 Disposition does NOT include a disposition made in compliance with an order of
court.
 E.g., payment of a contractual debt or delivery of property as ordered by a court.
 This does not apply if the creditor obtained a sequestration order fraudulently, or by
collusion with the insolvent, or with the intention of prejudicing other creditors.
 ^^ Dabelstein v Lane & Fey.

DISPOSITIONS WHICH MAY BE SET-ASIDE ARE USUALLY THOSE:

a) Made not for value;
b) Having the effect of preferring one creditor over others (voidable preference);
c) Intended to prefer one creditor (undue preferences);
d) Made in collusion;
e) Made to defraud creditors.

 ^^ First four are voidable (26; 29; 30; 31), and the last one can be set aside under
common law.
 Until a disposition is set aside by a court, it remains valid and binding (Galaxie
Melodies v Dally).

(a) Disposition not made for value:

 “Value” – benefit received or promised; it is not limited to money or tangible benefit.

 May be set-aside in terms of section 26(1).
 Trustee must prove that the insolvent made a disposition, and received no value for it.
  Where a disposition was made more than 2 years before sequestration, a court may
only set it aside if a trustee prove that when it was made, immediately insolvent’s
liabilities > assets – section 26(1)(a).
 If a disposition was made within 2 years of sequestration, court must set the
disposition aside UNLESS it is proved that immediately after it was made, insolvent’s
assets > liabilities – section 26(1)(b).
 It is NOT necessary to prove whether the insolvent intended to prejudice the creditors
by such disposition.
 Payment of a lawful debt is NOT payment without value since the payer receives a
counter-value of discharge (Jager v Whittaker).
 Liabilities of insolvent under section 26 read with 29 and 30 includes any obligation
undertaken as a surety;
 And assets of insolvent includes any sum recoverable as right of recourse after
creditors have been paid.
 Where it is proved that insolvent’s liabilities > assets by less than the value of the
property disposed of, the disposition may be made to the extent of the excess –
section 26(1).

EXCEPTION TO SECTION 26 DISPOSITION

A settlement of property in an ANC by a husband on his wife or unborn child may NOT be
set-aside as disposition without value on the husband’s insolvency, if the following
requirements are met (sections 27(1) & (2)):
a) Disposition must be an immediate benefit (i.e., benefit given by delivery, payment,
cession, pledge… completed within 3 months of marriage);
b) Disposition must have been given in good faith (without intention to prejudice
creditors);
c) ANC must have been dully registered for at least 2 years before sequestration.

RIGHTS OF BENEFICIARIES

 A beneficiary of a gratuitous disposition that was set aside by a court has NO RIGHT
to claim against other creditors of the insolvent's estate – section 26(2).
 The same applies to a beneficiary of a gratuitous disposition that was not set aside by
a court, but was uncompleted by the insolvent.
 This does NOT apply where the uncompleted disposition was made by suretyship,
guarantee or indemnity.

(b) Disposition which prefers one creditor over others (voidable preference):
The trustee bears the onus of proof to prove that (Simon v Coetzee):
a) A disposition may be set-aside in terms of section 29(1) if it was made by the
insolvent not more than 6 months before the sequestration of his estate;
b) The disposition had the effect of preferring one creditor above others;
c) Immediately after the disposition was made, the insolvent’s liabilities > assets.

 If the insolvent is dead, his estate will still be insolvent.

 Mere effect of preferring one creditor over others, and not necessarily actual or direct
disposition to a creditor, suffices (Paterson v Trust Bank).
 The claims proved against the estate are accepted as prima facie proof of the
insolvent’s liabilities at the date of sequestration and immediately after disposition
(Simon v Coetzee).

EXCEPTION TO SECTION 29 DISPOSITION

 Section 29 allows a trustee to set-aside a disposition made by an insolvent while close

to insolvency.
 However, the court CANNOT set-aside a disposition if the person in whose favour it
was made;
 Proves that it was made in the ordinary course of business, and was not intended to
prefer one creditor over others.
 BOTH elements must be proved!

Meaning of ordinary course of business:

 Objective test.
 Whether the disposition could be normally entered into between solvent business
persons? (Gazit Properties).
 The courts must determine if the disposition was in conformity with ordinary business
methods of solvent persons (Van Zyl v Turner).
 The terms and circumstances on which a disposition was made must be determined.
 A disposition may be made in ordinary course of business if it was made under a valid
contract;
 EVEN IF the overall business model of the insolvent is illegal.
 To be regarded as a disposition made in the ordinary course of business, the making
and receiving of the disposition in question must be lawful (Klerck v Kaye).

