ISR310 Week 1-12 PDF

ISR310 (INSOLVENCY LAW)
WEEK 1: FOUNDATIONAL CONCEPTS:

PURPOSE, POLICIES, AND PRINCIPLES OF INSOLVENCY LAW
PROVIDE AN OVERVIEW OF THE TOTAL FIELD OF INSOLVENCY LAW
- Insolvency law developed as a special debt enforcement procedure in order to provide a

fairer distribution of the proceeds of a debtor’s property (assets) among the creditor/s in
situations where the debtor does not have sufficient assets to cover his debts in full
- The law of insolvency = the totality of rules regulating the situation where a debtor cannot
pay his debts or where his total liabilities exceed his total assets
- In SA we speak about ‘insolvency’, but in other countries they talk about ‘bankruptcy’
- Debtors = people who owe other people (creditors) money
- Why do we need insolvency law? -> There are debtors that do not have enough money to
pay all their creditors
- insolvency law aims to deal with this situation ^ in a fair and orderly manner
- SA has a pro-creditor system -> system that protects creditors who are owed money.
However, there are rules in place to still protect the debtor from being unethically treated
(e.g. creditors cannot take the clothes of a debtor)
- All creditors have a right to be paid. However, secure creditors get paid before unsecure
creditors
DIFFERENTIATE BETWEEN FACTUAL AND COMMERCIAL INSOLVENCY
- Just because someone is insolvent (bankrupt) does NOT necessarily mean that the rules of
Insolvency Law apply
- In SA, we make a distinction between factual and commercial insolvency:
o Factual/Actual insolvency
§ also called “balance sheet insolvency”
§ Liabilities > assets
§ Factual insolvency is important when we talk about “voluntary surrender” ->
the debtor goes to court and asks to be put into the formal insolvency system
so that their financial situation can be sorted out (this is called sequestration)
§ Compulsory sequestration -> the creditors ask the court to put the debtor
into the sequestration process
o Commercial insolvency
§ Also called “cash flow insolvency”
§ Assets > liabilities, BUT their cash flow is of such a nature that the debtor
cannot pay their debt (aka not enough liquid assets)
1
WARNING: These notes were made by CAITLIN LEAHY © - please do NOT distribute them unlawfully!
DISCLAIMER: These notes have been complied using the prescribed textbook, the lecture slides & class notes, and the
prescribed case law. These notes are merely my own personal summaries and my own understanding of the work. I
acknowledge that all intellectual credit is due to the authors of the textbook and the university lecturers for this
module.
§ Commercial insolvency becomes important when we start looking at
companies
§ E.g.) A mining company has equipment worth R10 million. But their
equipment is too difficult to liquidate (sell). Even though they have R10
million worth of assets, they don’t have R10 million in cash to solve their
debts
EXPLAIN WHAT THE COLLECTION PROCESS ENTAILS
- Where a debtor fails to fulfil a contractual obligation or fails to satisfy his liabilities, each and
every creditor can claim performance from the debtor
- If the debtor’s assets are not sufficient to satisfy all claims -> the creditors can individually
OR collectively apply for sequestration of the debtor’s estate (this is called compulsory
sequestration) -> this action activates the collective debt enforcement procedure available
to creditors
- The purpose of this procedure = pay at least a dividend/portion of the debts to ALL the
creditors instead of only paying one or two creditors in full
- A formal sequestration order initiates/triggers the legal process of the law -> this is where
someone is declared insolvent and the court grants a sequestration order
- What is the value of this -> to prevent “grab law”
o Grab law is where creditors start taking everything away from the debtor who has no
money, like their clothes, and bedding etc. -> this will create a lot of chaos
o The sequestration order allows the court case against the debtor to be suspended
- Accessing sequestration is not a straightforward process because of the high consequences
for all the parties involved
There are 2 main options for debt collection: individual collection + collective collection
- Individual collection: (one-on-one payment)
o This is where a creditor sues a debtor (one creditor)
o The creditor will phone the debtor and send a letter of demand to the debtor -> If
the debtor doesn’t do anything the creditor will issue a summons -> If the creditor is
successful then he will get judgement -> If judgement debt is not paid then the
creditors will attach the assets of debtor and sell them in execution. This means the
assets go to the sheriff and gets sold in a public auction -> The money recovered
after the auction will go to the creditor to satisfy the judgement debt
o Why do we have individual debt collection? -> Sometimes the debtor disputes the
debt and wants to defend himself against the summons.
o Usually, the debtor has enough money to pay the debt, they just don’t pay.
- Collective collection:
o This is where a debtor is unable to pay his debts (insolvent). He does not have
enough money to pay all his creditors (multiple creditors)
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module.
o All the creditors are grouped into 1 process -> distribution of funds (what the debtor
has left) occurs among the creditors (some creditors will not get paid their full
amount because of the lack of money)
o Consequence 1: debtor loses control of his estate -> we bring in a trustee to deal
with this situation
o Person goes insolvent -> nothing happens until there is a court application -> if court
application is successful, then the debt will be pushed into insolvency -> trustee
comes in to liquidate the assets and pay the creditors -> when process is done, all
unpaid debts are discharged (there are a few exceptions) -> debtor starts fresh again
with no debt
o What happens if one creditor does not know that there are other creditors involved?
-> notification procedures need to be followed
Summary of the process:

- Step 1: Pre-sequestration
o Debtor declared insolvent -> either factually or commercially
- Step 2: process to get sequestrated
o Court application must be made -> can either be voluntary (if made by the debtor) or
compulsory (if made by the creditor)
- Step 3: administration
o Estate vests in Master of the HC and then in the appointed trustee
o The trustee must sell/liquidate the debtor’s assets and sell them in order to repay
the debtor’s creditors
o selling property in auction = execution
- Step 4: rehabilitation
o Debtor receives a fresh start / discharge of pre-sequestration debt (unpaid debts are
written off)
EXPLAIN AND DISTINGUISH BETWEEN THE DIFFERENT OPTIONS AVALIABLE TO A NATURAL

PERSON DEBTOR IN SOUTH AFRICA
There are a number of debt relief procedures available to a natural person/consumer debtor who is
unable to pay his debts, such as:
- (1) debtor can apply for an administration order in terms of (ito) s74 of the Magistrates’
Courts Act 32 of 1994, provided that his debts do not exceed R50 000
o Next step: debtor must make regular payments to the administrator + administrator
must pay these amounts to the list of creditors
- (2) debtor can apply for debt review for debts that amount to credit agreements as
regulated by the National Credit Act 34 of 2005
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module.
o Next step: either relief will be provided to the debtor for debts that are found to be
reckless credit or invalid credit agreements OR debt review may result in a
formalised repayment plan
- (3) debtor may enter into a voluntary agreement with his creditors regarding a repayment
plan/novation with any or all of his creditors
o Act of insolvency = debtor proposes a release or gives written notice to creditors of
his inability to pay his debts
o After the act of insolvency has been committed -> the creditor may apply for
sequestration of the debtor (this is called compulsory sequestration)
- (4) if the debtor is insolvent, he can voluntarily surrender the estate if the prescribed
requirements are met (this is called sequestration)
o Next step: assets will be realised, and their proceeds will be distributed among the
creditors ito the Insolvency Act
o Sequestration may eventually benefit the debtor by granting him a fresh start (this is
called discharge)
EXPLAIN THE UNDERLYING PRINCIPLES OF INSOLVENCY LAW + EXPLAIN WHAT THE CONCEPT OF
CONCURSUS CREDITORIUM ENTAILS
- The law of insolvency is mainly regulated by the Insolvency Act

- The law of insolvency is based on 2 principles:
o (1) the right which creditors have to satisfy their claims through the process of
execution against assets of the debtor (creditors have the right to be paid)
o (2) the concurrency of creditors who do not have a preferent or secured claim – but
the procedure will be put into motion only if an advantage or benefit to creditors can
be proved
§ Concurrent creditors are paid pro rata and treated equally (they all receive
the same amount from the debtor)
§ Some creditors take security for their debts -> creditors who do this get paid
first from the particular asset that they set up as security
§ E.g.) if you take out a home loan, the bank will register a mortgage over the
house. This means that if you cannot pay off your home loan, the bank can
take your house away.
§ Unsecured creditors protect themselves by having a high interest rate
§ Unsecured creditors only get paid from assets that have no burden
• E.g.) there is no other creditor linked to the asset
§ If multiple creditors attached security to the same object -> basic rule = first
in time, first in right (first creditor gets paid first)
§ A group = secure creditors / B group = unsecured creditors
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module.
- The debtor loses control over his estate as soon as an order for sequestration is given by the
High Court (HC) -> the property then vests in the Master of the HC -> this vesting is then
transferred to the trustee that the Master appoints
- The trustee realizes the estate property (assets) and distributes the proceeds among the
creditors -> this causes a concursus creditorium
- Concursus creditorium = the general interest of the creditors as a group ranks in priority
over the interests of the individual creditors
o In other words, it is better for all the creditors to get a small portion of the debtor’s
money rather than 1 creditor getting everything to the exclusion of the other
creditors
o One creditor cannot, through the process of execution, receive full payment of his
claim at the cost of the claims of other creditors
- Creditors cannot attach any other assets obtained by the insolvent after his sequestration
- The debtor cannot alienate or burden any property
DESCRIBE THE HISTORY OF SOUTH AFRICAN INSOLVENCY LAW
- Basis of South African Insolvency Law = Ordinance of Amsterdam of 1777

- First complete insolvency legislation in SA = Ordinance 64 of 1829 -> introduced into the
former Cape Colony under English influence
- Insolvency Act 32 of 1916:
o -> first uniform insolvency Act introduced in the former Unions
o -> was amended by Amendment Act 29 of 1926
o -> was then replaced by the present Insolvency Act 24 of 1936 (this is our current
legislation)
DISCUSS THE SOURCES OF INSOLVENCY LAW AND THEIR APPLICATION TO NATURAL AND
JURISTIC PERSONS RESPECTIVELY
- What is the difference between liquidation and sequestration?

o Liquidation has to do with the bankruptcy/insolvency of a juristic person (companies
and close corporations and banks)
§ Process of Liquidation is regulated by the Companies Act
§ Liquidation (process) = noun (capital L) / liquidation (selling assets) = verb
(lower-case l)
o Sequestration has to do with the insolvency of a natural person or of a partnership
§ Process of Sequestration is regulated by the Insolvency Act
o HOWEVER, the liquidation and sequestration process are the SAME
Sources of SA Insolvency Law:

- The Insolvency Act 24 of 1936
o -> main source of SA insolvency law
o -> regulates the sequestration of natural persons or of a partnership
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module.
- The (former) Companies Act 61 of 1973
o -> regulates the winding-up/liquidation of insolvent companies
o -> was replaced by the Companies Act 71 of 2008 as from 1 May 2011
- The Close Corporations Act 69 of 1984
o -> regulates the liquidation of insolvent close corporations
- The Banks Act 94 of 1990
o -> regulates the liquidation of insolvent banks
- The Constitution of 1996 (the consti) and its Bill of Rights (BoR)
o -> supreme law in SA
o -> the various principles of insolvency law have been and will still be scrutinised to
ascertain whether they align with the consti
- Judgements of the High Courts (HC) and Constitutional courts (CC) + precedents (case law)
- Principles of common law
Further notes on the liquidation of insolvent companies and close corporations

- Companies and close corporations are different things -> so different procedures apply
- Certain procedures providing for the winding-up and liquidation of a company are dealt with
by Chapter 14 of the 1973 Companies Act exclusively
o If, in this Act, there is an absence of the procedure or of needed principles -> the
Insolvency Act and the common law will apply
- How do we know when insolvency law applies to a company?
o Step 1: is the provision capable of application to a company?
§ E.g.) rules pertaining to exempt property and rehabilitation ONLY apply to
natural persons
o Step 2: does the 1973 Companies Act provide specifically and exhaustively for a
specific instance?
§ If yes -> the provision in the 1973 Companies Act will apply
§ However, sometimes it is not clear
• E.g.) s44 of the Insolvency Act and s366(2) of the 1973 Companies Act
BOTH apply to the time limit for the proving of claims
- Despite the 1973 Companies Act being repealed and replaced by the 2008 Companies Act,
the liquidation provisions in chapter 14 of the 1973 Companies Act still apply since the 2008
Act only provides for the liquidation of solvent companies
Summary:
- There are 2 Companies Acts -> the 2008 Act and the 1973 Act
- The 2008 Act deals with solvent companies
o When it comes to insolvent companies, the 2008 Act refers to the 1973 Act
(particularly Chapter 14 which sets out the grounds and process for winding up an
insolvent company)
- The 1973 Act deals with insolvent companies
o However, the 1973 Act lacks provisions on certain matters (e.g. impeachable
transaction, unexecuted contracts etc.)
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module.
o If the liquidator is dealing with an issue that is not covered by the 1973 Act -> he
must turn to the Insolvency Act for the necessary rules to follow
When we want to liquidate an insolvent company, the following modus operandi must be followed:
- Step 1: start with the 2008 Companies Act -> item 9 of schedule 5 will refer you to chapter
14 of the 1973 Companies Act
- Step 2: if a matter is not provided for in chapter 14, then S339 of the 1973 Companies Act
allows the provisions of the insolvency law (Insolvency Act and the common law) to apply
mutatis mutandis
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module.
WEEK 2: FOUNDATIONAL CONCEPTS CONTINUED
Right to satisfaction of claim:

- just because a creditor will not get paid in full does not mean that the right to satisfaction of
claims is no longer important in insolvency law
- sequestration tries to solve an impossible situation but it does not take away the right that
creditors have to get paid
- in SA we follow a pro creditor approach which means that our sequestration process is
aligned to benefit creditors
o e.g. the court will take into account the fact that creditors are better off in
sequestration than without the sequestration process
Grab law:
- this is the situation where whichever creditor gets to the estate of the debtor first, that is
the creditor who gets what is owed to him and there is not much left for any other creditors
- insolvency law wants to prevent grab law from happening because it results in wasted
expenses/costs -> this illustrates the special nature of insolvency law
Special nature of insolvency law:

- this special nature of insolvency law allows for things to be done better
- how? -> there are rules that cater for the unique situation where the debtor does not have
enough funds to pay all the creditors
- later in this module we will learn about ways in which to limit the costs of this process
(“costs of conservation”)
- sale of assets will usually occur through the mechanism of the trustee -> this shows it is a
streamlined process
- proving of claims does not necessarily need a judgment
- normally, in order to obtain a judgment order and to be able to execute and attach the
assets of the debtor, the creditor will have to go to court and obtain a court order. However,
the Insolvency Law simplifies this process in the following way: creditors go to the trustee
and they prove their claims with the necessary documents -> and only if there is a dispute,
can it be referred to court (this an example of a cost saving mechanism)
- why do we want to save costs? -> costs of the process are paid from the estate of the
debtor. The more expensive the process, the more the debtor has to pay, and then the less
funds there are for the creditors.
- Despite this cost saving mechanism, sequestration is still not a cheap process
o A High Court order is needed for sequestration
o the trustee needs to be paid
o there are other costs that are also associated with the process
Aims of sequestration:
- orderly distribution of the estate
- fair payment in accordance with the rules of insolvency
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module.
- although benefitting the debtor is not the primary aim of the sequestration process, it does
provide for discharge of pre-sequestration debts and allows for a “fresh start” -> allows the
debtor to be released from the pre-sequestration debts and to start his life anew and
participate in the market again without the debt burdens
Individual debt collection vs collective debt collection:

- Example of individual: ABSA issues summons and gets judgement against Abby -> if Abby
does not pay the debts owed, ABSA can instruct the sheriff to attach and sell Abby's assets -
> ABSA can recover the debts owed by Abby from the proceeds of the sale
o purpose: judgement and execution
- Example of collective: Abby owes ABSA, FNB, and Nedbank money and doesn’t pay them ->
ABSA obtains an order against Abby (ABSA will be the applicant creditor) -> trustee
administers Abby’s estate for the benefit of all 3 creditors
o Purpose: deal with the estate in an orderly manner
- Collective procedure is more beneficial to the parties than the individual procedures
Nature and purpose of sequestration:

- Sequestration is not an ordinary debt collection process, it is a special collective debt
enforcement process that is aimed at achieving different outcomes than individual
enforcement -> this principle has been confirmed in case law:
- Investec v Mutemeri (confirmed by SCA in Naidoo v ABSA) illustrates this principle as
follows:
o “a sequestration order is not an order for enforcement of the claim. Its purpose and
effects are merely to bring about a convergence of the claims in an insolvent estate
to ensure that it is wound up in an orderly fashion and that creditors are treated
equally. An applicant for sequestration must have a liquidated claim against the
respondent, not because the application is one for the enforcement of the claim, but
merely to ensure that applications for sequestration are only brought by creditors
with a sufficient interest in the sequestration. Once the sequestration order is
granted, the enforcement of the sequestrating creditor’s claim is governed by the
same rules that apply to the claims of all the other creditors in the estate. The order
for the sequestration of the debtor’s estate is thus not an order for the enforcement
of the sequestrating creditor’s claim.”
- Since the debtor is insolvent, not all the creditors will get paid their full amount. Therefore,
even though sequestration does not take away the right of the creditor to get paid, the
creditors will have to accept the fact that they will lose money in this process
- One of the consequences of sequestration for the debtor is rehabilitation. Upon
rehabilitation, all pre-sequestration debts that have not been paid will be discharged. This
means that creditors who do not get paid when the debtor is rehabilitated will lose that
money that they've not recovered
Consumer/personal insolvency vs corporate insolvency:

- Consumer insolvency:
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module.
o Regulated by the Insolvency Act and the common law
- Corporate insolvency:
o Regulated by the Companies Act & the Close Corporations Act
- Banks and insurance companies have their own pieces of legislation and laws because they
play a very important role in our economy
o The liquidation of a bank can have systemic financial implications for a nation's
banking and financial system, so the way in which banks are regulated are quite
different from normal corporations. Banks also have their own special procedures to
assist them when they go into financial distress
- Sometimes the Companies Act and the Closed Corporations Act does not provide
comprehensive guidance to a liquidator on how to deal with certain matters. In these
instances, the liquidator may refer back to the Insolvency Act
o E.g.) when it comes to the way in which creditors are paid and the order of
distribution, the Companies Act does not make provision for the differentiation
between the different types of creditors. So in order to know how to distribute the
money that was raised by selling the assets of the company, the liquidator will look
at the rules set out in the Insolvency Act
- close corporations and companies are not listed in the definition of a ‘debtor’ in the
Insolvency Act. So reference to a debtor in the Insolvency Act cannot refer to a company or
close corporation
- when we talk about debtors being sequestrated in terms of the Insolvency Act, we talk
about “sequestration” -> a natural person is sequestrated
- when it comes to corporations, we talk about “liquidation”/”winding-up” (this is the process
of selling the assets which you will then distribute in line with the rules pertaining to
insolvent corporations) -> a juristic person is de-registered
Underlying policies and principles:

- One of the main underlying rules or principles for insolvency law is the establishment of the
concursus creditorum
- when the sequestration order is granted, a concursus creditorum comes about. Thereafter,
the interests of the creditors as a group are more important than the interests of
individual creditors. The manifestation of this rule is evident in 2 specific ways:
o Creditors may only receive payment within the rules of insolvency law
o Creditors get paid in the order of ranking
§ secured creditors get paid from secured assets (get paid first)
§ thereafter, unsecured creditors get paid from unsecured/unencumbered
assets
§ creditors are not allowed to jump the line
- the concept of concursus creditorum was defined in: Walker v Syfret 1911 AD 141
o "The sequestration order crystallises the insolvent's position; the hand of the law is
laid upon the estate, and at once the rights of the general body of creditors have to
be taken into consideration. No transaction can thereafter be entered into with
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module.
regard to estate matters by a single creditor to the prejudice of the general body.
The claim of each creditor must be dealt with as it existed at the issue of the order."
Debt collection/enforcement versus debt relief

- debt collection and debt enforcement mean the same thing
- remember: there are 2 options available for creditors:
o (1) the creditor can pursue the debtor individually using the individual debt
collection procedure
o (2) the sequestration process / the special collective debt enforcement procedure
- The main difference between debt collection/enforcement and debt relief:
o Debt collection/enforcement -> creditor-focused
o Debt relief -> debtor-focused
- There are various forms of debt relief:
o Voluntary negotiation procedures
o Voluntary surrender
o Debt review
o Administration
o Debt intervention
o Discharge
- When it comes to debt relief, although payment of the debt is an outcome, if the debtor
experiences financial distress he can elect to follow voluntary negotiation procedures
o E.g.) the debtor can go to ABSA and say he is unable to pay his debt and wants to
negotiate a repayment plan. So instead of paying the R8000 he owes, he just pays
the R5000 he has. Sometimes creditors will accept this because it is better to have
R5000 you are sure of than R8000 of someone you know cannot pay
o However, there is a catch with voluntary negotiations -> the conduct of the debtor
can be of such a nature that he commits an act of insolvency. When a debtor
commits an act of insolvency, it's one of the things that the creditor can use to apply
for the compulsory sequestration of that debtor
- Another option a debtor can consider is voluntary surrender -> this is the process where an
individual debtor approaches the court and asks the court to sequestrate his estate
o In other words, the debtor voluntarily enters into the sequestration process
o Why would a debtor do this? -> because the ultimate consequence will be a
discharge (however, discharge is not the primary object of sequestration)
o The debtor still has to show that sequestration will be to the advantage of creditors
- Debt review -> this is a process regulated by the National Credit Act (NCA) whereby the
debtor approaches a debt counsellor and the debt counsellor draws up a repayment plan
o if that repayment plan is approved by the court, then the debtor will follow that
repayment plan and pay off his credit debts to credit providers
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module.
- Administration -> process regulated by the Magistrate’s Court Act
o Administration was initially envisaged to be a form of sequestration for smaller
estates, but it also takes on the form of a repayment plan
o an amount is paid over to an administrator and the administrator distributes that
amount to various creditors
- Debt intervention -> this is a new mechanism that is yet to become operational
o Debt intervention is regulated by the National Credit Act and it tries to fill the gaps
that is left by the current debt relief procedures that do not cater for all the needs of
the debtor and that also do not cater for all types of debtors
- NOTE: Each one of the current debt relief mechanisms available have certain shortcomings
because each of these mechanisms was written to serve a particular purpose and particular
type of debtor
- The problem is we don't have a debt relief remedy that caters for each and every debt
situation
- At present, voluntary surrender is the only process that offers discharge of debt. With the
other remaining debt relief mechanisms, the debtor will be forced to pay off all of his debts
REMEDY LAW SCOPE LIMIT ACCESS ISSUES