Meaning of no intention to prefer:

  The insolvent will NOT be regarded to have intended to prefer one creditor over
others;
 If it is proved that when he made the disposition, he did not expect sequestration
(Stock Owners).
 The same applies if it is proved that his motive was not to confer advantage to one
creditor over others.

(c) Dispositions intended to prefer one creditor (undue preference):

 The court may set aside a disposition made by the insolvent at any time before
sequestration;
 If he made it with the intention of preferring one creditor above others;
 And when he made it, his liabilities > assets.
 Section 30; Venter v Volkskas.
 The determination test here is subjective (Eliasov v Arenel).

The court is to determine:

a) Whether the primary or main purpose of disposition was intended to prefer a creditor
over others;

b) If the insolvent actually considered to prefer one creditor over others;

c) Whether the insolvent contemplated insolvency when he made the disposition;

** Contemplation of insolvency is usually needed before intention to prefer can be

established. The court may infer that there was intention to prefer if it is proved that the
insolvent knew that that sequestration was inevitable.

d) Whether the insolvent was, at the time of disposition, in a position to exercise a free
choice – if the insolvent paid a creditor under undue pressure or duress, then the
intention will not be proved;

e) Whether there is any relationship between the insolvent and the creditor concerned – a
close family relationship or friendship may be regarded as a motive to prefer one
creditor over others.

The court must consider all other relevant factors that occurred during the disposition.

DIFFERENCES BETWEEN VOIDABLE PREFERENCES (SECTION 29) AND

UNDUE PREFERENCE (SECTION 30):
 a) Undue preference maybe set aside irrespective of when it was made before
sequestration; whereas voidable preference may be set aside if they were made 6
months before sequestration or insolvent’s death.
b) Under undue preference, the debtor must be actually insolvent when he made a
disposition; while under voidable preference, a disposition may qualify even if the
debtor was not insolvent at the time of the disposition, provided he became insolvent
immediately thereafter.

c) Under undue preference, a trustee must prove that the debtor actually intended to
prefer one creditor over others; while under voidable preference, a trustee may simply
prove that the disposition had the effect of preferring one creditor over the other.

d) Section 30 does not grant a defence to a beneficiary of undue preference; whereas

section 29 provides a defence to the beneficiary of a voidable preference.

(d) Disposition made in collusion to prejudice creditors or prefer one creditor:

 A court may set aside a disposition made by an insolvent in collusion with another
person;
 If it is proved that it was meant to prejudice creditors or prefer one creditor – section
31(1).
 Collusion – an agreement made with fraudulent purpose.

Trustee must prove that:

a) The insolvent made the disposition of his own property;

b) The disposition was made in collusion with another person (both parties knew that the
debtor was insolvent and the disposition was meant to have the effect of prejudicing
creditors or preferring one creditor).

c) The disposition actually had the effect of prejudicing creditors or preferring one
creditor above others.

(e) Disposition made to defraud creditors (actio Pauliana):

 A disposition may be set aside if it is fraudem creditorum;

 Or meant to deprive creditors their rights at common law (Nedcor v ABSA).

The plaintiff must prove that:

 a) The disposition diminished the debtor or insolvent's assets;
b) The recipient of the assets from the debtor did not receive his own assets;
c) There was intention to defraud;
d) Fraud took place or actually occurred.

 Fraud – means giving an unfair advantage to one creditor above others or prejudicing
creditors.
 Where disposition was made for value, intention to defraud creditors must be proved.
 Creditors may invoke actio Pauliana to recover assets disposed, and any benefit that
accrued from the insolvent's fraud.

___________________________________________________________________________

(7) ADMINISTRATION OF INSOLVENT ESTATE

(PART 1)

MEETINGS OF CREDITORS

What does it entail:

 Series of meetings convened by the insolvent’s creditors;

 To establish their claims, elect a trustee and to give instructions to the trustee with
regards to the winding up of the estate.
 Vather v Dhavraj – in this regard, “creditors” means persons who incurred debts
BEFORE sequestration.
 Creditors who came after sequestration do NOT have voting powers and may not
prove their claims (Cranko).

4 types of such meetings:

1) First meeting;
2) Second meeting;
3) Special meeting;
4) General meeting.

(a) First meeting:

  Convened by the Master soon AFTER sequestration;
 By notice in the Gazette;
 At least 10 days before the date of the meeting
 Section 40(1); Nedcor v The Master.
 Such notice must state: time; date; and place of meeting, as conveniently chosen by
the Master (section 39(1)) – section 40(2).
 Purpose of this meeting is to enable creditors to prove claims against the estate;
 And to elect a trustee.

(b) Second meeting:

 After first meeting and the appointment of the trustee.

 Master must set the date for the second meeting of creditors – section 40(3)(a).
 Although the Master fixes the date of the meeting, he does NOT convene it; this is the
duty of the trustee.
 Meeting is convened by trustee, who must publish notice in the GG and newspaper
circulating in the district where the insolvent resides or has his principal business –
section 40(3)(b).
 Purpose of this meeting is to enable creditors to prove claims;
 Receive trustee’s report on the state of the estate;
 And to instruct the trustee how to administer the estate – section 40(3)(a).

(c) Special meeting:

 Convened by the trustee after second meeting.

 Is usually convened at the request of any interested party.
 Trustee is called upon to convene the meeting by notice in the GG.
 Such party is obliged to pay the expenses of the meeting – section (42)(1).

Purpose of this meeting:

a) Proof of claims by creditors, and not to unduly interrogate the insolvent and
other witnesses – section 42(1);

b) Interrogation of the insolvent – trustee may, with the consent of Master,

convene a meeting at the request of a creditor to interrogate the insolvent, and
NOT any other person – section (42)(2); Bernard v Klein.

(d) General meeting:

 Convened by the trustee at any time.

  May also be convened at the request of the Master or the creditors.

Purpose of this meeting:

a) Trustee to get instructions on how to administer the estate – section 41;

b) Consideration of an offer for composition;
c) Trustee to inform the creditors on the offer of composition – section 119(5);
d) Purposes other than solely interrogating witnesses.

GENERAL PROVISIONS ON MEETINGS

(a) Date and venue of meetings:

 The Master determines date and time of first meeting;

 While the trustee determines the date and time of other meetings.
 The presiding officer is empowered to adjourn any meeting from time to time –
section 39(5).
 Act does NOT provide for venue of meetings, but it states that the meetings must be
conducted in place accessible to the public – section 39(6).

(b) Presiding officer at meetings:

 Where a meeting is held at the Master’s office;

 Master or officer in the public service may preside over such meeting.
 Section 39(2).
 Where the meeting is NOT held at the Master’s office;
 It must be conducted in accordance with the Master’s instructions.
 If the Magistrate does not preside, the officer presiding must state the reasons in
respect thereof – section 39(4).
 Wilkens v Potgieter – any knowledge acquired by the officer in the course of his
duties as officer presiding is imputed to the Master.

(c) Record of proceedings:

 The presiding officer must keep record all proceedings;

 And give it the Master – section 39(3).
 Minutes of such meetings is regarded as prima facie evidence of proceedings –
sections 68(1) & (2).
  Pine Village v The Master – nothing preventing the leading of extraneous evidence
to establish that the minutes do not correctly record what transpired at the meeting,
and what did in fact occur.

(d) Privileged statement:

Publication of any statement made in meetings, is as privileged as publication of a statement
made in a court – section 39(6).

___________________________________________________________________________

(8) ADMINISTRATION OF INSOLVENT ESTATE

(PART 2)

PROOF OF CLAIMS
General rule: an estate creditor has NO RIGHT to:
 Share in the distribution of available assets;
 Vote on matters concerning the estate;
 Challenge a trustee's actions,

UNLESS he has already proved a claim against the estate at any of the prescribed
meetings.

 Proof of claims gives the creditors the required locus standi and prima facie proof of
the existence of the debt (Grufin v Cohen).
 Certain creditors (e.g., employees of the insolvent) are EXEMPTED from ordinarily
proving claims in respect of salary or wages.
 A person who claims to be a creditor of the insolvent estate may register his name and
address with the trustee after paying the required fees (R25) – section 43.
 The trustee is thereafter obliged to send to that address a notice of every meeting of
creditors;
 A copy of every account which he intends to submit to the Master;
 And a notice of the date, time and place of the sale of any property over which the
creditor has a preferent right.
 Failure of by the trustee to comply with section 43 will amount to a breach of his
duties.
 BUT it does not invalidate anything done under the Act.
  A creditor of the solvent spouse’s estate is entitled to share in the proceeds of that
spouse’s assets;
 ONLY if the creditor proved a claim against the insolvent's estate – section 21(5).
 Proof of his claim entitles the creditor to the same rights and remedies;
 And places him under the same obligations;
 As a creditor of the insolvent estate;

Except that:

a) He is not entitled to share in the separate assets of the insolvent estate;

b) He is not liable to make any contribution under section 106;
c) He is not entitled to vote at a meeting of creditors of the insolvent estate.