NEGOTIATIONS No applicable Any debt to any No limit on Potential act of
legislation as amount amount of debt. insolvency (gives
debtor makes his the creditor the
own arrangement tools to
with the creditor. sequestrate the
debtor)
DEBT REVIEW S86 of the Limited to Credit No limit on the Debtor must have
(repayment plan) National credit agreements amount of debt a disposable income
Act 34 of 2005 regulated by NCA debtor must have. in order to use
this remedy
Agreements ito
which credit
providers have
commenced
individual
enforcement
procedures are
excluded
ADMINISTRATION Magistrates’ Any debt up to Debt limit of Debtors must
Court R50 000 R50 000 (debtors have disposable
(S74 Magistrates with more than income
Court Act 32 of this cannot use
1994) this process)
VOLUNTARY Insolvency Act 24 Any debt of any No limit on Debtor has to
SURRENDER of 1936 -> High amount amount of debt show advantage
(liquidation/ Court to creditors (this
sequestration)
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module.
can be difficult to
show)
Costly -> not

accessible to
debtors who do
not have money
DEBT National Credit Limited in scope - Debt limit of Debtor must be a
INTERVENTION Act -> but not yet > NCA only R50 000 consumer under
operational regulates matters an unsecured
that fall within its Income limit of credit agreement
scope R7500
Must be
Aimed at low- overindebted
income debtors
Must not be
sequestrated or
subject to an
administration
order
ARTICLE SUMMARY
‘RECTIFYING AN UNCONSTITUTIONAL DISPENSATION? A CONSIDERATION OF PROPOSED

REFORMS RELATING TO NO INCOME NO ASSET DEBTORS IN SOUTH AFRICA’ – by Roestoff
Page 1
- what is the current system in SA? -> SA has a strong creditor-orientated approach
o that does not provide all debtors to a fresh start
o the current system causes indigent debtors to remain poor and in debt
- Current statutory debt relief measures in SA:
o Sequestration
o Debt review
o Administration
- Sequestration is only available to natural person debtors who have sufficient disposable
assets to prove advantage to creditors. This is also the only measure that will result in a
discharge of their pre-sequestration debt (this is why it is deemed to be the primary debt
relief measure in SA)
- Administration and debt review are only accessible to debtors who have sufficient income
to fund a viable repayment plan
Page 2
- It can thus be seen that the SA system differentiates between debtors “with” and “without”
assets and income
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module.
- This constitutes unfair discrimination against “no income no asset” debtors (also called
NINA debtors) on the grounds of socio-economic status -> unconstitutional
- In order to address the plight of this marginalised group of debtors, there are two law
reform initiatives that are under consideration:
o Debt intervention (this procedure will form part of the National Credit Act)
o Pre-liquidation composition (this procedure will form part of the Unified Insolvency
Act)
- Is the current system responsive to the present socio-economic context? NO -> NINA
debtors are a definite reality in SA, especially since we have an unemployment rate of
around of 27.5% and more than 25% of our population receives social income grants
- Sequestration entails:
o An application by a debtor for the voluntary surrender of his estate OR an
application by a creditor for the compulsory sequestration of the debtor’s estate
o the sequestration order is followed by an asset-liquidation process and the income
of the debtor is excluded from his insolvent estate
o then comes the debtor’s rehabilitation and the discharge of his pre-sequestration
debts which occur 10 years after the date of sequestration
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- A requirement for sequestration is that the debtor has to prove that sequestration will be to
the advantage of creditors. This results in many debtors (especially NINA debtors) not being
able to access sequestration because:
o They don’t have assets or income to prove that sequestration will be to the benefit
of the creditors
o Also, they cannot afford the expensive costs of sequestration
- In terms of the other 2 statutory debt relief measures (administration and debt review):
o These procedures are essentially repayment plans that are reliant on disposable
income (NINA debtor do not have disposable income)
o These procedures do not provide any actual debt relief in the form of a discharge ->
the proposed repayment plan is doomed to eventually only perpetuate the debtors
over indebtedness (not a workable solution for overindebted, low-income
consumers)
o These procedures were not intended as remedies for hopeless financial situations,
instead they were devised to assist only the mildly over indebted during a period of
temporary financial misfortune
Page 4
- NINA debtors are completely excluded from any of the existing South African statutory debt
relief measures
- Administration order -> only available to debtors with less than R50 000 in outstanding
debts (people who have more debt than this cannot use this procedure)
- Debt review -> agreements in terms of which credit providers have commenced individual
enforcement procedures are excluded
- both alternative procedures indirectly require the debtor to have some form of disposable
income available
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module.
- The last resort for NINA debtors is to enter into volunteering negotiations with creditors to
agree on a debt rearrangement. However, because these debtors have no disposable
income, a rearrangement is an unrealistic prospect for them
- Preliquidation composition -> Measure intended as a debt relief procedure available to
natural persons who are unable to service the debt but who, due to their inability to
demonstrate advantage for creditors, are excluded from the liquidation procedure
o Will only be applicable to debts that are less than R200 000
o This procedure would require a compulsory negotiation phase -> It is worthless to
force debtors with no negotiating power through a compulsory negotiation phase
(and hearing). Also, NINA debtors cannot afford the (wasted) costs that will certainly
accompany the procedure
Page 5
- Global trend = accommodate all destitute debtors. SA falls short of this trend
- National Credit Amendment Bill 2018 seeks to introduce the debt intervention measure
Page 6
- Access to and application for debt intervention:
o Only available if the unsecured debt is less than R50 000
o Only available if the debtor’s income is less than R7500 per month
o Only available to overindebted debtors
o Only available to debtors who have not been sequestrated or subject to an
administration order
Page 7
- The fact that the debt intervention procedure will be inserted to the NCA renders it subject
to its field of application
o Therefore, obligations arising from, for instance, tort claims, clothing accounts,
professional services, and municipal accounts where no interest is charged do not
fall within its scope
o Aka only certain debts will be dealt with under this procedure
- This procedure is also not available in cases where the credit providers already proceeded to
take steps to enforce the agreements
Page 10
- In terms of section 87A(4) of the proposed NCA Bill, provision is made for the actual
discharge of NINA debtors in line with the principal objectives of an insolvency system for
natural persons (economic rehabilitation)
- This Bill is also more accessible to NINA debtors who have no disposable income (the article
lists the technical aspects that make it accessible)
Page 13
- It is likely that the proposal will remedy the unconstitutional situation (through accessible
requirements + possible discharge)
ARTICLE SUMMARY
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module.
‘IS THE UNEQUAL TREATMENT OF DEBTORS IN NATURAL PERSON INSOLVENCY LAW JUSTIFIABLE?
A SOUTH AFRICAN EXPOSITION’ – by Coetzee
- The main aim of this article is to measure the South African natural person insolvency
system against the right to equality in terms of both the South African Constitution and the
Promotion of Equality and Prevention of Unfair Discrimination Act.
o The majority of cases dealing with the right to equality must, after commencement
of the Equality Act, be dealt with in terms of its provisions as opposed to a direct
constitutional challenge in terms of Section 9 of the Constitution.
o Only where a challenge falls beyond the reach of the Equality Act may the
constitutional right to equality be relied upon
- Coetzee argues that the South African insolvency regime discriminates against poor debtors
based on socio-economic status because debtors with no income and no assets (NINA
debtors) do not have access to any of the debt relief mechanisms, and especially not to
sequestration which results in a discharge of pre-sequestration debts
- Debtors who have no income and no assets are not in a position to access the debt review,
administration or sequestration process as they do not have income to contribute towards a
repayment plan and do not have assets to partake in the asset liquidation process for the
benefit of their creditors. As such, these debtors cannot access any of these measures and
do not have anything to offer a creditor in negotiations for a voluntary rearrangement
- The South African insolvency system has fallen behind the times due to the fact that it has
remained largely creditor-orientated and excludes honest but unfortunate debtors from its
ambit (SA’s approach is contrary to the world’s approach)
- The majority of hopelessly over-indebted natural persons do not have access to any of the 3
statutory debt relief measures due to the cumulative effect of the differentiation brought
about by the entry requirements of the individual procedures.
- The debt relief measures indirectly require the debtor to have some form of disposable
income available -> it can be seen that SA insolvency law differentiates between debtors
with and without income/assets -> unfair discrimination on the ground of socio-economic
status (2 stage analysis)
o Does the differentiation amount to ‘discrimination’? -> if the differentiation is on a
specific ground then discrimination is established
o If the differentiation amounts to discrimination, is it unfair discrimination? -> if the
discrimination is found to be on a constitutionally-listed ground then unfairness will
be presumed
- Prohibited grounds = race, gender, sex, pregnancy, marital status, ethnic or social origin,
colour, sexual orientation, age, disability, religion, conscience, belief, culture, language,
birth, or any other ground where the discrimination on that ground causes/perpetuates
systemic disadvantage, undermines human dignity, or adversely affects the equal
enjoyment of a person’s rights and freedoms in a serious manner
- Further factors: whether the discrimination impairs human dignity, the impact of the
discrimination on the complainant in society, whether the complainant or the group that
16
module.
the complainant belongs to suffers from patterns of disadvantage, the nature and extent of
the discrimination, whether the discrimination has a legitimate purpose etc.
- As far as discrimination is concerned, the evident socio-economic difficulties already riddling
the lower section of the South African economy serve as associated attributes and
characteristics having the potential to impair the human dignity of especially NINA debtors
and to affect these debtors adversely and seriously as opposed to those who have more and
are thus allowed access to statutory debt relief measures
- NINA debtors are adversely and seriously affected in a manner that is comparable with
discrimination on a listed ground
- NINA debtor’s circumstances illustrate that they are persons suffering from patterns of
disadvantage as these debtors are already left with no income and no assets
- An additional argument can be made that the exclusion of NINA debtors amounts to indirect
discrimination on the listed ground of race as it is an undisputed fact that there are more
black NINA debtors in SA than there are white NINA debtors
- Debtors facing the same financial predicament, but not the same level of financial capacity
should be treated equally
- We need to adopt a substantive approach to equality
17
module.
WEEK 3 – TECHNICAL ASPECTS (ESTATES THAT CAN BE SEQUESTRATED)
- When you approach the court, you need to have various legal documents that lay out your
case
- The first 2 things that your affidavit will discuss are:
o The estate that can be sequestrated
o The right court to approach
- The Insolvency Act has its own special provisions pertaining to jurisdiction of courts
- In order to determine which court to approach, you must look at the grounds listed S149 of
the Insolvency Act (hereafter referred to as ‘IA’)
- There is a possibility that more than 1 court could have jurisdiction to hear the matter. In
this instance we need to consider where the master’s office is situated with respect to
where the creditors and immoveable property are located
o Some of the meetings that happen between the insolvent, the creditors, and the
trustee occur at the master’s office
o We need to choose the location that is most convenient to everyone
- It is the person’s insolvent estate that is sequestrated (not the person himself). The person
himself (the insolvent) is rehabilitated
o The natural person is rehabilitated and released from pre-sequestration debts after
their estate has been sequestrated (a.k.a. after the assets were sold and paid to the
creditors)
- If an estate can be sequestrated, then you have to follow the rules set out in the Insolvency
Act (in other words, the provisions of the IA are your point of departure)
- How do we determine which estates can be sequestrated? -> we look at section 2 and the
definition of a ‘debtor’ in the IA
o Only if a person is defined as a debtor ito the IA, does he fall under the umbrella
provisions of the IA
- Ito S2 of the IA, a debtor is “a person or partnership, or the estate of a person or
partnership, which is a debtor in the usual meaning of the word, except for a company, an
association of persons or other juristic person which may be wound-up in terms of the law
in respect of companies. A deceased estate, as well as the estate of a person incapable of
handling his own affairs, also falls within the ambit of the definitions”
Estates that can be sequestrated ito the 1936 Insolvency Act include:
(1) Natural person’s estate

- The estates of natural persons (human beings) are sequestrated ito the IA
- This is also called consumer insolvency
- From a civil procedure perspective, the person whose estate is insolvent can apply to the
court to have his estate sequestrated (voluntary surrender)
18
module.
- The debtor himself can be the applicant in an application to court for the sequestration of
his own estate
- However, sometimes you get people who are unable to look after their own affairs. In these
cases, a curator is appointed. If the person’s estate is insolvent, then the curator will bring
the sequestration application on the debtor’s behalf
- There are specific rules in the IA to make sure that the person bringing the application
actually has locus standi (the right to stand in front of the court and ask the court to do
something)
(2) Deceased estate

- A deceased’s insolvent estate can also be administered ito S34 of the Administration of
Estates Act 66 of 1965 without first being sequestrated
- The person administering the deceased estate has a choice between continuing ito the
provisions of the Administration of Estates Act (AEA) OR they can ask the creditors of the
estate whether he (the administrator) should surrender the estate. He will then approach
the court and ask for the estate to be sequestrated/surrendered ito the IA
- What is the benefit of using the provisions of the IA instead of the provisions in the AEA? ->
ito the IA, the creditors have a lot of input and can give a lot of instructions to the trustee of
how to deal with the estate (therefore, it is more beneficial for creditors for the estate to be
surrendered ito the IA rather than administered ito the AEA)
- A creditor can apply for the sequestration of the estate only after the appointment of an
executor/administrator and the creditor will have to convince the court that the
sequestration will be more advantageous than the section 34 AEA procedure
(3) Trust
- A trust is not a separate legal person
- Certain assets are entrusted to a person called a trustee (this a different type of trustee to
the one we get with regard to insolvency)
- The trust assets are entrusted to the trustee. The assets don’t belong to the trustee. The
trustee is just responsible for dealing with these assets in accordance with the trust deed
(the document that created the trust)
- The trust is usually run to the benefit of the beneficiaries
o E.g.) the trust deed could say that the immoveable property (trust asset) must be
invested and rented out and the profits made must be distributed to the
beneficiaries of the trust
- If the assets of the trust are less than the liabilities of the trust -> you have an insolvent trust
- Magnum Financial Holdings v Summerly:
o Can we sequestrate an insolvent trust? -> the court said yes
o The court said that a trust is sequestrated ito the IA because it is a debtor in the
ordinary sense of the word (it can have its own assets and liabilities)
o Therefore, you can sequestrate the estate of a trust because that trust can be the
holder of assets and liabilities
19
module.
- The trustees themselves (they are natural persons) are not sequestrated because the
trustee is operating from his official capacity as trustee (not in his personal capacity)
- Trust assets are not part of the insolvent estate (the trust estate and the personal estate are
separate)
(4) Partnership
- A partnership is also not a separate legal person (this is the common law understanding) ->
the IA creates a statutory exception to this understanding
- Ito the IA, the insolvency legislation recognises a separate partnership estate and allows for
a procedure where you can sequestrate the estate of the partnership -> this is a legislative
exception because it recognises that partnership’s estate is separate from the individual’s
estate
- A partnership agreement needs to be concluded between the partners for a partnership to
come into existence.
- The common law attaches special consequences to this particular type of contract.
o Ito the common law, partners and partnerships are not separated
o You have to look at what the parties agreed on with regard to partnership assets
o The partners become joint co-owners of the partnership assets. A separate estate is
NOT created (like in the case of a trust)
o However, from the perspective of sequestration, this partnership (with all its assets
and liabilities) is seen as different/separate from the partners’ separate/individual
estates
- The partnership assets are jointly owned by all the partners -> they are co-owners and co-
debtors
- The partnership estate can be sequestrated ito the IA
- When you sequestrate an insolvent partnership estate, at the same time all the individual
partners’ personal estates must also be sequestrated -> sequestration happens at the same
time, but it happens separately
- The partners do not necessarily have to be insolvent for their personal estate to be
sequestrated
- Commissioner, SA Revenue Services v Hawker Air Services
o The court said that when you sequestrate a partnership estate, S13 of the IA says
that you also have to sequestrate the individual partners estates
o This case also deals with the situation where you have partners who are not natural
persons and thus whose estates cannot be sequestrated ito the IA
o It was held that a partnership estate can still be sequestrated even though some of
the partners are juristic persons (thus not natural persons) which cannot be
sequestrated and must be liquidated in terms of the relevant company laws.
Content of the application/affidavit:
- The following is an example of what you need to state in your affidavit when you bring your
application to court:
20
module.
-
- The Insolvency Act tells us to follow the application procedure, not the action procedure
(the application procedure requires there to be a lot more details)
o Action proceeding -> we use summons, particular of claims, and we can put a
witness in the witness box etc.
o Application proceeding -> we put all the info the court needs in affidavits
- The person bringing the application has to identify himself (“major male, ID number, the
nature of their business/employment, where they reside)
o The residence of the person bringing the application establishes jurisdiction
o Must be written in the first person
- If the insolvent brings the application himself then he will be the applicant (this would be a
voluntary surrender application)
- No matter whether it is the debtor (voluntary surrender) or the creditor (compulsory
sequestration) bringing the application to the court, it must always be the details of the
debtor that are placed in front of the court
o E.g.) if a creditor brings the application to the court, the affidavit will say “The debtor
is John Jack, a major male with identity number… etc.”
o If the debtor is not a natural person, then the affidavit must specify that the debtor
is a trust or a partnership
o If parties are married in community of property, then there is one estate, and that
joint estate is sequestrated. Here you will have 2 debtors/applicants in front of the
court -> you will have to provide the details of both debtors (authority = S17(4)
Matrimonial Property Act 88 of 1984)
The Sequestration process / the manner in which the court should be approached:
- Both voluntary surrender and compulsory sequestration are instituted by way of notice of
motion –> also known as application proceedings -> this procedure is regulated by rule 6 of
the High Court Rules -> during this procedure, evidence is placed before the court in a
written affidavit in support of the application
21
module.
- In the case of voluntary surrender, application is made by way of an ex parte application in
accordance with Form 2 of the Uniform Rules of Court, and it is directed to the Registrar of
the High Court
o In an ex parte application, only 1 party (the applicant) is involved who is seeking a
court order in respect of himself
o The person brining the application will be the person deposing to the affidavit. He
must identify himself to the court in the papers
o In the case of voluntary surrender -> the debtor is the applicant
- In the case of compulsory sequestration, a long notice of motion in accordance with Form
2(a) of the Uniform Rules of Court is used
o In the case of compulsory sequestration -> the applicant (the creditor/s) seek an
order of court against the respondent (the debtor)
- Civil procedure as well as the IA tells us that certain information has to be placed in front of
the court:
o The gender of the person
o Where they are a major/minor
o Identity number
o The residential address
o The employment of the person + place of employment
- What purpose does this information serve? -> it introduces the debtor to the court, and it
also establishes jurisdiction
- Why is it important for the debtor to say whether he is married or not, what the marriage
dispensation is, and the details of the spouse? -> there will be 2 debtors and you must join
both these debtors as applicants (aka there will be 2 applicants).
o There will usually be only 1 person deposing the affidavit. The other spouse will give
a supporting affidavit to say that she confirms what the other spouse has said
o The moment the court sees this, the court goes back to the parties and check
whether the parties have been joined as co-applicants in the specific matter -> they
will both be bound by the sequestration order
o If the parties are not joined or if the creditor is unable to find out whether the
debtor was married in or out of community of property -> this won’t necessarily void
the court order. the order will still apply to the other spouse as well
o It is important to know whether or not the joint estate is to be sequestrated
o This situation is regulated by S17(4) of the Matrimonial Property Act
o When we look at parties married in community of property, it is important to
understand that it is not separate estates that are joined at the time of
sequestration. When parties get married, the 1 joint estate is already established.
When you sequestrate the joint estate, you will have joint owners / joint debtors.
They are co-debtors of the debt of the estate
o However, when it comes to assets that can be sold there is provision made for
people to have separate estates. But because they are still joint co-debtors, case law
22
module.
says that it does not matter where the assets come from. Personal assets of one of
the parties/debtors can also be used to pay the debts that are owed by the joint
estate
1) Facts to take into account when you decide how to approach this matter:
- There are 2 clients/debtors -> John and Cathy -> they are co-debtors married out of
community of property -> Their debt amount = R250 000
- They are co-debtors, but since they are married out of community of property there will be
2 estates. Therefore, there will be 2 separate applications for the sequestration of separate
estates
- You will have to prove the requirements for sequestration in respect of each debtor. You
have to show that it will be to the advantage of John’s creditors if John’s estate is
sequestrated. Likewise, you will have to show that it will be to the advantage of Cathy’s
creditors if Cathy’s estate is sequestrated
- If Cathy and John were married in community of property -> it would be 1 application
- The manner in which the debt will be divided will firstly depend on what the contract says
2) What additional information is needed to draft the affidavit?