ACTUAL TIME FOR PROOF OF CLAIMS:

 Creditors may prove their claims at any time before final distribution of the estate –
section 44(1).
 However, if 3 months has lapsed from the second meeting;
 The creditor may only prove his claim after approval from the Master.

Cools v The Master

The court rejected a contention that the Master might not permit a creditor to prove a
claim in terms of section 44(1) after expiry of the 3-month period, if the creditor did not have
good reason for delaying proof of his claim and, in particular, if the creditor deliberately
withheld proof of his claim out of fear that a contribution would be payable by creditors.

“It is, in my view, perfectly proper for a creditor to decline to prove a claim whilst there is
such fear. . . . There is, in my opinion, no basis for attacking the bona fides of [the
creditor] for holding back proof of his claim until he was satisfied to run the risk of a
contribution.”

 A creditor who proves his claims after the trustee has already submitted his
distribution plan to the Master, is not entitled to share in the proceeds of the assets;
 UNLESS the Master allows him to do so in terms of section 104(1).
 Section 104(2) allows a creditor to share in the proceeds of the estate;
 If he objectively satisfies the Master that his delay to lodge a claim against the
insolvent’s estate was justified.

PROCEDURE FOR PROOF OF CLAIMS:

(1) Documents which must be lodged:
  A claim must be proved by way of an affidavit corresponding substantially with
Forms C or D in the First Schedule to the Act – section 44(4).
 The affidavit may be made by the creditor or any person “fully cognizant” of the
claim.
 Must set out the facts on which the deponent’s knowledge of the claim is based;
nature and particulars of the claim; whether the claim was acquired by cession after
the institution of the sequestration proceedings; and nature and particulars of any
security held by the creditor for the claim.
 Affidavit must be clear and precise.
 Where an amount is claimed on more than one ground of indebtedness, such grounds
must be separated and particularised so that they can be considered properly
(Marendaz v Smuts).

(2) Time and place for lodging claims:

 The affidavit must be delivered to the office of the presiding officer not less than 24
hours before the advertised time of the meeting – section 44(4).
 If the documents are not delivered timeously, the claim cannot be admitted for proof
at the meeting;
 UNLESS the presiding officer is of the opinion that the creditor was unable to deliver
the documents through no fault on his part.
 Schurman v The Master – where the creditor has delivered his claim documents in
time, but the affidavit or supporting vouchers disclose inadequate information, the
presiding officer has a discretion to grant a postponement to enable the creditor to
prove his claim in proper form.

(3) Examination of claim documents:

 This is usually done by creditors; trustee; insolvent;

 Or their representatives.
 During office hours, free of charge.
 Section 44(5).

(4) Creditor's attendance:

 The Act does NOT expressly require a creditor to attend a meeting in order to prove
his claim.
 Rather, a creditor who has timeously submitted his claim documents to the presiding
officer is deemed to have tendered proof of his claim at the meeting – section 44(3).
 I.e., at least 24 hours before the advertised time of the meeting.
 However, may be advisable for the creditor, or his representative, to be present to deal
with any queries or objections to the admission of the claim.
(5) Interrogation of creditor:

 A presiding officer may call a meeting;

 And call upon any person who has proved his claim;
 To submit to interrogation under oath in connection with his claim – section 44(7).
 If the claimant was NOT present at a meeting, he may be summoned by the presiding
officer for interrogation at any time – section 44(8);
 And if he fails to appear for interrogation, his claim may be rejected by the presiding
officer.

(6) Adjudication by presiding officer:

 Claims must be proved to the satisfaction of the presiding officer;

 Who is obliged to make his decision objectively.
 He will either admit the claim or reject it.
 If the claim is on the face of it bad (e.g., if it has prescribed), the presiding officer
should reject it.
 Conversely, if prima facie proof of the claim is produced, he should admit it.
 Unless the claim is on the face of it bad, the presiding officer should not reject it
without hearing the creditor’s evidence under section 44(7).
 The rejection of a claim does not prevent the creditor from proving it at a subsequent
meeting of creditors;
 Or from establishing it by action at law.