- Cathy and John’s identity numbers, where do they live/where are they domiciled, what jobs
do they have? Etc.
Jurisdiction / which court can be approached for sequestration and rehabilitation orders?
23
module.
- S2 IA -> only the High Court (HC) can make sequestration and rehabilitation orders because
these orders affect a person’s status
- S149 IA -> A local or provincial division has jurisdiction to sequestrate a debtor on the date
of application if the debtor:
o Is domiciled within the area of jurisdiction of the court, or
o Owns or is entitled to property located within the area of the court’s jurisdiction, or
o At any time during the 12 months immediately preceding the date of the application,
ordinarily resided or carried on business within the area of the court’s jurisdiction
- Different divisions of the HC may have concurrent jurisdiction in respect of the same estate
o A court may refuse the application if it is more convenient for another court to
sequestrate the estate
o Which division of the HC do we go to? -> the area in which the person is domiciled,
or the area in which the person owns property, or the area in which the person
resided within 12 months preceding the application date
o The court will also look at considerations of convenience and equity -> where are the
creditors located, where is the closest Master’s office, where is the property situated
etc.
o Jurisdiction has 2 components: -> we will learn about this next year
§ Is the court competent to hear this application?
§ Is the court able to exercise oversight over the type of order that is given?
- An application for rehabilitation must be brought in the same division where the debtor was
initially sequestrated
- The HC has review capacity -> can review decisions made by the Master
- Magistrate’s courts have jurisdiction regarding other issues which fall within their
jurisdiction, such as:
o Hearing of criminal matters
o The impeachment/setting aside of voidable transactions
o Actions ito sections 72(2), 73(1), 76, and 78(3) of the IA
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module.
- The Magistrate’s court can have jurisdiction to hear an insolvency-related matter if it does
not affect the status of the person
- The first problem we can see with the affidavit is that the respondent is married in
community of property yet there is only 1 respondent (there should be 2)
- Where do you look to find out if the right court was approached? -> look at the heading ->
we can see that the Cape Town High Court was approached -> is this the right court?
o We have to look at the debtor’s/respondent’s jurisdiction, not the creditor’s
jurisdiction
o The respondent is residing in Sunnyside Pretoria
o We can see that the respondent has been conducting business for more than 12
months in Menlyn Mall. She is also residing in Pretoria
o From the facts, we cannot see anything that supports the application for
sequestration of the respondent’s estate in the Western Cape High Court.
o The applicant/creditor, who brought forward the application for compulsory
sequestration, used the jurisdiction that is applicable to him as the creditor (this is
not in accordance with S149 of the IA). He should have used the jurisdiction of the
debtor instead
25
module.
WEEK 4 – TECHNICAL ASPECTS CONTINUED (DISTRIBUTIONS + APPLICATION OF PROCEEDS)
Study outcomes:
1. compare and differentiate between the different classes of creditors, and their treatment in
insolvency law;
2. explain what types of security confer preference;
3. explain in which order of preference claims are paid;
4. assess which creditors are liable for contribution;
5. apply the abovementioned principles/law to practical scenarios to solve legal problems.
General:
The court must be given information about the creditors of the estate
- Compulsory sequestration -> creditors must say if debt is secured or not and prove their
claim
o Proving a claim means providing proof that the estate owes money to that creditor
o This is done during administration of the estate by submitting an affidavit with the
info prescribed in s44 of the IA. The trustee will then consider these claims and
determine whether the estate does in fact owe the creditor/claimant the amount
claimed
o General rule = if a creditor who was supposed to prove a claim (within the
determined time allowed for submission of proof) does not do this -> he shall not be
entitled to share in the distribution of assets (there are exceptions to this rule)
- Voluntary surrender -> the debtor must indicate money that is available in the free residue
- free residue contains unencumbered assets (assets that are not subject to a form of
security)
introduction to distributions:
- ‘Distribution’ refers to how the trustee will pay/distribute the money generated from the
sale of the assets amongst the creditors
- Distributions are also referred to as the application of proceeds
- The manner in which proceeds should be distributed are laid out in the Insolvency Act (IA)
- S28 IA -> It is the duty of the trustee to collect and sell all the assets that fall in the insolvent
estate of the debtor (remember that not all assets fall within the insolvent estate. Only
assets that fall in the insolent estate can be sold)
Some creditors receive payment before others:

- The IA distinguishes between different creditors
- Some creditors have preference over other creditors and get paid first even if there is not
enough money to pay all the creditors -> definition of preference in s1 of the IA
- This means that the IA makes provision for a ranking of creditors
2 main groups of creditors: -> paid from different pools

26
module.
- group 1 = secured creditors
- group 2 = unsecured creditors -> 2 types
o group 2A: Statutory preferent creditors -> creditors that receive special treatment
above other creditors because legislation stipulates that they should be paid first
o group 2B: Concurrent creditors
- note: both a secured creditor and an unsecured creditor who enjoys a statutory preference
are referred to as preferent creditors
How do we know if the creditor is secured, statutory preferent, or concurrent? -> we look at the
legislation
- Insolvency Act
- If the creditor isn’t specified in the legislation as being secured or statutory preferent, then
that creditor will be a concurrent creditor
- In other words, if the creditor is not specified in legislation, then it is a concurrent creditor
ACCOUNT 1: THE ENCUMBERED ASSET ACCOUNT FOR EACH SECURED ASSET AND CREDITOR
Encumbered asset account:
- This is the account that reflects how much money was generated by a particular asset
- This account also identifies the particular creditor associated with that asset (this is our
group 1 creditor)
- Also stipulates which type of security everyone will have
Secured creditors:
- Secured creditors benefit from the proceeds (the money generated by the sale of the asset)
of the encumbered asset -> this is reflected in the encumbered asset account
o In other words, secured creditors are paid from encumbered/burdened assets
o Encumbered/burdened assets are property over which the creditor has a real
security right (categorised as a limited real right)
- Each secured asset has its own account
- For a secured creditor, you need 3 things -> a specific asset that is linked by way of a
recognised form of security (found in the IA) to a specific creditor
o a specific asset
o linked by way of a recognised form of security
o to a specific creditor
- To rank as a secured creditor, such creditor’s real security right must already have vested at
the time of sequestration of the insolvent
- Not all immoveable property is a secured asset. You can have a house where the loan has
paid been paid off -> now the house is an unencumbered asset. Or you can have a house
that is linked by way of a mortgage to ABSA bank -> here the house is an encumbered asset
27
module.
- Under the ‘secured creditor’ umbrella, we find secured creditors who rely solely on their
security
o Such creditors take what they can from the money generated by the secured asset
(even if they don’t get the full amount)
o In other words, secured creditors who relied solely on their securities benefit only
from the encumbered assets account
- We also get secured creditors who do not rely on their securities
o Such creditors will take the money they can get from the sale of the asset (this is the
pool/account that secured creditors get paid from) AND they will put in a concurrent
claim for the rest of the amount against the free residue (this is the pool that the
unsecured creditors get paid from)
o When the secured creditor puts in a concurrent claim -> he is then ranked with the
concurrent creditors. All the concurrent creditors get paid in the same proportion
o In other words, secured creditors who did not rely solely on their securities benefit
from both the encumbered assets account AND the free residue account
- Why would a creditor rely on a security and why wouldn’t they rely on a security?
o The aspect of ‘contributions’ come into play here
o Secured creditors are only liable for certain costs. Whereas secured creditors who
also have concurrent claims have additional risk of having to pay contributions
o The distinction is important because it affects the liability of the secured creditor for
contribution
Costs/expenses relating to encumbered assets:
- S89 costs: -> these are costs/expenses to which securities are subject
- these costs are linked to a particular asset (they are not general costs that apply to
everything)
- There are 3 types of S89 costs: realization + maintenance + conservation costs
o Costs of realization -> these are the costs necessary to sell the property
§ E.g.) auctioneer’s fees, estate agent’s fees etc.
o Maintenance costs -> these are costs to fix up the property
§ E.g.) If you struggle to sell your house, maintenance must be paid to keep the
grass short and attractive to buyers. Painting the walls etc.
o Costs of conservation -> these are costs to protect the property
§ E.g.) the cost of the security guard
§ if you must store your vehicle away, then you must pay security costs to
protect your car from being stolen
- Before the secured creditor gets paid, these s89 costs need to be paid first.
o E.g.) If you sell the house then the auctioneer who sold the house must be paid first
from the money generated.
- S89 also includes other costs that must be paid, such as:
o The trustee’s remuneration iro the property
28
module.
o A proportionate share of the trustee’s bond of security costs
o A proportionate share of the Master’s fees
o Taxes relating to immovable property (but only for the 2 years preceding insolvency
until transfer of the property into the name of the purchaser)
o If the immoveable property is sectional title property -> then outstanding sectional
title levies must also be paid as part of the S89 costs
- What happens after the costs and all the secured creditors have been paid?
o If there is anything left over -> the surplus goes to the free residue account
o If there is a shortfall:
§ The creditor can have a concurrent claim for the remaining debt (if there is
money in the free residue then this creditor might get some of it)
§ If the creditor relies solely in his security, then he will not receive anything
from the free residue
Examples:
Scenario: ABSA is paid from the proceeds of the house over which a mortgage bond was registered
in its favour
What can we see from this scenario?

- The house is the specific asset + the asset is linked to a creditor through a mortgage bond
(which is a recognised form of security) + ABSA is the specific creditor
- This shows that the 3 components making up a secured creditor have been met ->
therefore, ABSA is a secured creditor
- What does this mean? -> we already know that secured creditors get paid from the
encumbered asset account. This means that ABSA (the secured creditor) gets paid from the
account for the house (the house is an encumbered asset bc it has a mortgage bond + each
secured asset has its own account)
- However, the costs of maintenance, realization, and conservation must be paid before ABSA
gets paid (these are the s89 costs that securities are subject to)
Example of where the asset yields enough:

- -> This means that the asset (house) yields enough money to pay the S89 costs
- Scenario: The house is sold for R100 000. The costs amount to R20 000. The creditors (ABSA
bank) claim for is R100 000.
o Answer: Since costs are paid first, ABSA doesn’t get the full R100 000. The creditor
will recover R80 000.
Rule regarding contributions for S89 costs:

- If the proceeds of the asset do not yield enough money to pay all the s89 costs -> then the
secured creditor whose security it is (aka the creditor who is linked to that particular asset /
29
module.
the creditor for whose benefit the asset was primarily sold and the costs accrued) will have
to pay/contribute to the costs (this is called ‘contributions’).
- Not only will the creditor receive no payment, but the creditor will also have to pay money
into the account in order to settle these costs
- In other words, if the proceeds are insufficient, the deficiency must be paid by those
creditors who hold the property as security for their claims on a pro rata basis
Example of where the asset does not yield enough:

- -> this means that the proceeds of the asset are not sufficient to cover the costs
- Scenario: the house is sold for R10 000. S89 costs amount to R20 000. The creditor’s claim is
for R100 000.
o Answer: the creditor will not receive anything from the proceeds of the house but
will instead have to pay R10 000 into the estate
o Where did this R10 000 come from? -> the s89 costs amount to R20 000. The house
only sold for R10 000 so that R10 000 will go to paying the s89 costs, but another
R10 000 still needs to be paid as there is a R10 000 shortfall in the encumbered asset
account to pay the s89 costs. The creditor must pay this amount
- Rule: the secured creditor, whether he relied on his security or not, will be liable to pay the
s89 costs if the sale of the asset did not yield enough funds to pay these costs.
o This applies to the secured creditor(s) that would have been paid first from the
proceeds of that specific asset -> the specific creditor(s) is liable for the costs related
to the specific asset
Distinction:
- Whether the creditor relied on his security or whether he did not rely on his security is
irrelevant when it comes to the s89 costs.
o Why? -> bc a secured creditor will always be paid from the secured/encumbered
asset account
- Whether or not the secured creditor relied on his security or not only becomes important in
respect of a second claim for the remainder of the outstanding amount to be claimed
against the free residue as a concurrent claim
General remarks about security:

- Real security rights = limited real rights held by the creditor in the property of a debtor
- A secured creditor has both a personal right against the debtor (for payment of the money)
AND a property right (limited real right) in a thing
o Real security differs from personal security (suretyship)
- If the debtor cannot pay the money he owes to the creditor -> then the creditor is entitled
to seek payment from the specific property/asset he has a security right in
o How? -> when the secured asset is sold, the secured creditor will receive payment
from the proceeds of that asset/property before any other creditor can be paid
- Security rights can be created in the following ways:
30
module.
o Expressly through an agreement between the parties (in this case, the security right
only becomes a limited real right through delivery or registration of the thing)
o By operation of the common or statutory law (in other words, without an agreement
between the parties)
TYPES OF SECURED CREDITORS:
- S1 of the IA only recognises some forms of securities

o Security means that the creditor has a preferent right in the property by virtue of 1
of 4 forms
- There are 4 types of secured creditors (4 forms of security):
o Special mortgage (3 sub-types)
o Hypothec (2 sub-types)
o Lien (right of retention)
o Pledge
(1) Special mortgage
- There are 3 types of special mortgage:

o Special mortgage bond over immoveable property
o Special notarial bond over moveable property registered as security by the MMPA
o Special notarial bonds over moveable property registered before 7 May 1993 and ito
the NBA-Natal
- In basic terms: mortgage’s apply to immoveable property / bonds apply to moveable
property / some bonds offer security, others do not
Special mortgage over immoveable property:

- Special mortgage bonds occur over immoveable property -> aka you take out a home loan
and ABSA says they are going to register a mortgage over your property as security for the
loan
- What is real security and why would a creditor want to take out security in addition to a
debt repayment contract?
o Security is a real right a person has over property. When it comes to mortgages, the
bank will have a limited real right over your house in the form of a mortgage/bond
until you have paid your loan.
o When it comes to forms of securities -> certain creditors have a limited real right
over an asset of the debtor. The security acts as a plan B.
§ Plan A is that the debtor pays back the money successfully.
§ Plan B occurs when plan A fails. If the debtor doesn’t pay, the creditor has a
right (subject to following the rules of civil procedure) to sell that asset and
use the proceeds to pay the defaulting amount (this is known as ‘collateral’)
- Why is it referred to as a ‘special’ mortgage bond or a ‘special’ notarial bond? -> because
the property (subject of security) is specially described
31
module.
o This is different to a general notarial bond which is over all the property the debtor
has on his farm. A specific asset is not specified.
o General notarial bonds do not provide a form of security -> they are the last form of
statutory preferent creditors we have
- There are certain exceptions in the case of special mortgage bonds where the bond will NOT
confer a preference (like it usually does). When the exceptions apply, the creditor will NOT
be a secured creditor based on this bond. These 2 exceptions are:
o If a debt was incurred more than 2 months before the bond was lodged/registered
with the Registrar of Deeds
§ E.g.) X borrows money on 1 Jan 2022 and the papers to register the bond (to
secure the debt) are only lodged on 1 May 2022
o If the debtor is sequestrated within 6 months of lodging
§ E.g.) X’s estate is sequestrated on 1 July 2022
Special notarial bond over moveable property registered ito security by the Means of Moveable
Property Act 57 of 1993 (MMPA)
- Notarial bonds are registered over moveable property. If the bond is registered ito the
MMPA then that bond will provide security
- If you have a special notarial bond over moveable property that was registered BEFORE 7
May 1993:
o then it will NOT give you a form of security ito the MMPA
o It HAS TO be registered ito the Notarial Bonds Act of Natal (NBA-Natal) for it to
provide security
- In other words, special notarial bonds over moveable property registered ito security by the
MMPA is one type of secured creditor. On the other hand, a special notarial bond registered
over moveable property before 1993 ito the NBA-Natal is another type of security
- What does this bond/mortgage allow a person to do? -> the creditor does not need to have
the property in his possession in order for this particular asset to provide security. The way
in which creditors know that this asset is subject to security is bc it is registered
Special notarial bond over moveable property registered before 7 May 1993 AND ito the Notarial
Bonds (Natal) Act
- if you have a special notarial bond over moveable property that was registered before 7
May 1993 -> it must be registered ito the Notarial Bonds Act of Natal (NBA-Natal) in order
for it to provide security
(2) Hypothec
- There are only 2 types of hypothec that are recognised by the law (s85(1) of the IA) as
granting security:
o The landlord’s hypothec for arrear rental payments
o The credit grantor’s hypothec
- These 2 hypothecs come into existence by operation of law
32
module.
The landlord’s hypothec (arrear rental payments but limited):
- This hypothec comes into operation when the lessee is in arrears with the rental payment ->
certain circumstances must exist for the hypothec to appear
o The moment that the tenant becomes up to date with the rental payments -> the
hypothec disappears
o The moment the tenant falls behind on payment -> the landlord hypothec comes
into play
- This hypothec is over the moveable property (e.g. furniture) that has been brought onto the
leased premises
- The landlord’s hypothec allows the landlord to attach that moveable property and use it to
pay the arrear rental payments
- In other words, if the tenant/lessee is behind with the rental payments, then the
landlord/lessor has a hypothec over the moveable property on the premises as security for
the outstanding rental amount
- However, in the insolvency context, the amount that can be recovered is limited
o It is limited to a certain number of months that creditors can claim
o For the rest of the creditors, there will be a concurrent claim if the person decides to
put in a concurrent claim
- In other words, this preference is limited by S85(2) of the IA which says that: a landlord’s
legal hypothec shall confer preference with regard to any article subject to that hypothec
for any rent calculated in respect of any period immediately prior to and up to the date of
sequestration but NOT exceeding:
o (a) 3 months (if the rent is payable monthly or at a shorter interval than 1 month)
o (b) 6 months (if the rent is payable at intervals exceeding one month but not
exceeding 3 months)
o (c) 9 months (if the rent is payable at intervals exceeding 3 months but not
exceeding 6 months)
o (d) 15 months in any other case
The credit grantor’s hypothec (National Credit Act instalment sale agreement with reservation of
ownership clause)
- This is a special type of hypothec that we get in s84 of the IA
- This hypothec relates to an uncompleted contract relating to the sale of moveable property.
S1 of the NCA defines what an instalment agreement is
- 1st requirement: The uncompleted contract has to be an instalment sale agreement ito the
National Credit Act (NCA)
o S1 NCA says that an instalment agreement means a sale of moveable property ito
which: ----
o (a) all or part of the price is deferred and is to be paid by periodic payments,
o (b) possession and use of the property is transferred to the consumer,
o (c) ownership of the property either:
§ (i) passes to the consumer only when the agreement is fully complied with or
33
module.
§ (ii) passes to the consumer immediately subject to a right of the credit
provider to repossess the property if the consumer fails to satisfy all of the
consumer’s financial obligations under the agreement and
o (d) interest, fees, or other charges are payable to the credit provider iro the
agreement or the amount that have been deferred
nd
- 2 requirement: there must be a reservation of ownership clause in this particular contract
- E.g.) A consumer buys a car from a credit provider. The credit provider sells the car to the
consumer but reserves ownership. This means that the car does not become the property of
the consumer until the consumer has paid the full purchase price / all the instalment
agreements.
o In the insolvency law context, once a sequestration order is given by operation of
law -> ownership transfers from the credit provider to the consumer. That asset,
notwithstanding the reservation of ownership clause, falls into the insolvent estate.
In return, the credit provider gets a hypothec and becomes a secured creditor. The
credit provider will be paid first from the sale of that car after the s89 costs have
been paid
o This does not work if you have an instalment sale agreement without a reservation
of ownership clause -> because then ownership already vests in the consumer
before insolvency. In this case, the credit provider will be a normal unsecured
creditor because he didn’t protect himself by reserving ownership
o This also does not apply to cases where the ownership passes to the consumer
immediately subject to the right of repossession. Under these circumstances, the
asset will already have fallen into the estate before sequestration and the credit
provider will be an unsecured creditor iro the insolvent estate for any outstanding
amount
- If the test question does not specify wither or not the instalment agreement had a
reservation of ownership clause -> then we can assume that it did
(3) Lien (right of retention)
- If a creditor is in possession of another person’s property (moveable or immoveable), on

which that creditor has spent money or done work -> then that creditor may retain
possession of that property until he is reimbursed for his expenses/work performed
(common law definition)
- In other words, if money/time/expertise has been spent on an asset, then the creditor can
hold onto that particular asset until payment has occurred
- E.g.) if you take your car to the mechanic and the mechanic fixes your car -> the mechanic
can hold onto your car (as a form of security) until you pay him for his work on your car
- In this case, the asset has to be in the possession of the particular creditor
- However, in insolvency law, we do have a special provision that the asset can be handed
over to the trustee (so the creditor does not have to hold onto the asset). In other words,
there is provision for the creditor to lose possession of the asset (to give it to the trustee)
but still retain security over it
34
module.
- There are 2 types of liens:
o Debtor-and-creditor lien for work done ito a contract (mechanic example above)
o Enrichment lien (no contractual relationship between debtor and creditor)
§ E.g.) salvage lien -> saves someone’s property from being damaged
§ E.g.) improvement lien -> increases the value of property
- If the question says that X made improvements/repairs to the asset then we know that X
has a lien over that asset (X is thus a secured creditor)
(4) Pledge
- When you go to a pawn shop, and you give them your watch so that you can borrow R1000
from them. The creditor (owner of the pawn shop) will hold onto that watch until you pay
back the money.
- The creditor has to be in possession of the asset in order to be able to enforce his security
against third parties
- Ito the common law, there are 2 types of pledges:
o Pledge of corporeal moveable property through delivery (transfer of possession) to
the creditor [pawn shop example]
o Pledge of incorporeal moveable property through cession in securitatem debiti of
personal rights (claims) to the creditor
(5) Other forms of preferences (first payments) recognised in terms of statutory provisions –
this is an extra category [page 602 – 604 of the textbook]
- If an entity (Land Bank, a Cooperative, or a Municipality) is owed money, the security will
apply to the property (moveable or immoveable) of the debtor as set out below:
- Land and agricultural development bank
o Statutory pledge over movables
o Statutory charge over immoveable property
- Cooperatives Act
o Statutory pledge over movables
- Local gov: Municipal Systems Act
o Charge over land to secure municipal debts older than 2 years
o This charge must be paid before the holder of the mortgage bond can be paid -> this
suggests that the municipality has a super-preference
- Patents and trademarks are special types of real security rights for intellectual property
Order of payment:
- What if there is more than 1 real security right over the same property? -> the right that was
created first will be paid first (first in time is first in law)
- However, there are exceptions to this:
o An enrichment lien is always paid first even if it was not created first
o A debtor-and-creditor lien is always paid after other security rights, even if it was
created first
35
module.
o A charge for municipal debt is always paid after the enrichment lien but before the
special mortgage
- Order of payment examples:
o Enrichment lien -> pledge / special mortgage / hypothec -> debtor-and-creditor lien
o Enrichment lien -> municipal debts -> pledge / special mortgage / hypothec ->
debtor-and-creditor lien
- An improvement lien (which is an enrichment lien) ranks before an instalment agreement
(which is a hypothec)
ACCOUNT 2: THE FREE RESIDUE ACCOUNT
- There can be several unencumbered asset accounts, but there can only be 1 free residue
account
- This relates to our group 2 creditors -> statutory preferent creditors and concurrent
creditors
o Unsecured creditors get paid from unencumbered assets (property that was sold and
over which no creditor has a real security right)
o Statutory creditors get paid first but we need to check for limitations
o Sections 96 – 102 of the IA list the statutory preferent creditors & s103 refers to the
concurrent creditors who get paid last
- The free residue account consists of the following:
o Assets that are unencumbered (they are free in the sense that they are not
burdened by a form of security)
o Residue -> leftovers from the secured assets after the secured creditors have been
paid
- E.g.) The credit provider was only owed 1 instalment, but the car was sold for many more
instalments. The costs were paid, and the credit provider received payment, but there is still
money left. The creditor provider will NOT get paid more money than he is owed just
because there is money leftover. The leftover money will form part of the free residue
- There is a specific order in which these creditors are paid from the free residue:
o Funeral -> deathbed -> sequestration -> sheriff -> employees -> employer ->
income tax -> general bonds -> concurrent creditors
o Rhyme to remember the order: Freddy Did Sing Softly Each Evening In Grade C
- Generally, in most insolvent estates, the first claims that get paid are the sequestration
costs
o In the encumbered asset account, the costs relating to the sale of the secured asset
get paid before the secured creditors
o In the free residue account, if the secured creditors put in concurrent claims, then
we deal with these secured creditors as if they are concurrent creditors. Here we will
pay the sequestration costs first.
o Exception: there is a special type of preference for deathbed and funeral expenses. If
the insolvent or his wife or child died, then these expenses will be paid before the
36
module.
sequestration costs. If there isn’t enough money in the free residue account to pay
the funeral and deathbed expenses, then they can be paid from the encumbered
asset accounts
- If there is not enough money in the free residue to pay the sequestration costs -> certain
creditors will have to contribute (they must pay money into the account to pay the
sequestration costs) -> this is referred to as ‘contributions pertaining to the free residue’
o Not everyone pays. They pay in accordance with the category of creditors that they
fall into. If the 1st group of creditors is not available, then we move over to the next
group of creditors
o If there is an applicant creditor and if there are concurrent creditors -> these
creditors pay. If there is no applicant creditor and if there is no concurrent creditors
or anyone with a concurrent claim, then we move onto the next category
o The applicant creditor, whether or not he has proved a claim against the insolvent
estate, will always be liable to contribute.
o The applicant creditor is the creditor who brings the sequestration application to
court
- First Rand Bank Ltd v Master of the High Court (Pretoria) and Others [2018]:
o Court held that a body corporate (in its capacity as applicant creditor in the
proceedings) sequestrating the estate of the owner of a sectional title unit within a
scheme administered by the body corporate, was liable in terms of section 14(3) of
the IA. The applicant is compulsorily liable to contribute, whether or not it has
proved its claim.
o no distinction is therefore drawn between applicant creditors who are not required
to prove a claim and those who elect not to prove a claim
o a body corporate’s failure to have a proven claim does not exempt them from
contributions
TYPES OF COSTS/EXPENSES THAT ARE DEALT WITH IN THE FREE RESIDUE (IN ORDER OF
PAYMENT):
Note: Wherever there are limitations, it means that the outstanding amount will have to be claimed
as a concurrent claim. There can thus be a portion of a claim that is a statutory preferent claim and
another portion that is a concurrent claim (if the debtor chooses to prove the unpaid amount as a
concurrent claim)
Funeral and deathbed costs/expenses:

- These expenses get paid if the insolvent, his wife, or his child dies
- There is a limited amount attached to these expenses -> maximum amount of R300
- S96(1) and (2) IA
- Remember that these expenses can also be paid proportionally from the encumbered assets
account if there are not enough funds in the free residue account
37
module.
- Examples of deathbed expenses: medical services, nursing, medicines and medical
necessities of the insolvent, his wife or minor child
Sequestration and administration costs:

- Sequestration costs are mentioned in s97 of the Insolvency Act (IA) and include:
o Sheriff’s charges -> for attachment of the estate and drawing up of the inventory
o The Master’s fees -> for portion not paid from the encumbered assets account
o The other costs of sequestration (ranking equally):
§ Taxed costs of sequestration (legal fees for court application / cost of
sequestration application)
§ Remuneration of trustee (for portion not paid from the encumbered assets
account)
§ Trustee’s bond of security (for portion not paid from encumbered assets
account)
- These expenses have their own internal ranking -> there is a specific order in which these
expenses are paid
- Note: master fees and trustees fees ALSO constitute expenses under the encumbered assets
account
- Note: we already know that when auctioneers sell the asset they must be paid for the
realization (s89) costs. If the asset they sell is a secured asset, then the auctioneer gets paid
from the encumbered asset account. However, if the asset is an unsecured asset, then the
auctioneer gets paid from the free residue -> in this case the realization costs are a S97 cost
Sheriff’s fees/cost of execution:

- These fees are the cost of execution (and taxed fees of the sheriff)
- These are different to the fees that fall under sequestration and administration costs
- The total amount that can be claimed under this section may not be more than what the
property was worth while attached or the money that was generated from the sale of the
property
- S98 IA
Employee’s fees:
- If insolvent does not have employees -> then you skip this category
- S98A IA -> ‘Salaries or wages of former employees of insolvent’
- Employees’ claims also have internal ranking and limitations
o Salaries/wages for a period not extending 3 months or not exceeding R12 000 ->
whichever is lower
o Payment for leave/holiday that the employee of the insolvent has accrued in the
year of insolvency or previous year (cannot exceed R4000)
o Paid absence not extending a period of 3 months or a maximum of R4000 ->
whichever is lower
o Severance or retrenchment pay (maximum: R12 000)
o Contributions payable to medical aid, pension fund etc. (maximum: R12 000)
38
module.
- If there is not enough to pay all of these amounts, then the salaries/wages must be paid
first. The left-overs will be divided equally among the rest.
- It can be seen that employees have a number of possible claims. However, the statutory
preferent component is limited
o Employees can claim a certain amount as statutory preferent creditors
o However, if they want to claim the rest -> they will have to put in concurrent claims
o The moment you become a concurrent creditor, you have a big risk of having to pay
contributions (applicant creditors and concurrent creditors are liable for
contributions first)
Employer fees:
- These are payments that the insolvent has to make as an employer / Claims payable by
employer in respect law
- E.g.) UIF payment, compensation for occupational injuries and diseases (COIDA), medical aid
for the employees, pension, income tax deducted from the employees’ salaries (PAYE) etc.
- Other statutory obligations of the insolvent include: customs and excise tax and value-
added tax (VAT)
- No internal ranking -> they all rank equally (pari passu)
- S99 IA -> ‘Preference in regard to statutory obligations’
Income tax of insolvent:

- S101 IA -> ‘Preference in regard to taxes on persons or the incomes/profits of persons’
- Here the creditor will be SARS
- Income tax is payable by a debtor for the period before sequestration to SARS
General bonds:
- This refers to claims secured by general notarial/mortgage bonds + pre-1993 special notarial
bonds outside of Natal
- S102 IA -> ‘Preference under a general bond’
- A general notarial bond covers all of the debtor’s moveable property in general
- Unlike a special notarial bond registered under the 1993 MMPA, a general notarial bond
does not create a real security right
- The creditor under a general bond gets paid before concurrent creditors are paid but will
only have a preference to proceeds coming from moveable property. Any funds in the free
residue that derives from immoveable property will not be available for payment under this
preference
Concurrent creditors:
- Whatever is left over after all the above has been paid will go to the concurrent creditors.
They get paid last. The money will be divided among them in proportion to the size of each
claim. This means that each of them will get a dividend (a small portion of what is owed to
them)
- S103 IA -> ‘non-preferent claims’
39
module.
- Ex-wives etc. who have a claim for arrear maintenance ito a court order fall under
concurrent creditors -> judgments and court orders do not necessarily cause you to
automatically rank higher. But it will be easier for them to prove their claim.
PRACTICE QUESTION
40
module.
QUESTION 1: Which assets in her estate will be dealt with in the encumbered assets account and
which assets will fall into the free residue?
- Remember:
o secured assets (3 components) are dealt with the encumbered assets account (from
where group 1 creditors [secured creditors] get paid)
o unencumbered (unsecured) assets + left-overs from the encumbered assets fall in
the free residue account (from where group 2 creditors [unsecured creditors] get
paid)
- Asset 1: Plot 14
o Plot 14 is a secured asset. How do we know this?
§ Specific asset -> plot 14 (immoveable property)
§ Linked by way of a recognised form of security -> mortgage bond
§ Specific creditor -> Big Bank (secured creditor)
o Therefore, this asset (plot) will be dealt with in the encumbered asset account
o Big bank’s claim is a secured claim as they are a secured creditor
- Asset 2: Motor vehicle

o This is an unsecured asset. How do we know this? -> we can see from the facts that
the motor vehicle is not linked to a specific creditor or by a recognised form of
security)
o Therefore, this asset (vehicle) will fall in the free residue account
- Asset 3: Tarantula
o This is an unsecured asset (same reason as above)
o This asset will fall into the free residue account
QUESTION 2: identify the expenses that will be dealt with in the encumbered assets account
- General:
o Why is it important to know which expenses will be paid from which account? ->
these types of claims are paid first
o E.g.) if you have costs that are related to a particular encumbered asset -> that cost
will be paid from the encumbered asset account
o These costs are paid before the secured creditor gets paid
o To answer the question: we must look for expenses that are linked to a specific
secured asset
o Remember: s89 costs (maintenance, conservation, realization) are paid from the
proceeds of the encumbered assets
- Answer:
41
module.
o Costs of a nightly security guard -> this is a conservation cost (costs used to protect
the asset)
o Auctioneers cost -> this is a realization cost (costs used to sell/liquidate the asset)
o Property tax
§ There is a particular provision made for outstanding property tax (look at s89
IA -> refers to tax that relates to immoveable property)
§ These types of taxes that are specifically linked to the asset also enjoy some
preference and will also be paid as part of the preferent costs
§ Property tax are a type of realization cost
o Masters fees
o Trustees fees
o Provision of security
Important to note:
- From each account, a part of the trustee’s remuneration, the master’s fees, and the
provision of security is paid. Even though these are not specifically listed, you need to know
that master’s fees, trustee’s fees, and security fees are also payable against encumbered
assets.
- The master is the overseer of the insolvent estate. All the accounts that the trustee drafts
have to be approved by the master. The master gets remunerated for this.
o This means that there are masters fees payable ito the encumbered asset account
AND masters fees payable ito the free residue account.
- The trustee is also remunerated for work done on each encumbered asset AND for work
done on the free residue
- It can be seen that both the master and the trustee always get remunerated from BOTH
accounts because they do work on both accounts.
- When the trustee is appointed, the trustee has to provide security to the master of the HC
that he will execute his duties properly in respect of both accounts (this is called the ‘bond
of security’ – it is NOT the same as a mortgage bond)
- Therefore, the masters’ fees, trustees fees, and pro rata costs for provision of security have
to be added to this list of expenses because they are expenses that are dealt with the
encumbered asset account (and again in the free residue account)
QUESTION 3: state whether the claims that the respective creditors have proven against the
estate are secured, statutory preferential, or concurrent claims. And show which account deals
with these claims
- Remember:
o Secured creditors are paid from the encumbered assets account
o Unsecured creditors (statutory preferent creditors + concurrent creditors) are paid
from the free residue account
o Statutory preferent creditors get paid before concurrent creditors
o If the legislation does not list the creditor -> then it is a concurrent creditor
42
module.
- Claim 1: Big Bank -> bond
o Big Bank is a secured creditor and thus has a secured claim and is paid from the
encumbered asset account
- Claim 2: Donnie Dube -> arrear salary

o Donnie is an employee of the insolvent Jessie. Employees have a statutory preferent
claim up to a certain limit. Thereafter, employees are concurrent creditors that can
claim the rest of their money. Employees get paid from the free residue account
o Donnie has a claim against the insolvent for salary he wasn’t paid. he gets paid
R2000 per month and hasn’t been paid for 3 months. This means his claim is R6000.
§ There is a statutory limit: salaries cannot exceed 3 months’ pay or R12 000 ->
whichever is lower.
§ this means that Donnie can claim the full outstanding amount (R6000) from
the free residue as a statutory preferent creditor
- Claim 3: commissioner of revenue services (SARS) -> income tax

o SARS is a statutory preferent creditor. Jessie owes SARS income tax. SARS will get
paid from the free residue account.
o SARS will get paid after Donnie (employee) (think back to the rhyme)
- Claim 4: Hammanskraal community college -> arrear fees

o School fees are NOT listed in the legislation (Insolvency Act) and are not linked to a
specific asset by a recognised form of security. This means that Hammanskraal is a
concurrent creditor and will be paid (paid last) from the free residue account.
QUESTION 4: identify expenses that will be dealt with in the free residue account
- Sequestration administration costs are paid before the statutory preferent creditors and
concurrent creditors
o 1 exception: funeral and deathbed expenses
- Answer: sequestration costs include:

o Master fees
o Trustees fees
o Percentage of bond of security (security fees)
o Advertisement costs -> work that gets done by the trustee
o Taxed bill of costs -> this is the cost of bringing the sequestration application
- Note: If there is not enough money in the free residue to pay these costs -> the creditors
must contribute to pay these costs
CONTRIBUTIONS:
43
module.
- Contributions = the money that creditors have to pay when there is not enough money in
the debtor’s estate to cover the s89 and s79 costs
- But which creditors have to pay these costs?
- Liability to pay contributions is determined by 2 factors:
o (1) which costs must be paid?
§ S89 costs? (these encumbered asset costs are paid from the encumbered
asset account)
§ S97 costs? (these sequestration costs are paid from the free residue account)
o (2) the category of creditor
§ Secured creditors who relied on their securities
§ The applicant creditor (this can be a secured or unsecured creditor)
§ Creditors with concurrent claims (normal concurrent creditors + secured
creditors who did not rely on their securities and claimed the outstanding
amount from the free residue as a concurrent claim)
§ Statutory preferent creditors
Creditors contribute to the costs related to the account from which that creditor stood to benefit:
- Secured creditors contribute to the s89 costs
- Concurrent creditors (2 types) contribute to the s79 costs
- A secured creditor who relied solely on its security:

o is only liable to contribute to the s89 costs that relate to his specific asset/security
(NOT to other encumbered assets)
o generally not liable to contribute to the s97 costs of the free residue unless there are
no other types of creditors who can paid these costs
Free residue account:
- rules relating to the payment of s97 costs when there is not enough money in the free
residue account are contained in s14(3) and S106 of the IA
o s14(3) IA -> deals with the obligation of the applicant-creditor to contribute
o s106 IA -> deals with the obligation of the other creditors to contribute
- if there is only an applicant creditor and no concurrent creditors -> then the applicant
creditor will have to pay all the s97 costs himself
o there will always be an applicant creditor in cases of compulsory sequestration
o the applicant creditor is the creditor who brings the application to court and set the
machinery of the law in motion
44
module.
o it does not matter whether the applicant creditor is a secured or unsecured creditor,
and it does not matter whether the applicant creditor proves his claim or not -> the
applicant creditor will always be liable to pay the s97 costs
- if there is an applicant creditor and concurrent creditors -> the applicant creditor and
concurrent creditors will share the s97 costs
o where there is more than 1 creditor liable for these costs -> all the liable creditors
share the costs pro rata (in proportion to their claim)
- if there is no applicant creditor (voluntary surrender) -> then the concurrent creditors will
pay these costs
o even if there is only 1 concurrent creditor -> he will have to pay all the s97 costs
himself
- if there is no applicant creditor and no concurrent creditors -> then the secured creditor
who relied solely on their security will pay these costs (even though they did not benefit
from the free residue account)
o in other words, if there is no other type of creditor other than a secured creditor
with no concurrent claim (bc they relied solely on their security) -> then this
creditor(s) will have to pay the s97 costs
- if there were concurrent creditors to begin with who have now all withdrawn their claims
AND paid their contributions -> only then will statutory preferent creditors be liable to
contribute
o 2 reqs for this rule to become applicable:
§ (1) there must have been concurrent creditors who proved their concurrent
claims AND
§ (2) these creditors must have withdrawn their claims and paid their shares of
the contribution due
o Even when creditors withdraw their claims, they must still play their part by
contributing to their share of the s97 costs up to the date of withdrawal (why? Bc
sequestration was for their benefit)
45
module.
WEEK 5 – VOLUNTARY SURRENDER
The sequestration process when it comes to voluntary surrender:
Remember:
- There are 2 types of sequestration applications -> voluntary surrender (VS) and compulsory
sequestration (CS)
o VS -> debtor brings the application to have his estate sequestrated
o CS -> creditor brings the application to have the debtor’s estate sequestrated
- Voluntary surrender is when the DEBTOR approaches the court and asks the court to sequestrate his
estate (he must bring an application to court)
- Only a High Court (HC) can sequestrate a person’s estate (also called the motion court)
o Since it is an application we are dealing with -> we approach the motion court
o How do we know that it is an application? -> bc the Insolvency Act (hereafter ‘IA’) says so
o In the motion court, applications are heard and based on paper. All the info is set out in
affidavits
Application for voluntary surrender:

- Voluntary surrender is instituted by way of notice of motion/application proceedings (regulated by
rule 6 of HC rules)
- With application proceedings:
o evidence is placed before the court in the form of papers and documents and affidavits
(rather than witnesses testifying in a witness box – like action proceedings)
o application proceedings deal with disputes of law (whereas action proceedings deal with
disputes of fact)
o However, there can still be factual disputes in a sequestration application. That’s why the
courts have been expanding on what evidentiary information they need and developing the
rules
o Even though it is an application proceeding (which involves everything being on paper),
S3(3) IA makes provision for when there is petition for the acceptance of the surrender of a
particular estate -> the court may direct the petitioner to appear and be examined by the
court
- The rules of court require a specific way of approaching matters. Since it is the debtor bringing the
application for voluntary surrender, we use the “short form” and an ex parte application
o It is an ex parte application bc there are only applicants involved (the applicant is the
debtor(s)). Ex parte applications are used when there is only 1 party involved (the applicant /
debtor) who is seeking a court order in respect of himself
§ Sometime there can be more than 1 applicant such as:
• when the debtor is married in community of property (both spouses need
to apply for sequestration of their communal estate -> 2 applicants)
• or is a partner in a partnership estate (partners must apply jointly for the
sequestration of the partnership estate + must also apply individually for the
sequestration of their own estates)
o The ex parte application must be made in accordance with Form 2 (we find this in schedule 1
of the Uniform Rules of Court)
§ Form 2 (also called notice of motion) only makes provision for the details of the
applicant
46
module.
§ The notice of motion contains the details of the case: the date the application will be
brought before the court, the court order that the party is seeking, and reference to
the affidavit (which sets out the facts of the case)
o The affidavit is attached to this form (form 2) and sets out the details of each case. The
affidavit is deposed to by the debtor and is written in first person (“I am the applicant in this
matter and I depose under oath as follows”)
o The ex parte application (Form 2 + the affidavit) is given to the Registrar of the High Court
o Creditors and other parties do not need to be given notice of the application
How is the voluntary surrender form (form 2) different from the compulsory sequestration form (form 2(a))?
- When it comes to compulsory sequestration (CS) we use a long notice of motion form -> requires a lot more
info than the short form for voluntary surrender (VS) (mainly bc we are dealing with both an applicant(s) and a
respondent(s))
- For CS we use Form 2(a) -> found in schedule 1 of the uniform rules of court
- For CS the creditor brings the application to court (so the creditor is the applicant) for the sequestration of the
debtor’s estate (so the debtor is the respondent)
- CS application is brought ‘on notice’ -> the applicant/creditor has to give notice to the respondent/debtor of the
application (this is why it is called a notice of motion)
- Since we are using the application procedure, all the “evidence” will be put down on paper in an affidavit
attested to under oath
- The application will be deposed to by the creditor. If the creditor is a juristic person, then the affidavit will be
deposed to by someone (a natural person) who has actual knowledge of the facts of the particular case. A
juristic person can never depose to an affidavit because they are not human beings
- The affidavit will be in first person -> “I am Miss X. I am the chief financial officer of this particular juristic person.
I attest under oath to the following facts”
- The form makes provision for both the applicant and the respondent
o Remember: if the debtor is married in community of property then both debtors need to be cited ->
there will be 2 respondents)
-WARNING:
Because there is a respondent, the respondent
47
These notes were made by CAITLIN LEAHY(and the registrar)
© - please do NOT has to receive
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unlawfully!
o Instructions are also given to the respondent on how to act if they wish to oppose the application
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o These
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have been not wantusing
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sequestrated then he can
prescribed textbook, the oppose the application
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the an
answering affidavit giving reasons for his opposition (aka he can indicate that he is
prescribed case law. These notes are merely my own personal summaries and my own understanding of the work. I not insolvent)
module.
- These forms can be found in the uniform rules of court. The uniform rules of court can be found in
the Supreme Court Act of 2013
- The rules are amended from time to time so it is important that you use an updated form when you
bring an application to court
General:
- The courts require a lot of evidentiary information in front of them because in application
proceedings, the debtors and creditors don’t testify in court in a witness box
- The requirements for bringing a successful application are set out in the Insolvency Act (the IA)
- The court application is heavily influenced by the normal or ordinary rules of civil procedure
- Insolvency matters, especially those dealing with the sequestration process, must always be brought
within the ambit of Civil Procedure Law
o In other words, when you go to court, you have to use parts of civil procedural law (e.g. the
rules of court) in conjunction with the IA in order to provide the court with a comprehensive
application
o Since sequestration is a civil procedure matter -> you need to comply with the provisions of
the IA + the relevant procedures of the court (uniform rule 6)
- If its an application for compulsory sequestration -> the applicant will be the creditor and the
respondent will be the debtor
- If it is an application for voluntary surrender -> the applicant will be the debtor (he must be
described very well to the court)
- When bringing an application to court, there are a number of things to consider:
o Is the sequestration procedure viable? Can it be used for what I have in mind?
§ Look at what is the purpose of insolvency law? what are the alternatives to
insolvency law?
o Is sequestration of this particular debtor possible? -> answer in s2 of IA (definition of debtor
must be satisfied)
48
module.
§ If yes -> follow procedure set out in the IA
§ If no (aka it is a company or close corporation) -> then sequestration is not possible
(liquidation ito the Companies Act must be followed instead)
o What court must be approached?
§ Look at where debtor is residing, where he has property, and/or where his place of
business is -> factors like this help establish jurisdiction
- It is very important to follow the requirements of the legislation as closely as possible so that the
creditors or any other party does not face substantial prejudice
Jurisdiction of court:
- Set out in s149 of the IA
- One of the paragraphs in the affidavit will have to deal with the jurisdiction of the court.
Additionally, the jurisdiction of the court is mentioned in the headings of the form 2 and form 2(a)
notice of motion forms.
- Type of court? -> we already know that the HC has jurisdiction to hear a sequestration application
- Which division of the HC? -> s149 of the IA lists the grounds on which the particular divisions who
have jurisdiction are determined:
o Where the debtor is domiciled
o Where the debtor owns or is entitled to property
o Where the debtor was ordinarily resident 12 months before the proceeding
- Concurrent jurisdiction is possible -> in such cases we look at which division is the most convenient
- The ‘division’ of the HC refers to whether the HC is in Gauteng etc.
- The particular court refers to whether it is in Johannesburg, Pretoria etc.
Overview of voluntary surrender process:

- Step 1: notice of surrender (needs to be published)
- Step 2: copy of notice (must be sent to certain parties/entitles)
- Step 3: statement of affairs (needs to be lodged)
- Step 4: application to court
- Step 5: sequestration order
WHO CAN APPLY FOR VOLUNTARY SURRENDER? (S3 of the IA)
- The debtor
o If the debtor is married in community of property -> both spouses must apply for the
voluntary surrender as co-applicants (but there will be 1 application) [s17(4) MPA]
o If the debtor is a partner in a partnership -> Ordinary partners have to apply jointly for the
voluntary surrender of the partnership estate. At the same time, each partner must also
individually apply for the voluntary surrender of his own estate [s3(1) and (2) IA]
- The debtor’s representative with special authority (aka his attorney -> results in legal fees)
- The debtor’s curator bonis (if the debtor is incapable of handling his affairs)
o The curator acts in his official capacity, not his personal capacity
o The initials N.O. will appear after the name of the curator in the court documents
- The executor of the deceased estate (if the insolvency procedure will be more advantageous than
s34 of the AEA)
Further information on partnerships:

49
module.
- S13(1) IA -> if the court sequestrates the estate of a partnership whether provisionally or finally or
on acceptance of surrender (this basically means whether it's by way of compulsory sequestration or
because of a voluntary surrender application)-> it shall simultaneously sequestrate the estate of
every member of that partnership other than… a partner en commandite
o partner en commandite = a partner who limited his liability towards the other partners to a
fixed amount
o so his estate won’t be sequestrated even if the partnership and other partners are
sequestrated
- s13(3) IA -> the surrender of the estate of the partnership shall not be accepted unless and until the
court is satisfied that the petitions have been presented for the acceptance of the surrender of the
separate estates of all the partners in the partnership concerned.
o In other words, the court will not accept a surrender of a partnership estate if it's not also
presented with the voluntary surrender applications of the separate estates of the partners
- S13(3) IA indicates that even though the surrender of the separate estates of the several partners
may be incorporated in the petition regarding the surrender of the estate of the partnership, this
does not mean that the surrender of the partnership and the sequestration of that estate is now
mixed with the sequestration of the individual partners estates.
- S49 IA -> Although the estates are sequestrated simultaneously, they are sequestrated separately.
o e.g.) the creditors of the one estate is not entitled to prove claims against the other estate.
Additionally, creditors of the partnership may not prove claims against the estate of a
partner and creditors of the partner may not prove claims against the estate of the
partnership
o However, after the claims have been paid, there may be some payment from the trustee of
the estate of the partnership or the trustee of a partner may be entitled to the balance of a
partner's estate,
FORMAL STEPS THAT MUST BE TAKEN BEFORE THE APPLICATION CAN BE MADE FOR VOLUNTARY
SURRENDER:
- The steps (set out in the IA) need to be translated into paragraphs in the affidavit so the court can
take them into account when deciding whether this matter will succeed or not
- There must be proof of compliance with each step
There are preliminary formalities that have to be met before the debtor can apply for voluntary surrender:
(1) The applicant (debtor) must, between 14 – 30 days before the date of application, publish a notice
of surrender in the Government Gazette and local newspaper [s4(1) Insolvency Act]
- Since there are many newspapers circulating, which one is the correct one to publish the notice in?
o The newspaper circulating the magisterial district where the debtor resides, where the
debtor is a trader, or where the debtor has his principal place of business [s4(1) IA]
- The notice of surrender must correspond with Form A of the first schedule of the Insolvency Act (the
‘IA’)
- What are the possible ways in which a debtor can commit an act of insolvency during this stage of
the formality? -> the debtor commits an act of insolvency when:
o The notice of surrender is revoked from the gov gazette and the newspaper
o The court rejects the application (thereafter application expires)
50
module.
o The debtor does not continue with the surrender process
o The debtor fails to apply for the acceptance of the voluntary surrender of his estate
o If he fails to lodge a statement of affairs or lodges an incomplete/incorrect statement
- Remember: the creditors are able to apply for compulsory sequestration as soon as they see a
debtor commit an act of insolvency
o Voluntary surrender does not include act of insolvency
o Only compulsory surrender concerns an act of insolvency
- If the debtor wants to revoke/withdraw his notice of surrender from the gov gazette, he may do so
at any time as long as:
o He obtains the written consent of the Master to do this (considerations of good faith and
good cause for withdrawal will be taken into account)
o And his notice of withdrawal is published in the gov gazette and newspaper
The publication of the notice of surrender also has the following effects (these effects come into operation
from the date of publication):
- Execution (when the sheriff sells the assets in an auction) is halted. This means that the sheriff may
not pay any proceeds from the sales to creditors of the debtor’s estate. Instead, the sheriff must
hand over the assets and the proceeds to the trustee.
o In certain circumstances, the court may sometimes authorize the sheriff to continue with
the sale in execution
- The Master may appoint a curator bonis to temporarily control the debtor’s estate ito s5(2) IA
(2) The debtor must send a copy of the notice of surrender to all known addresses of possible
creditors within 7 days from the date of publication [s4(2) IA]
- Within this 7- day period, the debtor must also furnish a copy of the notice of surrender by post to
SARS + every registered trade union of his (the debtor’s) employees
- What are the ways in which this notice may be given to the employees? -> the debtor can:
o Give the notice to his employees themselves or
o Affix the notice to a notice board that the employees have access to or
o Stick the notice on the front gate of the premises or
o Stick the notice on the front door of the premises… from which the debtor conducted his
business
- If the employees are not represented by trade unions or if the debtor is not an employer (and thus
does not have employees) -> then this rule is not applicable (but the court must still be informed
that this rule was not complied with bc it wasn’t applicable)
- Summary of relevant parties that notice must be given to:
o Creditors
o SARS
o Trade unions
o Employees
- Notice of surrender can be found in Form A in schedule 1 of the IA
- Giving notice to other parties is important because there are parties other than the debtor who have
a very real interest in the outcome of the sequestration application
(3) The debtor must prepare a statement of affairs [s4(3) IA]
51
module.
- The statement of affairs must be drawn up shortly BEFORE the application is brought
- The statement of affairs must be in accordance with Form B of schedule 1 of the IA
o The statement of affairs must confirm the assets and liabilities of the debtor according to
Form B
o It must be confirmed by a sworn affidavit
o It must lie open for inspection for 14 days from the date of the notice of surrender
o The statement must lie open at the masters office (and where applicable, the magistrates
office – see below)
- 2 copies of this statement must be sent to the Master’s office in the district where the debtor
resides or does business (this is called the local master office)
- If there is NO local Master’s officer in this area -> then the 2 copies must be sent to the provincial
masters office AND to 1 magistrates office of that specific district
- Note: if the statement of affairs shows a credit/positive balance -> this does not necessarily mean
that the debtor is not insolvent
WHAT HAPPENS WHEN THESE FORMAL STEPS ARE NOT COMPLIED WITH?
- When formalities aren’t complied with, there is the risk that the matter will be struck off the role, or
the application will be dismissed, or the application can even be postponed with the direction to go
properly comply with the requirements -> this cancels out the prejudicial effect of non-compliance
- What is the purpose/significance of these preliminary formalities?
o -> the creditors must be notified that their debtor wants to bring a sequestration application
o why? -> so that the creditors can object to the application if they wish (maybe they see that
the application has a defect/mistake)
- What happens when there is a defect/mistake in the application? [s15(1) IA]
o If the mistake is a formal defect -> the court may condone the mistake
o If the mistake prejudices the creditors + cannot be corrected by a court order -> the mistake
will not be condoned (in which case the application may be rejected)
- Various tests exist that can be applied to determine whether there is in fact a mistake and what type
of mistake it is, for example:
o One test is asking whether the relevant provision is peremptory or merely directory?
§ If the provision is peremptory, it commands you to do something (aka you have to
do it)
§ If the provision is directory, it allows you to do something (aka you can choose
whether you want to do it or not)
o A premature or late publication is hardly ever condoned -> The Roestoff and Burdette article
list examples of where non-compliance of the time periods were condoned. The following
are some examples of where the condonation could be granted in the discretion of the court
despite non-compliance with time period requirements:
§ Where it is impossible to comply with the time period requirements
§ Where the applicant’s notice of motion was published late owing to a mistake by the
government printer
§ Where the newspaper gets published the wrong day (referred to as the de minimis
non curat lex principle)
o Statement of affairs that do not lie open for inspection at the required place are also rarely
condoned
52
module.
o Failure to send a copy of the notice of surrender to the creditors personally -> also not
condoned
- NOTE: how do the courts know that there was compliance with the preliminary steps?
o The person has to make the averment/statement/swear under oath that there was
compliance with the requirements.
o This statement will be a paragraph in your ex parte application and it will have an affidavit
attached to it which is deposed of under oath
DISCUSS THE CONTENTS OF AN APPLICATION FOR VOLUNTARY SURRENDER
General:
- The application for voluntary surrender (sequestration) is brought by way of notice of motion
supported by an affidavit(s)
- The court’s decision to order or reject an application is based on the strength of the documentary
evidence contained in these affidavits (aka the affidavits need to have ALL the relevant info and
state ALL the relevant facts)
- These affidavits are ‘sworn’ -> this means they are written under oath (you cannot lie or make
mistakes in the affidavit)
- The applicant (debtor) must lodge these documents at least 2 days before the date of the
application
- If creditors object to an incorrect statement of affairs -> the master or magistrate must certify this
objection and notify the court of these objections
o The objections must be on paper and submitted as documents to the court
The affidavit must state the following facts/allegations:

- The full name, address, occupation, and status (major/married etc.) of the debtor
o If the applicant is not the debtor himself then the details of the applicant must be given -> to
show locus standi
o In situations where someone else is applying for sequestration of the debtor’s estate -> the
person deposing to the affidavit must have actual knowledge of the contents to which he
attests to under oath
o These statements need to be supported by annexures
o E.g.) if a curator bonis is applying for sequestration of a person’s estate who is unable to
look after his own affairs -> the curator must attach annexures showing that he was
legitimately appointed to look after that person’s affairs. Then the court can see that this
curator actually has the right (locus standi) to bring the application
- The court’s jurisdiction (the court must see that they are the correct court to be approached or they
may reject the application -> remember that jurisdiction is mainly based on the debtor’s location)
- The debtor has actually become insolvent (because only insolvent estates can be sequestrated) for
reasons other than fraud and dishonesty
- There is sufficient free residue to meet the costs of the sequestration
- The debtor wishes to surrender his estate for the benefit of his creditors
- The causes of the debtor’s insolvency (the statement of affairs must be attached to this)
- Sequestration will be to the benefit/advantage of the debtor’s creditors
- Each formality (in s4 IA) has been complied with
53
module.
- NOTE: most of these ^ relate to the applicant’s burden of proof
o The applicant must not only just state these facts/allegation, he also needs to prove them on
a balance of probabilities so that his application can be successful
o Proof must be given in the form of documents
o Every allegation must be substantiated by evidence -> keep slips and copies of everything,
cut out the notices in the newspaper and attach it etc.
WHAT MUST THE APPLICANT-DEBTOR PROVE IN ORDER TO SUCCEED WITH HIS APPLICATION?
S6 of the IA sets out the substantive aspects of the affidavit and sets out what the debtor must prove. S6(1)
reads as follows:
- “if the court is satisfied that the provisions of S4 (the preliminary formalities) have been complied
with, that the estate of the debtor in question is insolvent, that he owns realizable property of a
sufficient value to defray all costs of the sequestration which will in terms of this Act be payable
out of the free residue of his estate, and that it will be to the advantage of creditors of the debtor if
his state is sequestrated, it may accept the surrender of the debtor’s estate and make an order
sequestrating that estate.”
In terms of S6 of the IA, the applicant must prove on a balance of probabilities that the following are
present:
(1) The applicant must prove that the preliminary formalities have been complied with
(2) The applicant must prove that he is actually insolvent

- Voluntary surrender requires actual insolvency (balance-sheet insolvency)
- Commercial insolvency is NOT a ground to bring an application for voluntary surrender
- Actual insolvency may be shown by the statement of affairs
- Debtor must provide reasons in his affidavit for why he went insolvent
- There must be proof that his estate is indeed insolvent -> usually in statement of affairs (but not
always)
(3) The applicant must prove that there is sufficient free residue to cover the costs of sequestration
- Remember: that free residue consists of unencumbered/unsecured assets + the costs of
sequestration (s97 costs) include the masters fees, the trustees remuneration, costs of the
application, legal fees etc.
- From a transformative constitutionalism perspective, this requirement unfairly discriminates against
NINA debtors (no-income-no-assets debtors) on the grounds of socio-economic status.
o NINA debtors do not have sufficient free residue to cover the costs of sequestration.
Therefore, they cannot apply for voluntary surrender of their estate -> they have to remain
in debt
(4) The applicant must prove that the sequestration is to the advantage of all his creditors as a group
- If the creditors are placed in a better position than they were in before sequestration -> then
sequestration is deemed to be to their advantage
- In practical terms, the applicant must show that all the creditors will at least (potentially) receive a
dividend of the proceeds (this is not the only factor that the court will consider)
54
module.
- The IA does not prescribe the size of the dividend. The size of the dividend depends on the facts and
circumstances of each case
- In order to assist the court with this requirement, the applicant must provide sufficient details of all
the material facts relating to the financial position of his estate
o such as: the value of the assets + income vs expenses
o The valuator of immoveable property may lay a basis for this valuation -> look at Ex parte
Bouwer and 2009 (6) SA 382 (GNP)
- When exercising its discretion and adjudicating the advantage to creditors requirement, the court
will also take other factors into account, such as:
o Will the debtor retain or lose his employment because of the sequestration?
§ This is important because there may be excess income available that can be
distributed to the creditors -> which will put them in a better position
o If the debt amounts to a credit agreement ito the National Credit Act (NCA), did the debtor
consider alternative procedures provided for in the NCA such as credit agreements and debt
review? -> see Ex parte Ford 2009 (3) SA 376 (C)
§ There is academic debate around this judgement. Some people criticise the court for
transgressing its powers. Trying out alternative debt relief mechanisms is not a req
ito the IA. So why did the court act like it was?
§ On the other hand, the judge linked this concept to advantage for creditors (this is
good). Why? -> in sequestration, there is a discharge of debt which means that the
creditor doesn’t get full payment. However, in debt review there is no discharge
(debtor has to pay ALL his debt). Court said debt review is more beneficial to
creditors so they can get full payment.
- The process of sequestration should yield enough proceeds that the creditors that rank after
payment of this cost of sequestration will be paid (so where concurrent creditors receive no
dividend or a negligible dividend of the payment of the cost of sequestration -> would generally not
be an advantage to creditors)
- The voluntary surrender application should disclose whether the applicant considered the debt
review procedure
o If the debtor did not consider this option, comprehensive reasons must be provided
explaining why
o Remember: debt review involves a debt counsellor drawing up a repayment plan for the
debtor ito the NCA
o The applicant must present the debt counsellor’s full report that list the procedures that
were followed and if the applicant observed the debt restructuring arrangements (if any)
(5) The discretion of the court:

- Even if all 4 requirements/aspects are proved, the court still has the discretion to sequestrate the
estate or not (aka the court can still reject the application)
- The court has the authority to postpone or refuse the application. The following are examples of
why/when a court may refuse the application:
o E.g.) if the application was brought with improper motive and/or amounts to abuse of the
sequestration process -> look at Ex parte Ford
o E.g.) if the application does not disclose detailed reasons for the insolvency, the moveable
assets, income, and expenditure of the applicant -> see Ex parte Bouwer
- Why must so much information be disclosed by the debtor and why does the court have so much
discretion? -> this question was answered in Ex parte Arntzen 2013 (1) SA 49
55
module.
o “voluntary surrender requires a high level of disclosure since the risk for abuse is even
greater than in friendly sequestrations” [para 12 of judgemnt]
o Friendly sequestration application = a compulsory sequestration application, but there is a
link between the debtor and the creditor bringing the application to court.
§ In such cases, the creditor is sympathetic. The creditor is a family member or friend
of the debtor that is sympathetic to the plight of the debtor. Even though this is still
compulsory sequestration, the courts deem this as an abuse of process
§ Why do debtors and friendly creditors do this? -> to try circumvent the high
threshold of advantage to creditors to have easier access to the sequestration
process (so they can get rehabilitated quicker) (this is bad)
- Even if all the requirements have been satisfied the court can still exercise its discretion. However,
the court can only exercise its discretion once all the reqs have been met
Summary of voluntary surrender process:
What to do:
Steps to take before applying to court:

- Step 1: Notice of surrender
- Step 2: Copy of notice must be sent to certain parties/entities
o Such as the employees, creditors etc.
- Step 3: Statement of affairs
o Must lie open for inspection
Steps to take when applying to court/bringing the application to court:

- Step 4: Application to court
o Bring court application in accordance with the correct processes of court and civil procedure
o For an ex parte voluntary surrender, you have to use a certain form (find these forms in the
uniform rules of court to see how form must look)
o Some specific divisions of the HC also issue their own practice directives that must be
complied with (for fast and better service delivery) -> does NOT replace the court rules, it
just assists with the workload
- Step 5: Sequestration order
What to say:
The contents of the court application:

1. Who, why, where?
- Who brings application? -> debtor as defined in s2 of IA
- Why is the debtor insolvent? -> must say it was NOT through fraud, dishonesty, or fault of his own
o Note: in the cases of Bouwer, Ford, and Arntzen, the court zoomed into the stories of the
debtors (why are they insolvent). Much of the criticism against the debtor’s applications was
their reasons and stories did not make sense to the court
- Where is the court’s jurisdiction? -> must tell the court that this court is the right court to grant the
application
2. Preliminary steps
56
module.
- 3 main steps
- Burden of proof
3. Actual insolvency, causes, and statement of affairs

- The 1st thing the debtor must show (not only aver/allege, but also prove) the court is that he is
insolvent
o Voluntary surrender requires actual insolvency (balance-sheet insolvency)
o Commercial insolvency is NOT a ground to bring an application for voluntary surrender
- How do you show actual insolvency? -> via the statement of affairs
o At the end of the IA, there is a pro forma form (example/sample) for the statement of affairs
-> very detailed so sometimes debtors ask accountants to help them complete the
statement of affairs (this will form part of the s97 costs)
o The statement of affairs must be attached to the allegation that the debtor is actually
insolvent (as an annexure)
o If statement of affairs (SoA) is sworn under oath, then the court can use this to establish that
the debtor is actually insolvent. As such, the debtor may not lie in this SoA. However, there
are provisions that provide for situations where the debtor may have left information out. If
he left something out then he may add extra info and evidence in front of the court
4. Funds to cover the sequestration costs