(7) Examination of claims by the trustee:

 After a meeting of creditors at which claims have been proved, the presiding officer
must deliver to the trustee every claim proved along with the documents filed in
support of it.
 Trustee must then objectively analyse all admitted claims and relevant documents;
 And ascertain whether they are genuine claims.
 I.e., whether the estate in fact owes the amount claimed by the creditors concerned.
 If the trustee disputes a claim, he must notify the Master;
 The reduction or rejection of claim does NOT preclude the claimant from proving it
by action of law.
 Thus, the admission of a claim by the presiding officer is, in a sense, only provisional
because the trustee may still dispute the claim.
 However, the admission has the effect of putting the onus of disproving the existence
of the claim on the trustee.

(8) Establishing a disputed claim:

  The action to establish a claim which has been rejected by the presiding officer or
disallowed by the Master lies against the trustee.
 The creditor does not, for instance, have a right to compel the Master to allow the
claim against the estate.
 Filed by the trustee – section 75(2).
 Section 75(2) provides that no action in respect of any claim which arose BEFORE
sequestration may be brought AFTER the Master has confirmed the trustee’s account
in terms of section 112;
 UNLESS the court finds that there was a reasonable excuse for the delay.
 This provision does NOT apply if the account in question is not a final one, and there
are further assets in the estate to be dealt with.

Wilkens v Potgieter

A creditor brought an action to have his claim included in the second liquidation and
distribution account, which had not yet been confirmed by the Master. It was held that it was
not necessary for him to obtain the permission of the court to institute proceedings or offer
any excuse for the delay in lodging his claim.

 The trustee may, if so authorized by creditors (or Master), compromise or admit a

disputed claim, provided it has been tendered for proof at a meeting of creditors.
 Once a claim has been compromised or admitted, or once it is settled by a judgment
of the court, it is deemed to have been proved and admitted in the usual way.
 A creditor may sue to enforce his claim even if it has not been rejected by the
presiding officer.
 Rejection is not a prerequisite.

(9) Review of the proof of claim decision:

 Any person aggrieved by the decision of the presiding officer or the Master to admit
or reject a claim may apply to court to have the decision reviewed – section 151.
 A person is considered to be “aggrieved” if he was injured or wronged in rights and
interests.

VOTING AND RESOLUTIONS OF CREDITORS

CREDITORS’ POWER TO VOTE:

General rule: every creditor who proved a claim against the insolvent's estate is entitled to
vote in any of the prescribed meetings – section 52(1).
However, a creditor who proved a claim may have limited or no voting power where:
a) He acquired his claim through cession after the commencement of the sequestration –
section 52(4);

b) A secured creditor may vote up to the full value of his claim on the election of a
trustee or any matter affecting his security, but in all other matters his voting power is
limited to the amount by which his claim exceeds the value which he placed upon his
security when proving his claim or, if he did not value his security, the amount
obtained on realization of the security in terms of section 83 – section 52(5);

c) A creditor may not vote on whether steps should be taken to contest his claim or
preference – section 52(6);

d) A creditor whose claim is conditional has no right to vote if the condition is one which
will be fulfilled, if at all, within 1 year of the sequestration – section 48(a). If,
however, the condition does not fall into this category, the claim is admitted to proof
at a valuation and the creditor may vote in respect of that value.

DETERMINATION OF VOTE:

 Voting power is usually based on the value or amount of the claim – section 52(2).
 Any matter to be voted on, is determined by the majority vote – section 53(2).
 In matters of election of trustee or acceptance of an offer for composition, both the
value and number of the votes is considered – section 54.
 Creditors may vote on all estate administration issues.
 Creditors may NOT vote on the distribution of assets;
 EXCEPT for the purposes of directing the trustee to contest, compromise or admit a
claim against the estate – section 53(1).

VOTING VIA AGENTS:

 Creditors may vote through agents.

 Such agents should have been given powers of attorney or special powers to vote –
section 53(2).
 Caledon v Magistrate of Riversdale – held that special authorization by telegram
was sufficient to empower an agent to vote.
 The legislature has disallowed voting through (section 53(2)):

a) A person who has been nominated or appointed as trustee;

b) His employer or employee;
c) His spouse or relative within the third degree;
d) A co-employee working for the same employer;
e) Anyone having a pecuniary interest in his remuneration.
CREDITORS' RESOLUTIONS:

 Every resolution at a meeting of creditors and the result of the voting on any matter as
declared by the presiding officer must be recorded in the minutes of the meeting –
section 53(3).
 Such a resolution is binding upon the trustee insofar as it is a direction to him as
regards to administering the estate.
 Resolutions duly carried out at a meeting of creditors are binding upon all creditors.
 A creditor CANNOT escape the consequences of the resolution on the basis that he
was not present or did not vote at the meeting or voted against the resolution.
 BUT if he withdraws his claim within 5 days after the date of the resolution, he is
deemed to have withdrawn his claim before anything was done in pursuance of the
resolution – section 106(b).

SETTING ASIDE CREDITORS' RESOLUTION:

 A court may set aside a resolution if it was taken irregularly;

 Or the creditors were not competent to take it;
 Or it was not bona fide.
 I.e., not passed in the belief that it was the interests of the estate or for the benefit of
creditors.
 A court may also set aside any direction which infringes the rights of a creditor –
section 53(4).
 A party who did NOT prove a claim;
 But who is a prima facie creditor of the estate;
 And whose rights are affected by a certain direction;
 Has locus standi and may seek relief from the courts – section 53(4).

___________________________________________________________________________

(9) ADMINISTRATION OF INSOLVENT ESTATE

(PART 3)

INTERROGATION OF THE INSOLVENT AND WITNESSES

 Interrogation may take place to help the trustee and creditors;
 To investigate the insolvent’s affairs;
  And ascertain his true financial position.

WHEN AND WHERE INTERROGATION MAY TAKE PLACE:

 At any meeting of creditors:

 Section 65(1).
 E.g., at a special meeting (Lubbe v Estate Lubbe)
 E.g., at a general meeting.

Essop v The Master

The trustee called a general meeting for the purpose of ‘interrogation of witnesses’. It was
held that, in terms of section 41, a general meeting had to be convened by the trustee “for the
purpose of giving him directions concerning any matter relating to the administration of
the estate”, and that it was not competent to call the meeting solely for the purpose of
interrogating witnesses.

 Apart from the insolvent, witnesses may be called for interrogation.

Marques v De Villiers

Trustee called a special meeting for the ‘further proof of claims’, but his sole purpose in
convening the meeting was to interrogate the insolvent and other witnesses. The court held
that the meeting had not been properly convened and, hence, the interrogation could not
proceed.

THE PERSONS WHO MAY BE INTERROGATED ARE:

1) The insolvent;
2) Any other person present at the meeting who has been, or might have been,
summoned to appear for interrogation in terms of section 64(2).

In terms of section 64(2), a presiding officer at any meeting of creditors may summon any of
the following persons for interrogation:
a) Any person who is known, or on reasonable grounds believed, to possess or been in
possession of property of the insolvent, prior to the sequestration; or which belongs or
belonged to the insolvent estate or to the insolvent’s spouse;

b) Any person who is known, or on reasonable grounds believed, to be indebted to the

insolvent’s estate.
 c) Any person who, in the opinion of the presiding officer, may be able to give material
information concerning the insolvent or his affairs (before or after sequestration); or
any property belonging to the estate; or the business, affairs or property of the
insolvent’s spouse.

INTERROGATION MAY BE CONDUCTED BY:

a) The trustee;
b) Any creditor who has proved a claim against the insolvent estate;
c) The presiding officer;
d) An agent of the of any of the parties involved.

INTERROGATION BY THE MASTER:

 A master may;
 Whenever he is of the opinion that the insolvent, trustee, or any other persons is able
to give relevant information;
 Concerning the insolvent;
 Make an inquiry in terms of section 152(2).
 A master may summon the party concerned to appear before him or a Magistrate to
provide the required information.
 A master may interrogate any party concerned any time after sequestration, and before
rehabilitation of the insolvent (Appleson v The Master).
 It needs NOT be shown that an interrogation under sections 64 or 65 is impossible
(Cools v The Master).
 Master may administer an oath to the party summoned, and then he and/or the trustee
may interrogate him – section 152(3) & (4).

NATURE AND SCOPE OF THE MASTER’S INQUIRY UNDER SECTION 152:

a) Inquiry must be purely investigative in nature (Podlas v Cohen);

b) Inquiry must not adversely affect anyone's rights, and the presiding officer need NOT
apply the audi alteram partem rule;

c) Presiding officer must observe the dictates of procedural fairness, but may NOT
allow the examinee access to the information on which the inquiry was based upon
(Strauss v The Master);

d) Inquiry need NOT follow any specific procedure, and the presiding officer is NOT
compelled to write any notes or keep a record of the inquiry, or to disclose any
informal notes he might have (Stadler v Wessels);
 e) A person, other than a trustee, is NOT entitled to representation at the inquiry.
However, a presiding officer who is being interrogated must be allowed to have legal
representation (Hoskins v Van der Merwe).

 The court's power of review in terms of section 151 is very limited.

 But the court may interfere with the Master’s decision to hold an inquiry;
 If he acted mala fide (Strauss v The Master).

CONSEQUENCES OF FAILURE TO ATTEND OR SUBMIT TO INTERROGATION:

a) If a person who is duly summoned fails to appear; or attend; or remain in attendance
at a creditor's meeting, the presiding officer may issue a warrant of arrest against him
– section 66(1);

b) Unless he provides a reasonable justification, the presiding officer may commit him to
prison – section 66(2);

c) If a person who is duly summoned appears, but fails to produce the required
documents; or answer questions; or refuses to be sworn in by the presiding officer, the
presiding officer may commit him to prison – section 66(3);

d) If a party fails to fulfil an agreed undertaking, the presiding officer may commit him
to prison – section 66(4);

e) Presiding officer is also immune just like judicial officer – section 66(6).

De Lange v Smuts
It was argued that section 66(3) is constitutionally invalid because it violates section 12(1)(b) of the
Constitution (the right not to be detained without a fair trial). The court accepted that the section is
invalid, but only to the extent that it empowers a presiding officer who is not a judicial officer to issue
a warrant committing an examinee to prison. Same reasoning applies to section 66(2).

Sections 66(2) and (3) should both, therefore, be read subject to the qualification that a presiding
officer may order committal on the grounds stipulated in the sections only if he is recognized as a
judicial officer (judge or magistrate).

SECTION 65 (SELF-STUDY)

SUBJECT MATTER OF INTERROGATION:

Section 65(1) provides that the insolvent or a witness may be interrogated concerning:
a) All matters relating to the insolvent or his business or affairs, whether before or after
the sequestration of his estate;
b) Any property belonging to the estate;
c) The business, affairs, or property of the solvent spouse.

 It will be noted that the scope of the interrogation (like the presiding officer’s power
to summon witnesses) is defined in the widest terms.
 This is necessary if the interrogation is to achieve its object.
 I.e., obtaining a complete and detailed picture of the insolvent’s estate and financial
affairs.
 It follows that it is permissible (not an abuse of the process) to hold an interrogation
for the purpose of gathering information for possible civil litigation;
 Against parties with whom the insolvent was connected or had dealings (Pitsiladi v
Van Rensburg).

Harksen v Lane
It was argued that section 65(1) amounted to an unconstitutional violation of the solvent
spouse’s fundamental rights enshrined in the Interim Constitution, in particular her rights
under equality and property clauses, and her rights to privacy and freedom and security of the
person.
The court did NOT agree:
On the basis that it is constitutional to vest the property of a solvent spouse temporarily in the
Master or trustee, it follows that the solvent spouse similarly can have no legitimate complaint
to being interrogated concerning her own property and affairs to the extent that they are
relevant to the insolvent estate.

The first limitation relates to the relevance of the questions to be answered to the purpose of
the meeting. That purpose is clearly the affairs of the insolvent estate. It follows that to the
extent that persons may be required to answer questions concerning the business, affairs or
property of the solvent spouse, the information sought must be relevant to the estate of the
insolvent spouse.

A second and even wider limitation is to be found in the provisions of section 139 read with
66(3) of the Act… A presiding officer may NOT commit to prison a person who refuses to
answer a question not ‘‘lawfully put to him’’. A question which would constitute an invasion
of a constitutional right of an examinee cannot be said to be one ‘‘lawfully put’’.

If a presiding officer at a meeting of creditors finds that, in answering any question, the
examinee’s rights would be infringed, he should hold that this did not constitute a question
‘‘lawfully put’’ to the examinee and that a refusal to answer such a question did not therefore
 constitute conduct punishable by imprisonment under section 66(3) and therefore would not
constitute an offence under section 139(1).

PROCEDURE AT INTERROGATION:

 The presiding officer must call and administer the oath to the insolvent or other
witness who may then be interrogated – section 65(1).
 There are no issues formulated beforehand.
 The inquiry is conducted for the purpose of discovery.
 To obtain facts that the trustee and creditors do not possess, and which may be of
financial benefit to the estate (Agyrakis v Gunn).
 The statement of any person being interrogated must be recorded in the same way as
the evidence in a civil court – section 65(3).
 Where the insolvent is interrogated, he must be required to make a declaration that he
has made a full and true disclosure of all his affairs – section 65(4).
 The presiding officer must ensure that the proceedings are conducted in accordance
with the fundamental principles of justice;
 And must ensure that he performs his functions fairly and impartially (Advance
Mining v Botes).
 The court may intervene to stop an interrogation if it amounts to an abuse of section
65;
 Or if it is vexatious or oppressive (Lane).
 The presiding officer must disallow any question which is irrelevant;
 And may disallow a question which would prolong the interrogation unnecessarily –
section 65(1).
 It has been held that he should exclude questions on the latter basis if they are not
calculated to produce material information about the insolvent’s affairs;
 Or if the information can be obtained more readily from another source (Agyrakis).
 Questions to establish the general credibility of a witness are permissible;
 PROVIDED, they are relevant to the affairs of the insolvent (Pretorius v Marais).
 Questions which infringe a witness’s constitutional rights are not lawfully put, and a
witness need not answer them (Harksen v Lane).
 The fact that the presiding officer is obliged, in certain circumstances, to hold the
inquiry in camera does NOT mean that in all other circumstances it must take place in
public (Roux v Die Meester).
 A person called upon to give evidence may be assisted by an advocate, attorney or
other agent – section 65(6);
 And is entitled to be informed of his right to such assistance (Advance Mining).
 However, he has NO constitutional or other right of access to information prior to the
inquiry.
 He is called to the inquiry to assist in providing information, NOT to receive it
(Pitsiladi).
  A witness may be interrogated even though he is a witness in a pending civil trial
concerning the subject of the proposed interrogation (Pretorius v Marais).

PRIVILEGE:
a) Applies when giving evidence or required documents – section 65(2);
b) Evidence given at an interrogation is admissible in any proceedings against the person
who gave such evidence – section 65(5);
c) Person interrogated may not refuse to answer a question on basis that the answer will
incriminate him, or he may be prejudiced – section 65(2);
d) A banker of the insolvent or his spouse must, if summoned to do so, produce all
cheques in his possession which were withdrawn by them, or any other relevant
information – section 65(2).

 Presiding officer must hold the incriminating evidence or part of any proceedings in
camera;
 And prohibit the publication of any incriminating evidence – section 65(2A)(a);
 And no such evidence may be admitted in criminal proceedings;
 EXCEPT for perjury related offences.

Having taken charge of the estate assets, the trustee must realise them for the benefit of
creditors.

TYPES OF CREDITORS

(a) Concurrent creditors:

 Does NOT enjoy any advantage over other creditors.

 They are paid out of the free residue.
 I.e., the portion of the estate which is NOT subject to any of the preference by reason
of any special mortgage, legal hypothec, pledge or right of retention, after the any
preferent creditors have been paid.
 Concurrent creditors all rank equally.
 And are paid equally from the residue.

(b) Secured creditors:

 Holds security for his claim in the form of a special mortgage, pledge or right of
retention.
  He is paid out of the proceeds of the property, subject to the security.
 Singer v The Master – if the proceeds of the encumbered property are insufficient to
cover the secured creditor’s claim, he has a concurrent claim for the balance.
 In terms of section 89(2), a secured creditor may choose to rely exclusively on his
security.

(c) Preferent creditors:

 Any creditor who is entitled to receive payment before other creditors.

 Usually reserved for a creditor whose claim is not secured;
 But nevertheless ranks above the claims of concurrent creditors.
 Preferent creditors may be given with regard to:

 Funeral and death bed expenses;

 Costs of execution;
 Salary or remuneration of employees;
 Statutory obligations;
 Income tax.

Types of security conferring preference:

(a) Special mortgage:

 Mortgage bond hypothecating immovable property;

 Notarial bond hypothecating specially described movable property.

(b) Landlord's legal hypothec:

A landlord who is owed rent has a legal hypothec over the lessee’s movable property on his
leased premises – section 85(2).

(c) Pledge:

 Usually occurs when there is delivery of movable property to a creditor;

 On the understanding that it will be used retained by him;
 Until his claim has been satisfied.

(d) Right of retention:

 A party has a right of retention or lien over specific property belonging to another;
 If he performed or incurred expenses in respect of the property.
  2 types of liens: enrichment liens & debtor and creditor liens.

Ranking of claims:
Order in which various claims may be brought against the insolvent's estate:
a) Encumbered assets:

 Initial costs;
 Secured claims;
 Immovable & movable property.

b) Unencumbered assets or free residue:

 Funeral expenses;
 Death-bed expenses;
 Costs of sequestration;
 Costs of execution;
 Salary of employees;
 Statutory obligations;
 Concurrent creditor's claims;
 Claims secured by general and special bond.