- Problem for NINA debtors
- This is NOT a requirement for compulsory sequestration
- If there are enough funds in the free residue -> high likelihood that there won’t be contributions to
pay (this is good for creditors)
- When an application is served before the court, much of the info is projections into the future
o (e.g. what is the value of this asset so we can know how much it will generate at a public
auction?) -> court wants to predict how much money will potentially be available in the
estate.
o This is not an exact science. It is only once the trustee sells the assets that we know how this
estate will turn out.
o This is one of the reasons why the court is strict wrt the application procedure and how
much evidentiary info is provided. Court must protect the creditors as much as they can
(pro-creditor approach)
5. Advantage to creditors
- The factors to consider here are the same as under compulsory sequestration
- Main advantage = monetary/financial/pecuniary benefit
- Burden of proof is high for this requirement ito voluntary applications. Why? -> because the debtor
has intimate knowledge of what’s going on in his affairs. He can give the court all the info they need.
For debtor to be successful to show advantage to creditors, debtor has to give positive proof and
convince court that there WILL be advantage to creditors
o In cases of compulsory sequestration, the creditor must also show advantage to other
creditors. But the burden of proof is lower because the creditor does not have all the
intimate personal knowledge of the debtor
CASE LAW SUMMARIES
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- There are 3 main cases (Arntzen, Ford, Bouwer)
- Determining advantage to creditors is dependent on the level of disclosure in the application and
also a number of other factors. These 3 cases are important in this regard bc they revolve around
how to show advantage to creditors and what the courts will look at when it determines whether
the sequestration of the estate will be to the advantage of creditors
- There is also another case (the Steers case) that provides an illustration of how the principles laid
out in the above 3 cases can be applied to various circumstances
Ex parte Arntzen 2013 (1) SA 49 (KZP)
- The issues the court dealt with in this case: how to determine if there are sufficient assets in the
estate to defray the sequestration costs + how to determine advantage to creditors
- Both of these issues are dependent on the content of the affidavit
- The court held that when it comes to voluntary surrender, full and frank disclosure is needed +
proof/evidence and details must be given in the affidavit
o Why? -> it is necessary to provide all of this info bc there are other parties (other than the
debtor) who have a very real interest in the outcome of the application and need to have
access to all this info in order to make certain decisions
o For creditors, the outcome of the application spells the difference between the prospect of
recovering the applicant’s full indebtedness and the prospect that recovery will be reduced
by virtue of sequestration. This is why notice must be given to creditors [para 6]
- The court also mentioned the following things that are relevant to the preliminary steps:
o There are 2 forms of notice given to creditors: [para 7]
o (1) the notice of surrender in the statutory form which advises of the date of the application
and the date from which a statement of the applicant's affairs will lie for inspection at the
relevant office or offices must be published in the Government Gazette and a newspaper
circulating in the district in which the applicant resides. (The publication must take place not
more than 30 days and not less than 14 days from the date of the application.)
o (2) the notice of surrender giving the same information must be delivered or posted to each
creditor whose address is known within 7 days of publication in the Gazette. (creditors may
only be left with a few days to inspect the statement of the applicant's affairs so as to decide
whether or not to intervene in the application.)
- The court also said that in voluntary surrender applications creditors are required to be more alert,
proactive and must respond more quickly in assessing whether or not to intervene than if they had
been a party to the application [para 8]
o In such a case, an overburdened court, confronted with an unopposed application, may not
scrutinize the application as carefully, and thus become aware of material non-disclosures,
as it would do if it were opposed.
o A further reason for requiring a higher level of disclosure in voluntary surrender
applications, is that an outright order can be given on the first appearance in court whereas,
in most sequestration applications, a provisional order precedes a final order in a two-stage
process.
- The court indicated some factors that must be taken into account that needs to be reflected in the
affidavit or supporting documents to support the debtor’s allegations
- Factors relating to support for allegations of value: [para 15]
o the value placed on the immovable property in the founding affidavit must be based on a
letter supported by any affidavit from the person concerned
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module.
o mention must be made of comparable sales
o descriptions must be given on the improvements to the property
o must state whether the amount is a market value or based on a forced sale
o estate agent must depose to the affidavit and say how the valuation of the property was
derived
- Factors relating to support for allegations of income: [para 18 & 19]
o did the debtor disregard the debt review process?
o Despite the applicant being insolvent, will the indebtedness likely be liquidated over time if
the income of the applicant exceeds expenses? -> if there is excess income then this should
be supported by statements. The debtor must indicate that there will be more income than
what would be necessary to support himself and his dependents and that the excess income
can be distributed to the creditors by the trustee (income > expenses -> benefit to creditors)
o The level of disclosure concerning income and expenditure is important when determining
advantage to creditors -> must be clear and not contradictory
o It would also affect considerations of the advantage to creditors if a trustee on insolvency
would be able to utilise s 23(5) of the Act to apply any excess income to the settlement of
claims against the estate
o Debtor must give proof of what he is earning, whether it be a salary or a commission
(which changes monthly). Also, multiple statements for this must be given (not just 1) to
show what he has earned over an extended period of time (which will establish his average
income)
Ex parte Ford 2009 (3) SA 376 (WCC)
- In this case there was an over-indebted consumer (ito credit agreements) who applied for
sequestration. In other words, the debtors debts were created ito agreements to which the NCA
applied
- This case dealt with additional factors that the courts take into account
- The court questioned why the data approached the court for voluntary surrender rather than
making use of the remedies under the National Credit Act (such as debt review).
- The court indicated that when the reason for the financial distress is due to credit agreements, the
remedies under the NCA should be considered because the interests of responsible creditors are
protected in the sense that the debt counsellor can look for reckless credit. Additionally, debt review
favours full payment (this is more beneficial to creditors than insolvency/sequestration where
creditors only receive a dividend)
- If the debtor’s dire financial situation is due to credit agreements, the courts would want the
debtor to indicate why debt review was not considered as a debt relief mechanism. However debt
review has not been elevated to an additional specific s6 requirement that has to be satisfied. It is
merely something the court takes into acc when exercising its discretion to grant the sequestration
order.
o Why do the courts consider this? -> unlike insolvency and sequestration, debt review results
in full payment of a creditor. It will be more beneficial for the creditors if the debtor went
into debt review because then the creditors would receive full payment.
- The court highlighted the need for full disclosure of the assets and liabilities in the application to
court
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o The court must be fully informed of the applicant’s proprietary situation. We need to see
where the debts are coming from. If they are coming mostly from bank loans, money
lenders, credit card extensions etc. -> indicative of a credit agreement
o The applicant said that he became insolvent by misfortune and due to circumstances beyond
his control. This did not make sense to the court. How can getting into credit agreements
you cannot afford be beyond your control?
o Sometimes creditors are reckless and just let the debtors have more money (which increases
their debt). there are provisions in the NCA to discourage reckless credit extension like this.
- The NCA has various remedies to help debtors in these specific situations. this is why debtors (ito
credit agreements) must first resort to the NCA before they resort to sequestration
- In this case, the applicants told the court that they DID consider debt counselling (NCA remedy) but
they said that the debt repayment plan they were given by the debt counsellor was very financially
impractical for them. However, there was no evidence in their applications that proper
consideration was given to debt counselling and the debt counsellor did not even tell them to
consider declaring reckless credit for some of their debts ito s86(7) NCA.
- The court held that they were not disposed to exercise discretion in favour of granting a voluntary
surrender order in this case bc the applicants failed to explain why their credit agreement related
debt is not amendable to administration under the NCA. The incomplete facts gave the impression
that the machinery of the NCA is more appropriate than sequestration. Therefore, their applications
for voluntary surrender were dismissed
- The debtors cannot just choose which form of debt relief suits them or is most convenient for them.
The debtors cannot just mechanically and superficially satisfy the relevant statutory reqs under the
IA just so they can get sequestrated -> this is a misdirected approach especially since satisfying the
reqs won’t necessarily guarantee them a sequestration order. The grant of the selected remedy is
discretionary.
- This case shows us that the courts are only wiling to exercise their discretion in granting a
sequestration order once all the IA reqs are met.
o E.g.) if the debtor did not show advantage to creditors, then the discretion of the court is not
relevant bc the legislation says that the debtor MUST prove advantage to creditors. If the
debtor does not do this, then the application must fail
o However, even if all the reqs are met, the court retains discretion to deny the order in
favour of a different remedy
o The court won’t only consider compliance with the IA reqs, but will also consider other
factors like the level of disclosure given by the debtors, the debtor’s motive in applying for
sequestration etc.
- The primary object of voluntary surrender is NOT the relief of harassed debtors [para 21].
Sequestration is to benefit creditors -> to regulate the manner and extent of their payments
Ex parte Bouwer 2009 (6) SA 382 (GNP)
- Issue: requirements for voluntary surrender were considered in this case. Not all the material facts,
details and information were provided.
- This case is very similar to ex parte Arntzen in the sense that it provides us with specific indications
of aspects that need to be addressed in an affidavit for voluntary surrender
- The reasons for insolvency were inadequate and tersely stated. The applicants all alleged that they
didn’t own any moveable assets, no particulars of income and expenditure were furnished, and
inadequate evidence in valuation reports. [para 2]
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- If the application does not disclose detailed reasons for the insolvency, the moveable assets,
income, and expenditure of the applicant -> the court may postpone or refuse the application
- The impact/role on salaries plays a large role in the implications for dividends paid to creditors when
considering the circumstances (extra income can be distributed to the creditors)
- Factors to consider when valuating a property is the same as the Arntzen case (para 15)
- The applicant must provide sufficient details of all the material facts relating to the financial position
of his estate
o such as: the value of the assets + income vs expenses
o The valuator of immoveable property may lay a basis for this valuation
o This helps establish whether there will be a benefit to the creditors and takes us closer to
determining the size of their dividend
Ex Parte Steers and Others 2021
- This judgment concerns four ex parte applications seeking orders of voluntary surrenders and one
friendly sequestration.
- The 3 main substantive reqs in s6 of the IA for voluntary surrender are:
o The debtor must be actually insolvent
o The debtor must own realizable property of sufficient value to defray the costs of
sequestration to be paid from the free residue of the estate
o Must be to the advantage of creditors
- The onus of proving the IA reqs differs for debtors and creditors. The burden is more onerous
(higher) for debtors in voluntary surrender bc they have intimate knowledge that a creditor would
not normally know about the debtor. The debtor is in the position to make full disclosure to the
court
- insolvency should be used as a measure of last resort and not be used to free debtors from liability
to the disadvantage of creditors. (other debt relief measures should, therefore, be used first)
- in this case, the court was concerned with the method of valuation applied to attached value to the
movable assets. The reasons are as follows:
o the valuations did not instil a sense of integrity and accuracy to a level that this Court can
safely grant these orders
o the valuator said that he did the valuation on various dates in the presence of the applicants
and at the applicants residence -> but this was not confirmed in the applicants affidavits
o the valuations did not provide the court with a coherent expose of the methodology
employed in valuing the assets
o The assets were categorised by attributing a quality to them, without an explanation of the
reasoning behind the categorisation
o The categorisation of the assets as ‘Good’, ‘Fair’, ‘Average’ is not helpful to determine
whether the valuations of the different assets are realistic. This Court cannot attach any
probative value to the valuations
o Bc of the unreliable and undetailed info, the court said that the valuations appeared to be
adapted into a pre-determined formula designed only to achieve a favourable result (rather
than reflecting their true value). Because the court was not satisfied that the applicants own
realizable property was sufficient to defray the costs of sequestration, there can be no talk
of advantage to creditors
- The applicants did not make a full and frank disclosure and they also didn’t explain their preference
to voluntary surrender to the NCA mechanisms.
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- Therefore, the applicants applications for voluntary surrender were refused
PRACTICE QUESTION (application for voluntary surrender)
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Information that is missing from or that is incorrect in this affidavit:
- The jurisdiction of the court is wrong. The applicant resides and works in Pretoria but the application
is made to the Western Cape Division
- The applicant is married in community of property but the spouse is not listed as the co-applicant
- The information of her spouse is missing. She has only included his name -> needs additional details
too
- In paragraph 3 -> an act of insolvency is not relevant for voluntary surrender. She must rather say
she is actually insolvent (she must make an averment of actual insolvency) -> she must attach the
statement of affairs to show that she is actually insolvent
- Paragraph 5.1 is too vague. The applicant needs to be specific about what constitutes a “substantial
dividend”. She has made a bare averment (skeleton that the court cannot work with). She needs to
say what assets are available that will fall into the insolvent estate that can be sold? What is the
probable value the asset will fetch at an auction? How did she reach this answer? (she needs a
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valuator to depose to the affidavit to say the value the house is valued at). The valuator must show
he has experience in this field.
- In paragraph 4 she is talking about s89 costs. But it should have been s97 costs bc the realizable
property is in the free residue
- Paragraph 6.1 must also state that the notice of surrender was also published in a newspaper that is
circulating the district
- She left out SARS -> should be paragraph 6.2.4
- She needs to say that the statement of affairs was sent to the masters office and laid open for 14
days
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module.
WEEK 6 – COMPULSORY SEQUESTRATION
GENERAL
- From the debtor’s perspective, sequestration is a form of debt relief

o Why? -> bc it gives the debtor discharge of his pre-sequestration debts
- From the creditor’s perspective, sequestration is a debt is a collective form of final execution of
debt that brings about a concursus creditorium
o Why? -> bc it comes down to the payment of the debt owed by the debtor to the creditor
and it is paid from the proceeds of the assets of the debtor
o However, sequestration is NOT viewed as an ordinary order for the enforcement of the
applicant-creditor’s claim
- It can be seen that debtors and creditors may have different motives for trying to access
sequestration
Application of the National Credit Act:

- Remember: when it comes to voluntary sequestration, if the debt is a debt ito a credit agreement ->
the debtor has to first pursue the remedies available in the National Credit Act (NCA) before he can
bring his application for sequestration to court
- However, when it comes to compulsory sequestration and if the debt is a debt ito a credit
agreement -> the NCA does NOT prevent/bar the creditor from bring an application for compulsory
sequestration
- When it comes to individual debt collection process -> the creditor has to send a s129 notice to the
debtor before he brings his application to court (discussed more below)
- However, when it comes to collective debt collection process (aka sequestration) -> the creditor
does not have to send a s129 notice/letter to the debtor
- Certain rules come into play with compulsory sequestration that would not normally come into play
with the individual debt collection/enforcement mechanism -> see the summary below of the Van
Heerdan & Borraine article
- The NCA has very specific objectives and these objectives differ from sequestration proceedings
- The NCA is aimed at the following:

o designing harmonised mechanisms of resolving disputes between creditors and debtors
o enable debtors to access certain debt relief options
o prevent debtors from becoming over indebted by incorporating things like reckless lending
rules and enforcing these rules when it comes to creditors that provide reckless credit.
Important question: Does insolvency proceedings (specifically an application for compulsory sequestration)
amount to enforcement of debt?
- This question was answered in Investec v Mutemeri and then confirmed in Naidoo v ABSA Bank
(answer = no)
- The reason why this is a point of contention is bc under the NCA, before a creditor can enforce a
debt that is owed by a debtor and go to the court for assistance, the creditor must issue a s129
notice/letter to the debtor to inform the debtor that he is in arrears with payment (thereafter the
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module.
debtor can take certain steps to remedy this situation). Without this notice/letter, the creditor is
prohibited from asking the court for assistance
- It can be seen that when it comes to credit agreements, the NCA has certain procedural reqs that
affect the individual debt collection procedure
- The question is whether these procedural reqs are also applicable when it comes to the collective
debt collection procedure (sequestration)?
- In Investec v Mutemeri, the court said:
o You have to look at the enforcement of a debt and decide whether the nature of a
sequestration application amounts to enforcement of a debt
o The motives of the parties do not matter bc they do not affect or change the nature of the
proceeding
o The order placing the person’s estate under sequestration CANNOT be described as an order
for debt enforcement
§ Why? -> the whole purpose of instituting sequestration proceedings is NOT to claim
something from the debtor or indicate to the debtor that he has to pay his debt.
§ Sequestration puts the machinery of the law in motion to have the debtor declared
insolvent
§ This was stated in Collet v Priest
o The purpose behind sequestration is to achieve a fair and orderly distribution of what the
debtor has amongst all of his creditors. The sequestration procedure makes sure that
certain rules are applied so that all creditors are treated equally
o The moment the application becomes successful, these rules apply the same to all creditors
involved. In other words, whether the creditor brought the application or whether he was
just pulled into the process bc another creditor brought the application -> the same rules
apply
§ This is very different from the individual procedure for enforcement of a debt -> if
creditor is successful, he benefits from the procedure bc now he has a court order
saying that the debtor has to pay the full amount to this particular creditor
o Key point: collective debt enforcement/collection proceedings (aka sequestration
proceedings) cannot be seen as a normal/ordinary enforcement of a debt, whereas
individual debt collection proceedings can be seen as ordinary/normal.
o Why is this significant? -> the procedural reqs of the NCA that apply when a creditor wants
to enforce a debt (namely that he has to first send a s129 notice to the debtor before
bringing his application to court) does NOT apply when it comes to sequestration
proceedings. In other words, not sending the letter/notice to the debtor will NOT prevent
the creditor from applying for the debtor’s sequestration
- In the Naidoo case it was held -> creditor does not have to issue s129 notice ito NCA prior to
initiating proceedings for the compulsory sequestration of a debtors estate
Preliminary formalities (steps taken before the matter is heard by the court):
- When a creditor brings an application to court, the application must be preceded by certain
formalities. The applicant must:
o (1) Provide security
o (2) Furnish a copy of the application to interested parties
- Requirements that creditors must comply with are laid out in s9 of the Insolvency Act (IA)
DESCRIBE THE SECURITY THAT THE APPLICANT MUST LODGE WITH THE MASTER
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- Providing the master with security is the first formality that a creditor must comply with (and
provide proof thereof in his application)
- The applicant must give security to the Master to defray all sequestration costs until a trustee is
appointed (this is the specific purpose of the security)
- The applicant needs to provide the master with security within 10 days before the matter is heard
by the court
- Thereafter, the applicant must obtain a certificate, issued by the Master, confirming that security
has been given, not more than 10 days before the application for sequestration
- The certificate has to be filed together with the application
- The certificate does NOT have to be filed with the Registrar of the HC nor served on the
respondent/debtor -> but it MUST be available at the hearing (bc it shows compliance with the req
that the creditor provided security to the master within the stipulated time period)
DISCUSS THE CONTENTS OF AN APPLICATION FOR COMPULSORY SEQUESTRATION
Furnishing interested parties with a copy of the application:
- Furnishing interested parties with a copy of the application (notice of motion + founding affidavit) is
the second formality that a creditor must comply with (and must also provide proof thereof in his
application)
- Rule 6 of the Uniform Rules of Court says that notice of the application should be given to the
respondent-debtor
- Who are the interested parties that must receive/be furnished with notice/notification of the
application?
o The respondent-debtor
o Every registered trade union that represents the debtor (if there are any)
o The employees of the debtor (if he has any)
§ Stratford v Investec held that employees not only include business employees, but it
also include domestic workers (their trade unions must thus also receive notice)
o South African Revenue Services (SARS)
- The following distinction can be seen:
o With voluntary surrender, the interested parties only need to be provided with notice of the
surrender of the estate
o With compulsory sequestration, the interested parties need to have notice of the whole
application
- How is furnishing accomplished? What are the modes of furnishing?
o furnishing can be accomplished by means of formal serving by post OR by delivery by hand
o ‘furnishing’ means -> making the documents reasonably accessible to the identified persons
o The affidavit MUST indicate the method in which the interested parties were informed of
the application
- If there is no trade union and/or if the debtor does not have employees -> the applicant MUST state
this is the founding affidavit
- The applicant must provide proof of compliance with each subsection of S9(4A)(a) by means of an
affidavit. The affidavit must be deposed to by the person who furnished the copy of the application
(this is how you prove compliance to the court)
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o If the creditor is a juristic person, then it needs a natural person representative to depose to
the affidavit on its behalf and represent it in court
o This representative needs to have knowledge of the situation (e.g. the person who handled
the debtor’s accounts etc.)
Note:
- Whether it be the Insolvency Act, the laws of civil procedure, or S197 of the Labour Relations Act ->
certain parties must give notice of the application to certain people
o The employer has to give notice of the application to certain persons
o When it comes to voluntary surrender, the notice of surrender needs to be sent by the
debtor
o When it comes to compulsory sequestration, notice of the application needs to be given by
the creditor
The contents of the application:
In the case of compulsory sequestration, the applicant’s affidavit must disclose the following information:
- The full names, address, occupation and status of the applicant creditor
- The full names, date of birth, and identity number of the respondent debtor
- Information indicating the court’s jurisdiction (this will be established according to the debtor’s
locations)
- The marital status of the debtor
- If the debtor is married, then the affidavit must disclose the full names, date of birth, and identity
number of the debtor’s spouse.
o If they are married in community of property -> the application will be in respect of a joint
estate and the spouses must be joined as co-respondents
o Where the applicant is unable to establish whether or not the debtor is married in
community of property, or the name and address of the debtor’s spouse -> the court may
still grant the order if the applicant has satisfied the court that he was unable to establish
this, despite reasonable steps taken by him
- The nature, amount, and cause of action of the applicant’s claim (creditor must prove he has locus
standi -> liquidated claim)
- If the creditor has security -> he needs to say what the nature and value of the security is
o E.g.) the creditor will say “the debtor took out a home loan and as security for repayment of
this loan, a mortgage bond was registered over the property to the value of R2 million.”
- An allegation of the debtor’s actual insolvency or that an act of insolvency has been committed,
supported by relevant facts (reason for application)
- That there is reason to believe that sequestration will be to the advantage of creditors (why debtor
should be sequestrated)
- That security for the payment of the costs of sequestration has been lodged with the Master,
supported by a Master’s certificate confirming this
o The certificate must not be given more than 10 days before the date of issuing the
application
- Compliance with the notification procedures in that the prescribed interested parties (the debtor,
trade unions, employees, and SARS) were furnished with a copy of the application where applicable
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- If the applicant has omitted any of this information ^ he must state the reasons for such omissions in
his affidavit
o Ex parte Shmukler-Tshiko and another and 13 other cases [2013] JOL 29999 (GSJ) -> the
court held that it is important to prove all the statutory reqs ito the Act (see summary
below)
The following can be seen:

- The affidavit can basically be broken into 2 components
- The first component deals with WHO and WHERE -> who is the creditor, who is the debtor, why is
the application being brought, info on jurisdiction (these things are regulated by s9 of the IA)
- The second component is more content based -> tells the court why the debtor’s estate should be
sequestrated and how there was compliance with the statutory reqs (these things are regulated by
S10 of the IA)
What happens after the applicant has given his application to the court?
- The court will initially place the estate under provisional sequestration (this is different to final
sequestration)
- Interested parties can come object to the application by addressing the court with the reasons why
the sequestration application should not be granted
- If any creditors or the debtor himself objects to the application -> they must prove their objection by
way of sown statements/affidavits that contain all the facts and circumstances of the specific case
EXPLAIN WHAT THE APPLICANT MUST PROVE IN ORDER TO SUCCEED BEFORE A PROVISIONAL ORDER WILL
BE GRANTED
The applicant’s burden of proof:
Ito s10 of the IA, the applicant must prove the following 3 things (prima facie proof):
(1) The applicant must prove that he is creditor who qualifies to bring such an application to the court
- In other words, the applicant must prove that he has a liquidated claim of at least R100 OR that the
creditors as a group (where there are co-applicants) have an aggregate of claims that is not less than
R200
- A liquidated claim is a claim for a fixed/certain/determined amount of money
- A liquidated claim which has accrued but which is not yet due on the date of hearing of the
application, shall be reckoned as a liquidated claim
- The following claims are NOT liquidated claims:
o A claim for the delivery of goods
o A claim for the debtor to do or stop doing something
o A claim for an amount of money which is in dispute (this means that the amount of money is
not yet fixed/certain but merely determinable)
- When it comes to a disputed claim:
o The creditor must first issue a summons or conclude a settlement agreement with the
debtor to liquidate his claim. Only after he has done this can he apply for compulsory
sequestration
o Sequestration is not the appropriate procedure to enforce a disputed claim
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o The amount due must not be in dispute
- The claim must also be legal and valid and must not have become unenforceable through
prescription
o E.g.) a claim in terms of a cancelled lease agreement is not a liquidated claim
(2) The applicant must prove that the debtor is actually insolvent OR has committed an act of
insolvency
- When proving that the debtor is actually insolvent, the creditor will often have to rely on indirect
evidence -> the dishonouring of a cheque or the debtor’s request for an extension of time to pay
o Proving things like this can have practical problems
o Such evidence will not necessarily be conclusive of a state of actual insolvency
o Sometimes it can be very difficult for creditors to prove this which is why the legislature
gave them the alternative option of proving an act of insolvency
- Alternatively, the creditor can prove that the debtor committed an act of insolvency (these are listed
in S8 of the IA)
o Acts of insolvency only apply to compulsory seq – NOT voluntary surrender
- The following are all acts of insolvency ito s8 IA:
o Where the debtor leaves the country, remains absent from the country (avoids coming
back), departs from his dwelling, and absents himself with the intent to evade or delay
payment of his debts [s8(a) IA]
§ In such case, the applicant must prove the debtor’s intention
§ Although a debtor’s extended absence might create a presumption of insolvency, it
will always be possible for the debtor to provide reasons for his absence (e.g. state
of health, working conditions etc.)
o Where a judgement is given against the debtor AND ---- [s8(b) IA]
§ The debtor fails to satisfy the judgment, or he fails to indicate his disposable
property to the sheriff (sheriff = officer who executes the debtor’s property) OR
§ The officer/sheriff has not found sufficient disposable property to satisfy the
judgement debt (in other words he makes a nulla bona return). This means that
attempt to make execution after the judgement is unsuccessful
• If the officer is able to find the debtor + if the debtor does not indicate
sufficient disposable assets -> the officer does not have to search for the
assets himself (it is an automatic act of insolvency)
• If the officer cannot find the debtor -> the officer has to search for the
disposable assets himself. Only if the officer does not find sufficient assets,
will an act of insolvency be committed
§ The same sheriff who executes the judgement must sign the return. The applicant
must find out if a return is defective or not before the application proceeds
o If the debtor makes or attempts to make any disposition of any of his property which would
have the effect of prejudicing his creditors or of preferring one creditor above another [s8(c)
IA]
o If the debtor removes or attempts to remove any of his property with the intent to
prejudice his creditors or of preferring one creditor above another. In such case, the
creditors must prove the debtor’s intention [S8(d) IA]
o If the debtor makes or attempts to make any arrangement with any of his creditors to
release him wholly or in part from his debts. Such a request will constitute an act of
insolvency only if it is indicative of the debtor’s inability to pay his entire debt [s8(e) IA]
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o If, after having published a notice of surrender of his estate, the debtor fails to bring such
application on the stated date, or lodges a statement which is incorrect or incomplete in any
material respect, or fails to apply for the acceptance of the surrender of his estate on the
date mentioned in the notice of surrender [s8(f) IA]
o If the debtor gives notice in writing to any of his creditors that he is unable to pay any of his
debts [S8(g) IA]
§ The notice must clearly state that the debtor is unable, and not merely unwilling, to
pay his debts
§ The notice must be in writing and must be evaluated holistically as a whole. The test
to be applied is whether the reasonable reader will construe the notice as an
indication of the debtor’s inability to pay
§ This act of insolvency is frequently committed where the debtor requests a creditor
for an extension to pay his debts
§ A notice of intention to apply for an administrative order ito S74 of the Magistrate’s
Court Act can also constitute this act of insolvency
§ However, a debtor who has applied for debt review is not to be regarded as having
committed an act of insolvency [s8A IA]
o If, being a trader, he gives notice in the Government Gazette ito s34 of his intention to
transfer his business and is thereafter unable to pay his debts [s8(h) IA]
(3) The applicant must prove that there is reason to believe that the sequestration would be to the
advantage of the creditors
- Unlike voluntary surrender (which requires positive proof of advantage for creditors), compulsory
sequestration requires only a reasonable prospect that it will be to the advantage of creditors
- The burden of proof is less onerous bc the creditors do not have all the intimate knowledge about a
debtor’s situation as the debtor himself has
- If the applicant is the only creditor, he will have to indicate why sequestration will be more
advantageous than execution
- In the case of a friendly sequestration, all information pertaining to the advantage of creditors must
be properly furnished (burden of proof is high here)
o E.g.) A body corporate which applies for the sequestration of a member whose levies are in
arrears, must still prove advantage to the general body of creditors. The fact that a body
corporate has a statutory obligation to protect the interest of all of its members (and is thus
a friendly creditor) does not necessitate a deviation from the general rule
- Other factors that may prove advantage to creditors:
o If one creditor is threatening execution to the detriment of the other creditors
o Where property concealed and/or disposed of might be found and vindicated after
sequestration
o Opposition to the application by a large number of creditors might be taken into
consideration in determining advantage for creditors, but it is not necessarily conclusive
- If it appears that there will be NO free residue to pay any of the sequestration costs or dividends, but
it rather appears that there will be a contribution risk by creditors who prove their claims -> the
court will conclude that there is NO advantage to creditors
The granting of a provisional sequestration order:
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- Where the applicant proves all the above-mentioned requirements, the court has a discretion to
provisionally sequestrate the estate of the debtor
o This means that even if the applicant successfully proves all the reqs, the court may still
choose to not grant the order
o The court may only exercise discretion like this when all of the reqs have been satisfied
What happens after the provisional order is granted?
- It is peremptory/necessary for the applicant to serve the provisional sequestration order on SARS.
Failure to do so effectively prohibits the granting of a final sequestration order
- After being notified that such an order was made, the Master of the HC must publish a notice of
sequestration in the gov gazette
- The Registrar must transmit copies of the sequestration order to the following people:
o the Master
o the sheriff of every district in which the insolvent resides or owns property
o every sheriff who holds under attachment property that belongs to the insolvent estate
o every Registrar of Deeds
o every person in charge of a register of ships
- A provisional order can be set aside but it cannot be appealed (because it is not yet a final decision)
- S11 IA -> If the court sequestrates the debtor’s estate provisionally, it must also grant a rule nisi
o This means that the court will grant the final order unless the s9(4A) reqs are not complied
with and/or the debtor appears before the court and shows why his estate should not be
sequestrated finally
EXPLAIN WHAT THE APPLICANT MUST PROVE BEFORE THE COURT WILL FINALLY SEQUESTRATE AN ESTATE
The granting of a final sequestration order:
- Ito s12 IA, the court may grant a final sequestration order when:
o The applicant can prove a liquidated claim,
o The debtor is actually insolvent or committed an act of insolvency, and
o Where there is reason to believe that the sequestration will be to the advantage of creditors
- Even after these reqs have been met, the court has discretion to allow further proof
- If the court is not satisfied -> it will dismiss the application
What happens after the final sequestration order is granted?
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- The debtor may lodge an appeal against the final sequestration order if he is unhappy with it [s150
IA]
- If there are problems with the application or lack of proper grounds and the order should have never
been granted -> recission becomes an option (not appeal)
- Ito s149(2) IA, a final order can be rescinded:
o where new evidence is brought before the court proving that the order should never have
been given
o where insufficient grounds for such an order exist
o where all the creditors give their consent for rescission
- If the final order is rescinded -> the debtor regains control of his estate and of all his debts
- The debtor (and his spouse if he has one) must be notified of the final sequestration order.
Thereafter, the debtor (and his spouse) is obliged to lodge a statement of affairs with the Master in
duplicate within 7 days [s16 IA]
DEFINE AND EXPLAIN THE CONCEPT "FRIENDLY SEQUESTRATION" + CRITICALLY ANALYSE THE FACTORS
THAT GAVE RISE TO THE CONCEPT "FRIENDLY SEQUESTRATION"
What are friendly sequestrations?

- Friendly sequestration is a form of compulsory sequestration where the creditor that brings the
application is a friend or family member of the debtor
What factors gave rise to the concept of friendly sequestrations? Why do debtors and creditors prefer
friendly sequestrations?
- The debt relief measures in SA are insufficient for quite a few debtors (especially NINA debtors who
have no income or assets to prove advantage to creditors)
- Out of the available debt relief measures we have, debtors tend to prefer sequestration the most
because it is the only method that leads to the discharge of the debtor’s debts. This is why debtors
sometimes rely on sequestration proceedings to try force a discharge of their debts on their
creditors
- Although a debtor may apply for the voluntary surrender of his estate, sometimes debtors prefer
compulsory sequestration over voluntary surrender
o Voluntary surrender has a lot of technical formalities that need to be complied with + the
burden of proof required to prove advantage to creditors is very heavy/onerous on the
debtor during voluntary surrender (bc he has all the intimate knowledge of his situation
available to him)
o In the case of compulsory sequestration, the burden of proving advantage to creditors is
much lighter/less onerous bc the creditors do not have as much knowledge as the debtor
has about his situation
o in order to have access to the less stringent compulsory sequestration process, the debtor
needs a creditor to institute an application against his estate -> this is where the friend or
family member steps in
- Friendly sequestrations are usually based on an act of insolvency ito S8(g) IA
o Remember that this means that the debtor commits an act of insolvency by giving written
notice to a creditor that he is unable to pay any/all of his debts
o In the case of friendly sequestrations, the debtor will give this notice to a family member or
friend that he owes money to so that they can bring an application of compulsory
sequestration to court
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o It is much easier to ask a family member/friend to do this than a normal creditor who has no
friendly relationship with you
How do the courts feel about friendly sequestrations? how are these applications approached?
- Where such a friendly or familial relationship exists between the debtor and creditor, the court has
a duty to scrutinise the application with great care to ascertain advantage for creditors (other than
and in addition to the friendly creditor) and to prevent prejudice to them
- If all the reqs for compulsory sequestration are proved, then the fact that a friendly relationship
exists between the debtor and creditor should NOT prevent the granting of the sequestration order
- However, sometimes the friendly applicant-creditor applies for the sequestration only to benefit the
debtor and not the debtor’s other creditors. In such instances, the application must NOT succeed or
be granted bc this amounts to an abuse of the sequestration procedure (motive is important here)
Note:
- From the facts of the affidavit, if it looks like it might be a friendly sequestration, then you have to
look at the requirements of the courts practice directives to see what else has to go into the affidavit
(so there are a few additional requirements)
- Some academics argue that this is encroaching upon the legislature’s role ^
- See the Mabe & Evans summary below
DISCUSS THE POSITION IN RESPECT OF VEXATIOUS APPLICATIONS
- A malicious or vexatious application is an application that amounts to an abuse of process

- S15 of the IA says that if the court is satisfied that an application for compulsory sequestration is an
abuse of the court’s procedure and/or that the application is malicious or vexatious -> it may award
damages to the debtor
ASSESS THE POSITION IN RESPECT OF THE COSTS OF THE APPLICANT AND THE COSTS OF POSSIBLE
OPPOSITION BY THE DEBTOR
- The successful applicant’s taxed costs of sequestration are paid from the free residue [s97 IA]
- Where the free residue is insufficient to pay the costs of sequestration -> the applicant has to make
a contribution (irrespective of whether or not he proved a claim)
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PRACTICE QUESTION (application for compulsory sequestration)
Information that is missing from or that is incorrect in this affidavit:

- The applicant has not mentioned that he will furnish a copy of the application to SARS or to the
debtor (paragraph 10 of affidavit)
- Applying for debt review is NOT an act of insolvency (authority = s8A IA) (paragraph 6)
o If the debtor committed an act of insolvency ito S8(g), that means the debtor has an inability
(not an unwillingness) to pay their debts AND the notice was given in writing and must be
evaluated holistically as a whole
o These are the 2 reqs for the S8(g) notice
§ The debtor must be unable to pay his debts, not merely unwilling (e.g. if he is
unwilling to pay then it is a disputed claim and disputed claims are not liquidated
claims)
§ The notice must be in writing (e.g. telephone conversation is not sufficient)
o If this is the case then from a civil procedural perspective, this paragraph 6 must make
reference to the annexure that contains a copy of the debtors written notice
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- So the applicant will either have to found their application on a diff act of insolvency or he must
state that the debtor is actually insolvent and then out evidence in front of the court to substantiate
why he is saying that
- This affidavit only lists ONE respondent in its heading. The facts say that the debtor is married in
community of property -> so there should be a first respondent (the debtor) and second respondent
(the spouse)
- The security should be furnished to the master of the HC (not the Registrar)
- Paragraph 8 deals with advantage of creditors. However, the info the applicant provided is NOT
sufficient
- The affidavit talks about immovable property but there is no additional info given like an indication
of how much the property would fetch at a public auction or a sworn affidavit from a valuator
- The word “probably” in paragraph 8 is NOT too vague. Compulsory sequestration just requires
reason to believe that advantage will be to benefit of creditors. Only voluntary surrender requires
positive proof
- The applicant has to establish his locus standi. The applicant must say what his claim is -> debtor
owes him money that is more than R100
- If the affidavit was submitted with all of these mistakes -> court will dismiss the application
Extra note:
- Insolvency law pulls in a number of other laws -> like Matrimonial Property Act, civil procedure laws,
NCA etc.
- Additional notification reqs are set out in s197B in the Labour Relations Act and also s189
o -> employees must receive notification when employer files for insolvency or when an
application for sequestration of employer is brought to that employer
FUTHER CASE LAW SUMMARIES
Stratford v Investec Bank 2015 3 SA 1 (CC)
- The Stratford case is not only about employees. It is also about proving advantage to creditors and
the implications of non-compliance (especially when SARS does not receive a copy of the
application)
What did the court say about compliance with the requirements of the IA:
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- compliance with the provisions of section 9(4A) is peremptory (as opposed to directory) and that
failure to comply with the section would result in the discharge of the rule nisi.
o S9(4A) IA says that the applicant/petitioner must furnish a copy of the petition to every
registered trade union that represents the debtor’s employees, the employees themselves
(by affixing a copy to the notice board or gate), SARS, and the debtor himself (unless the
court says it isn’t necessary)
- In this case, the court had to determine whether Investec’s representative made the petition for
sequestration available in a manner that was reasonably likely to become accessible to the
Stratford’s employees. The court made the following observations:
o The candidate attorney, according to the Stratfords, enquired whether they had a domestic
employee and they answered that they had one domestic employee (referring to Mr
Ngoma).
o She then left a copy of the petition on the kitchen table for Mr Ngoma after having alerted
the Stratfords that it was for the employee.
o It was reasonable of her to assume that the Stratfords would pass on the information to
their employees (after she said that a copy of the petition was for their employee).
o The candidate attorney could not have been aware that there were other employees
because of the Stratfords’ failure to disclose that fact to her.
o The Stratfords, as the employer, had a duty to bring the application to the attention of the
employees in terms of section 197B of the LRA.
- The court held that these attempts to furnish the petition on the employees (domestic workers) was
sufficient
- Failure to furnish the employees with the petition may not be relied upon by the debtor for
opposing sequestration when the question to be decided is whether sequestration is to the
advantage of creditors [para 42]
- Previously the courts required a “non-negligible benefit to be shown in the context of a single
creditor.
- The court in this case held that the aspect of a non-negligible dividend is not helpful [para 44]
- The meaning of the term “advantage” is broad and should not be rigidified. This includes the
nebulous “not-negligible” pecuniary benefit on which the appellants rely.
Ex parte Shmukler-Tshiko and another and 13 other cases [2013] JOL 29999 (GSJ)
- If the applicant has omitted any information in the application, he must provide reasons for the
omission in the affidavit. In this case, the court spoke about the importance of proving compliance
with all the statutory requirements of the IA
- Court addressed theabuse of its process which is found to be occurring in many such applic-ations
- indebted but not insolvent persons sought to avoid the inconvenience of taking steps to res-
ponsibly and proactivelyadminister their financial affairs through the process of voluntary surrend
er.
- Insolvency proceedings do not exist for the benefit of distressed or even harassed debtors.
- There is a lot of dishonesty and abuse of both IA and the court process.
- Individuals will go to extreme lengths to evade their personal indebtedness and pass the burden
onto creditors, shareholders, taxpayers, and the SA economy.
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- In this case, the applicants prepared affidavits but failed to set out the calculations which are of
value to the judge that exercise their discretion -> the court needs info like this to consider
advantage to creditors
- only when it is established that it is improbable that his assets will realize sufficient to settle theamo
unts ofhis debts in full that it can truly be said that the Court ought to be satisfied that the estate of
the debtor is insolvent
- collusion in friendly sequestrations happens a lot in SA where bogus creditors falsely claims
indebtedness of a person who wants to be sequestrated
- friendly sequestration is where an individual who feels burdened by debt comes to an agreement
with another to masquerade as a creditor who will procure the debtor’s sequestration
- Some individuals make their administration costs appear to be more just to increase the shortfall
between assets and liabilities.
- Furthermore, the result of incurring such administration costs obviously reduces the amount availabl
e fordistribution amongst concurrent creditors, ie the funds which can be used for partial payment
of the claims of genuine creditors which undermines the purpose of
sequestration for the "advantage of creditors".
- The court must be satisfied or have reason to believe there will be an advantage to creditors.
- However, an act of insolvency is an insufficient reason on its own for the belief that the sequestratio
n of his estate will be to creditors' advantage.
SUMMARIES OF THE PRESCRIBED ARTICLES
Boraine and Van Heerden 2010 PELJ 84 (article 1)
Summary of some of the aspects that the court could take into account when exercising its discretion in
respect of advantage to creditors in sequestration applications [para 2.2 of article]:
- Was there compliance with the procedural provisions and basic requirements?
- Court must consider taking a common-sense approach to the matter. What makes the most sense?
- A question the court must consider is whether a "substantial portion" of the creditors, determined
according to the value of their claims, will derive advantage from sequestration
- sequestration must not yield a negligible dividend
- did the debtor make use of debt repayment plans (Like ordinary composition with creditors based
on agreement?
- did the debtor make use of formal debt relief measures? (like administration ito the Magistrates Act
or debt restructuring/review ito the NCA)?
- How much income does the debtor have? (is he able to make the required payments?)
- Have creditors refused to grant the debtor a rescheduling of the debt?
- Is there a statement of assets and liabilities compiled by or on behalf of the applicant-debtor to
assist in making provisional calculations?
- Has the applicant (creditor) demonstrated a reasonable expectation that the anticipated payment to
him will exceed the proceeds of execution of the debtor’s assets?
- In the case in which execution is cheaper and more expeditious than sequestration and the applicant
is the sole creditor with judgment in his/her favour -> there will generally be no reason to believe
that sequestration will be to the advantage of creditors.
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- However, in the case in which the applicant has no judgment in his/her favour -> the particular
circumstances may be indicative that the machinery of the Insolvency Act will be quicker and more
effective than following the route of issuing summons and moving for judgment and execution
- It will be to the advantage of creditors if the estate vests in the trustee after sequestration, since the
debtor will then be prevented from further disposing of his/her property and the trustee will also be
able to reclaim certain estate property disposed of by the debtor prior to sequestration
- strong resistance against an application for sequestration by creditors on the basis that it is not to
their advantage should also direct the court in exercising its discretion to grant or to deny the relief
applied for
- a provisional sequestration order must first be considered before the court will decide on making it a
final sequestration order in case of compulsory sequestration
- Thus, even where all the requirements for granting a sequestration order are met, the court may
refuse the order if it amounts to abuse in one way or another
Summary of some of the reasons why sequestration proceedings are NOT ‘debt enforcement’ (based on
the nature of insolvency proceedings and how it differs from civil debt enforcement proceedings): [para 4.2
& 5 & 6.1 of article]
Para 4.2:
- The question whether an application for sequestration constitutes an application "for an order to
enforce a credit agreement" within the meaning of Section 130(1) of the NCA, depends on the
nature of the relief sought by the creditor and not on the sequestrating creditor's underlying motive
in bringing the application
- Consequently, whatever the underlying motive, an application for compulsory sequestration is not
barred by Section 130(1) of the NCA unless it is in fact (regarded as) an application for an order "to
enforce a credit agreement".
- Sequestration proceedings are instituted by a creditor against a debtor not for the purpose of
claiming something from the latter, but for the purpose of setting the machinery of the law in
motion to have the debtor declared insolvent.
o On the other hand, the purpose of debt enforcement is to enforce a debt (clearly this is not
the purpose of sequestration)
- No order in the nature of a declaration of rights or of giving or doing something is given against the
debtor (in sequestration proceedings)
o Whereas debt enforcement requires the debtor to do something -> pay his debts
- The order sequestrating his estate affects the civil status of the debtor and results in vesting his
estate in the Master.
o Debt enforcement does not result in the debtor’s estate being vested in another entity
- In sequestration proceedings, the court has to satisfy itself as to the correctness of the allegations in
the petition
- In sequestration proceedings, there is no claim by the creditor against the debtor to pay him what
is due nor is the court asked to give any judgment, decree or order against the debtor upon any such
claim
o Whereas debt enforcement is where the creditor wants to force the debtor to repay his debt
- 130(1) of the NCA therefore does not apply to a compulsory sequestration application of a
consumer's estate by a credit provider based on a claim in terms of a credit agreement between
them, as such application is "not one for an order enforcing the credit provider's claim against the
consumer".
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- Ito s9(2) of the Insolvency Act, the sequestrating creditor’s claim need not even be
due/enforceable (whereas debt enforcement requires the debt to be due and payable)
- an application for sequestration may be made on the strength of a claim that is not yet enforceable
because a sequestration order is not an order for enforcement of a claim
- The purpose or effect of the sequestration is thus merely to bring about a convergence of claims
against an insolvent estate to ensure that it is properly wound up in an orderly fashion and that
the creditors are treated equally
- The court pointed out that the reason that the applicant must have a liquidated claim against the
debtor is not because the application is to enforce the debt but to show that the applicant has a
sufficient interest in the application
Para 5:
- In the Investec v Mutemeri case, the crucial question is whether an application for (compulsory)
sequestration constitutes "debt enforcement" as meant by the NCA.
- The answer to this question is of extreme significance, as it can have severe implications for a credit
provider
- If the answer is YES, the effect would be as follows:
o where debt enforcement by compulsory sequestration is sought by a credit provider, such
credit provider will have to comply with the requirements of Section 129(1)(a) as a
mandatory step prior to debt enforcement as well as any other provisions of the NCA
relating to debt enforcement; or
o where debt enforcement by compulsory sequestration is sought against a consumer who (as
with the Mutemeris) is under debt review by the time that the application for compulsory
sequestration is brought, such pending debt review will as a result of the provisions of
Section 88(3) of the NCA constitute a bar against compulsory sequestration
o A credit provider who wishes to apply for compulsory sequestration would first be obliged to
deliver to the consumer a Section 129(1)(a) notice drawing the consumer's attention to
his/her default and requiring him/her to, inter alia, consult with a debt counsellor for
purposes of resolving a dispute or agreeing on a debt repayment plan
- If the answer is NO, the effect would be as follows:
o a credit provider can apply to have a consumer sequestrated without having to comply with
Section 129(1)(a) as a prior step or without having the worry that a pending debt review
might trigger the bar contained in Section 88(3) of the NCA, as such bar is only operative in
respect of debt enforcement by litigation
- the court submitted that the answer to the question should be NO. sequestration does not
constitute debt enforcement as referred to by the NCA
- To adopt the view that compulsory sequestration amounts to debt enforcement would be too
simplistic
- Application for compulsory sequestration does not result in a civil judgment and does not convert
the credit provider into a judgment creditor (this is not the case wrt debt enforcement)
- Other arguments that may be raised as to the nature and purpose of sequestration as compared to
ordinary debt enforcement is that the insolvent estate vests in the trustee, thereby preventing the
debtor from further disposing of estate property
- In this regard, the Insolvency Act clothes the trustee with extensive powers to trace estate property
that could be utilised to pay creditors by holding interrogations and reclaiming property
- The sequestration order crystallises the insolvent's position; the hand of the law is laid upon the
estate, and at once the rights of the general body of creditors have to be taken into consideration.
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No transaction can thereafter be entered into with regard to estate matters by a single creditor to
the prejudice of the general body.
- It must be mentioned that some insolvency law commentators refer to insolvency as a collective
debt-collecting device as opposed to the ordinary debt collecting mechanism (aka debt enforcement
by way of summons followed by judgment and execution)
- While debt enforcement has a strong and necessary relationship to insolvency proceedings, it has its
own important and independent role to play in an economic system. Insolvency proceedings are not
effective tools for debt collection as such. A collective proceeding is too cumbersome and expensive
to be useful for the purpose of forcing payment of a particular debt.
- Sequestration also sometimes affects creditors in the sense that contribution may be levied from
them in certain instances (creditors do not have a risk of paying contributions when it comes to
debt enforcement)
Para 6.1
- Given the extensive nature of sequestration, it is submitted that it should rather be viewed as a sui
generis mechanism that sets a collective procedure in motion aimed at administering an insolvent
estate on behalf of the insolvent's group of creditors in order to achieve an equitable distribution of
the insolvent's assets
- Compulsory sequestration is not a debt enforcement procedure as envisaged by the NCA although
one of its many effects, as with the case of voluntary surrender, is that the claims of creditors are
paid as provided for by the Insolvency Act
- The fact that compulsory sequestration does not amount to debt enforcement and that
sequestration is not barred in terms of the NCA does not, however, mean that the NCA cannot still
have an influence on insolvency law
- whereas voluntary surrender and compulsory sequestration are both forms of sequestration,
different considerations apply in each instance, which may have an influence on their possible
interaction with the NCA
Roestoff and Coetzee 2012 SA Merc LJ 53 (article 2)
Summary of some the aspects a judge hearing an application for sequestration can consider, in respect of
debt review as an alternative option for the applicant-debtor, to decide whether there is advantage to
creditors or whether the debtor should rather be referred to a debt counsellor ito S85:
Para 3.2 of article:

- Before reading, note: if the debtor has applied for debt review, this does not bar/prevent the
creditor from bringing an application of sequestration against the debtor. However, the creditor
cannot bring the application for sequestration based on the fact that the debtor has applied for
debt review
- One of the aims of the National Credit Act is to provide for debt relief through debt re-organisation
in cases of over-indebtedness
- S86 contains the major debt relief mechanism introduced by the NCA, namely, debt review
- The process commences with the application of a consumer to a debt counsellor to be declared
over-indebted and to be placed under debt review. Once the consumer has applied, the debt
counsellor must inform all the consumer's creditors as well as all registered credit bureaux of the
application.
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- Debt counsellor may propose that the Court declare one or more of the credit agreements to be
reckless credit.
- Once the Magistrate's Court has made an order rescheduling the consumer's debt, the consumer
must abide by it.
- The debt review procedure places no monetary limitation on the total outstanding debt
- debt review is evaluated as a debt relief measure intended to serve as an alternative to
sequestration, one cannot ignore its intrinsic shortcomings. In the first place, the Act only applies to
credit agreements as defined in s8. Debts that are not incurred under these agreements will
therefore be excluded from the debt review procedure
o such as delictual claims, clothing accounts, professional services as well as municipal
accounts where no interest is charged
- Another exclusion relates to agreements where the credit provider has proceeded to take steps to
enforce the agreement
- The provisions of s 86(2) would bar the consumer from including that specific agreement in the debt
review procedure as soon as a s 129(1)(a) notice has been delivered in respect of that specific credit
agreement
- The debt review process does not require the consumer to show an advantage to credit providers
- At a procedural level, debt review poses various difficulties that are due mainly to the limited and
somewhat inelegant provisions of the Act in this regard.
- In addition, the debt review procedure is not aligned with existing civil procedure. Consequently,
credit providers often use procedural gaps to oppose applications for debt review solely on technical
grounds
- the debt review process will not provide debt relief to debtors who do not have sufficient income
to repay their debt
- In practice debt review has proved to be effective only for consumers who can be described as
'mildly' over-indebted.
Further summary of other paragraphs (related to ex parte Ford case):

- the Court in Ex parte Ford created a further prerequisite for voluntary surrender applications: debt
review in terms of s 86 of the National Credit Act.
- the Court refused to exercise its discretion in favour of the applicants for an order for the voluntary
surrender of their respective estates, because it found that debt review was the appropriate
mechanism to be used.
- The Court pointed out that a referral of the matter to a debt counsellor in terms of s 85 of the
National Credit Act might eventually result in the credit agreements being declared reckless credit,
and being set aside or suspended. (credit agreement was a lot compared to Ford’s income)
- the Court indicated that the applicants had no choice in the matter, because it found that they had
no 'constitutional right' to acceptance by the Court of the surrender of their estates 'as the primary
object of the machinery of voluntary surrender is not the relief of harassed debtors'.
- It is submitted that the Court in Ford essentially placed a new stumbling-block in the way of debtors
wishing to use the sequestration process as a form of debt relief
- The courts decision in Ford was a creditor-orientated decision (as it was in Mutemeri as well)
- As a result of Ford. debtors electing for voluntary surrender as a form of relief may be compelled to
consider debt review even though it may probably not provide a workable solution to their debt
problems.
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- It is submitted that in voluntary applications Parliament should expressly provide that the court,
when exercising its discretion to grant a sequestration order, should take into consideration the
debtor's interests regarding what the best solution for his or her debt problems would be.
Evans 2001 SA Merc LJ 485 (article 3)
- it is perfectly legitimate for a creditor to take insolvency proceedings against a debtor for the
purpose of obtaining payment of his debt. (however, not all sequestration proceedings bear fruits)
- friendly sequestration = This manner of compulsory sequestration is usually engineered by means of
s 8(g) of the Insolvency Act.
- In terms of s 8(g), a debtor commits an act of insolvency if he or she gives notice in writing to any of
his or her creditors that he or she is unable to pay any of his or her debts.
- it should be remembered that, whether in the form of a voluntary surrender or a compulsory
sequestration, sequestration proceedings are statutory mechanisms designed primarily in the
interest of creditors and not for the relief of debtors who find themselves in financial difficulties.
- As long as the requirements of s 9 have been met, the court should consider exercising its discretion
in favour of an order for sequestration.
- Leveson J in fact avoided setting practice guidelines for ascertaining an acceptable dividend for
creditors because he realized that the court would be encroaching on the functions of the
Legislature.
- What is the debtor to do, then, when, through no fault of his or her own, he or she is unable to pay
his or her debts and is not in a position to produce assets sufficient to show an advantage to
creditors?
- Statutory remedies may be sought in terms of the Magistrates' Courts Act by applying, for
instance, for an administration order.
- The premise of Schedule 4 of the Draft Bill is that the debtor should not be left to the mercy of his or
her creditors. It is therefore a magistrate who must decide whether the debtor can offer
substantially more to creditors than that offered in the composition. No advantage to creditor
necessary.
- The South African Law Commission appears to be in agreement with this statement in its attempt to
align future legislation with present times. The proposals in Schedule 4 of its Draft Bill appear to
bring about the much-needed solution to fill the lacuna in this field of the law.
Mabe and Evans 2014 SA Merc LJ 651 (article 4)
- Circumventing advantage to creditors = abuse of court process.

- This abuse may occur where the costs of sequestration exceed the alleged shortfall between
assets and liabilities; where the costs reduce the amount available for distribution to creditors;
and where the costs favour administrators rather than creditors.
- Voluntary surrender places a heavy burden of proof to show advantage to creditors.
o Sections 3 and 6 of the Insolvency Act contain the requirements for the petitioning for the
acceptance of the surrender of a debtor's estate.
o Court will accept voluntary surrender if:
§ if the debtor is insolvent
§ if he owns realisable property of sufficient value to defray all costs of sequestration
which will in terms of the Act be payable out of the free residue of the estate;
§ be to the advantage of creditors of the debtor if the estate is sequestrated.
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- Compulsory sequestration is less burdensome on creditors because the court will grant if; there is a
valid claim for sequestration, the debtor has committed an act of insolvency and if there is reason to
believe that sequestration will be advantageous to creditors. (reason to believe = court grants a
provisional order)
- Section 9 Petition for sequestration of estate.
- There are eight acts of insolvency that are set out in section 8 of the Act.
- The act of insolvency that is of specific importance for the content of this article can be found in
section 8(g) of the Insolvency Act.
- This act of insolvency has however resulted in the abuse of the process of the court in compulsory
sequestration proceedings, resulting in what is referred to as 'friendly sequestrations'.
- This occurs where creditors applying for the sequestration of debtors' estates are family or friends of
the debtor.
- If this is done merely to assist the latter debtors to escape the payment of their debts, and to
achieve speedy rehabilitation, it is an abuse of the process of the court.
- Overburdened people apply for surrender even if their liabilities don’t exceed their assets and they
don’t even administer their financial affairs properly.
- The requirement for voluntary surrender is more stringent because debtors have the intimate
knowledge that creditors do not have. (debtors can make full disclosure)
- full and frank disclosure along with clear proof of the relevant facts = no sign of collusion in
friendly sequestration
- debtor having locus standi =requires documentary proof.
- Valuation and complete list of assets is required.
- 'the friendly creditor makes no effort to have a trustee appointed or to prove his claim, no creditor
takes steps to prove a claim because of a fear of contribution, the debtor waits for the dust to
settle and with his old creditors off his back carries on business as normal -> In situations such as
these the sequestration of the debtor's estate cannot be said to have been to the advantage of
creditors.
- Level of disclosure must be decided on a case-by-case basis.
- The court said the following should therefore be applied to voluntary surrender applications:
available documents to support the averments made should be put up; and courts should require
admissible evidence in support of these applications, rather than bare averments by the applicant or
pieces of paper supposedly supplied by persons who express opinions on the value of assets,
unsupported by affidavits, cogent reasoning or relevant qualifications.
- A consequence of some of these judgments regarding abusive practices is that courts in different
divisions have set down practice guidelines to be followed in sequestration proceedings in order
to assure advantage to creditors and to prevent abuse generally.
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WEEK 7 - THE EFFECTS OF SEQUESTRATION
THE INSOLVENT LOSES CONTROL OF HIS ESTATE
What happens after the sequestration order is given?
- Insolvent debtor loses control of his estate

- Estate vests in the master of the HC -> thereafter it vests in the trustee (after he has been
appointed) -> vesting happens by operation of law
o Estate no longer vests in the insolvent or his curator bonis (if he has one)
- Trustee then collects the debtor’s assets, sells them, and uses the proceeds to pay the creditors
o The trustee does this in his capacity as trustee of the insolvent estate (not in his personal
capacity)
- Debtor receives notice of final sequestration order

- Debtor must provide info to master regarding his assets, liabilities, documents, and records
- The debtor (and his spouse if he is married in community of property) must lodge a statement of
affairs to the master within 7 days of the order
- Automatic rehabilitation occurs 10 years after the seq order is given
- Sheriff must attach and make a list/inventory of all the moveable property of the estate (S19 IA)
o This excludes property that secured creditors are holding onto (e.g. where there is a pledge
or right of retention to protect their security)
- Collected cash must be sent to the master and arrangements must be made for the safekeeping of
the moveable property
- Sheriff must report (in writing) to the master that the attachment process is complete
- If any property is in the possession of a lawful possessor of a pledge -> sheriff must report this to the
master
- Sheriff must give copy of inventory to the master
- Sheriff is compensated according to a Tariff
- Publication of notice of surrender prevents/stops sheriffs from selling property or distributing
proceeds to the creditors
- In order to make sure that the assets of the insolvent estate are not unlawfully disposed of -> there
are additional parties that need to receive notification of the sequestration (hereafter ‘seq’) order:
o Registrar of deeds who deals with immovable property
o Sheriff of every district where insolvent resides or conducts business
o Officers that work with the contents of ships
o Officers who are holding any of the debtor’s property under attachment
- Who sends the notice? -> the registrar of the court
- What happens if the insolvent unlawfully disposes of immovable property or a right to such property
that is supposed to form part of his insolvent estate?
o Trustee has a right of recourse to recover the value of the property or the rights to
immovable property which were alienated/disposed of by the insolvent IF:
§ The 3rd party knew that the asset formed part of the insolvent estate OR
§ The 3rd party did not give sufficient value for the property
o If the trustee does not institute his recourse action -> the creditors can do it on his behalf
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Insolvent’s assets at the date of sequestration:
- General rule = all assets belonging to the debtor fall into the insolvent estate and vest in the master
and then the trustee. HOWEVER, there are exceptions to this rule
o The exceptions apply ONLY to natural person debtors
o They do NOT apply to juristic persons
- Even once the estate has vested in the trustee, the insolvent debtor still has an interest in the estate
o What does this mean? -> if the debtor was not factually insolvent OR his assets increased in
value, then after rehabilitation the insolvent becomes entitled to any residue of his estate
after all the debts have been paid
o Additional funds may help the insolvent secure an earlier rehabilitation if he does not wish
to wait 10 years
- Assets acquired before seq -> form part of the insolvent estate (why? Bc these were the debtor’s
assets AT the time of sequestration) (these are the insolvent’s assets at the date of seq)
o There are 8 exceptions
- Assets acquired after seq but before rehabilitation -> form part of the insolvent estate
o There are 4 exceptions
- It is important to know what constitutes “property” for the purposes of insolvency bc certain
property falls into the insolvent estate, whereas other property is excluded or exempted from falling
into the insolvent estate (in other words, some types of property that the debtor owns is NOT
available for liquidation + will form part of a separate estate for the debtor that is out of the
trustee’s reach)
o “included” property = assets that constitute ‘property’ ito S2 IA and fall into the insolvent
estate
o “excluded” property = assets that do not form part of the S2 IA definition of property and
thus do not fall into the insolvent estate
o “exempted” property = assets that would fall into the insolvent estate if we followed the
normal rules BUT are regulated by special rules and statutes that provide that they should
not be included in the estate
What is “property”? -> definition in S2 of IA

- = all moveable and immoveable property situated in RSA and includes certain contingent interests in
property other than the contingent interests of a fidei commissary heir or legatee
o Immoveable property = land and every right or interest in land or minerals which is
registrable in any office in the Republic intended for the registration of title to land or the
right to mine
o Moveable property = every kind of property and every right or interest which is not
immovable property
o Property situated outside of SA -> special rules that trigger cross-border insolvency
(exempted from forming part of insolvents estate in certain circumstances)
o Property does not include the contingent interests of a fidei commissary -> see
fideicommissum exemption/exclusion below
- Property also includes assets owned by the insolvent at the time of seq as well as assets acquired
after seq but before rehab
- Property also includes conditional rights
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o Note: a right is not conditional if it is in the discretion of a 3rd party to grant the right to the
acquiree
- Debts payable to the insolvent constitute the property of the insolvent estate and must be paid to
the trustee
o If they are paid to the insolvent himself -> the debt obligation is not terminated for the 3rd
party debtor unless he can prove that he was bona fide and had no knowledge of the seq
- Rights of inheritance comply with the definition of property and thus also form part of the insolvent
estate
o Aka if the insolvent inherits property/assets -> his right to this inheritance and his actual
inheritance will form part of his insolvent estate
o However, this is not the case if the insolvent repudiates the inheritance before or during his
seq (in other words, a repudiated inheritance will not form part of the insolvent estate)
o Why? Bc the insolvent no longer has a right in such property as required by the S2 definition
of property (this was held in Wessels NO v De Jager NNO 2000 (4) SA 924 (SCA))
- Remember: certain assets are statutorily excluded or exempted from forming part of the insolvent
estate of a natural person debtor. Why? -> to enable the debtor to maintain himself and his family
even during the process of seq
Assets (acquired before sequestration) that do not form part of the insolvent estate:
(1) Clothing and household furniture (s82(6) IA)
- Clothing and bedding as well as furniture and tools -> excluded from insolvent estate (meaning that
the trustee cannot sell these assets to pay the creditors)
- There are conflicting judgements on whether the debtor may waive his rights to such protected
property (aka what happens if a debtor WANTS his clothes and furniture to be sold with the view of
increasing his assets in order to prove advantage to the creditors?)
- The latest judgement on this issue says that the debtor may not waive these rights
o Why? -> bc the exemption is intended to preserve the right to life and dignity of the
insolvent and enable the insolvent and his family to rebuild their lives. the exemption was
not created with the intention to be waived
o See Ex parte Kroese and Another 2015 (1) SA 405
o This is also discussed in Evans 2018 De Jure 298 (the author agrees that it should not be
waived but questions the reasonings behind the exemption)
(2) Life insurance policies
- Life insurance policy = policy taken out by the debtor so that if the debtor becomes injured or
disabled then he can get money, or if he dies then his dependents (spouse, child etc.) can get money
- A life insurance policy has a monetary value and will technically form part of the assets of the
insolvent estate bc it constitutes ‘property’ ito S2 IA. HOWEVER, life insurance policies are statutorily
exempted from forming part of the insolvent estate (this exemption only applies to certain types of
insurance policies – not all of them)
o Life, disability, and health policies -> exempted from insolvent estate (payouts from these
policies cannot be used to settle the insolvent’s debts unless he has ceded these benefits as
security for his debt)
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o Other polices (such as damage to property policy) -> not exempted (and thus form part of
insolvent estate)
- Exemptions of long-term insurance benefits from an insolvent estate are provided for in S63 of the
Long-term Insurance Act 52 of 1998 (this Act was amended in 2014)
o Before the 2014 amendment: only R50 000 of the insurance policy (that was at least 3 years
old) was exempted/protected from forming part of the insolvent estate. Any amount
exceeding R50 000 was included in the insolvent estate
o After 2014 amendment: the entire sum of the insurance benefit (that is at least 3 years old)
is excluded from the insolvent estate
- Policies must have been in force for at least 3 years prior to sequestration of the debtor and must
not serve as a security for a debt of the debtor
o Personal rights under an insurance policy entail an incorporeal asset that can be pledged to
a creditor via cession in securitatem debiti.
o In other words, sometimes debtors willingly use their insurance policy payouts as collateral
for repayment of their debts. If this occurs, then the insurance policy (an encumbered asset)
cannot be excluded from the insolvent estate bc there is a secured creditor that needs to be
paid from this asset.
- If the debtor purchased something (a benefit) with the money from the insurance payout -> this
asset he bought/received is excluded from the insolvent estate
o However, if this benefit was received more than 5 years before insolvency -> then the
insurance payout or the assets bought with it will not be exempted from the insolvent estate
- The policy will also not be exempted from the insolvent estate if it was taken out with the intention
to defraud creditors
- Summary: an insurance policy will be exempted from the insolvent estate if:
o It is a life, disability, or health policy
o It is at least 3 years old by the time sequestration occurs
o It is not an encumbered asset serving security for a debt
o Any benefit received from its payout is not more than 5 years old by the time seq occurs
(3) Fideicommissum
- A fideicommissary’s contingent interest in property does not vest in the insolvent estate unless the
actual right accrues to the insolvent before his rehabilitation
Example:
- A (grandfather) is the owner of the farm, who determines in his will that B (son) will inherent the
property but that, in when B dies, C (grandson) will inherit the farm.
o Fiduciary = B
o Fideicommissary = C
o Fiduciary interest = the property
o C’s contingent interest = his right to the property once B dies
- If C’s estate is sequestrated while B is alive -> C’s contingent interest in the farm does not form part
of the insolvent estate (why? Bc the property only vests in C when B dies)
o Even though the farm does not yet belong to C, C cannot alienate/dispose of his right to the
property without the written consent of his creditors (why? To protect the creditor’s
interests)
- If B dies before or during C’s sequestration but before C’s rehab -> the actual right in the property
will accrue to C and will form part of the insolvent estate
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- If B is the one who gets sequestrated -> the property will vest in his insolvent estate. But then what
about C’s right to the farm after B’s death?
o The farm must be sold subject to C’s rights (stated differently: the trustee is entitled to
realize the asset, but realization is subject to the fideicommissary burden)
o This means that if a mortgage bond is registered over the property (aka the property is
encumbered) and C is unable to fulfil the mortgage obligation -> the property will be sold
and the proceeds will be used to pay the secured creditor
- Fideicommissum = contingent right that is excluded from the insolvent estate
- Other types of contingent rights are included in the S2 definition of property and thus form part of
the insolvent estate
- A person has no contingent right if it remains within the discretion of a third person to grant such a
right
(4) Trust property / assets in trust
- Assets/funds held in trust (trust property) do not form part of the trustee’s personal insolvent estate
- Trusts established by a written trust document are kept separate from the insolvent estate
- This is a statutory exemption regulated by:
o S12 Trust Property Control Act
o S88 Legal Practice Act
o S4(5) Financial Institutions (Protection of Funds) Act
(5) Property of third parties (S24(2) IA)
- Property that is in the possession of the debtor but that does not belong to the debtor -> does not
form part of the debtor’s insolvent estate (why? Bc the property belongs to someone else)
- Examples of such property:
o Property loaned/borrowed to the debtor
o Property leased to the debtor
o Property sold to the debtor which has not yet been delivered
o Property acquired by the debtor as an agent for his principal
- How should 3rd parties protect their property?
o They (as true owners of the property) must notify the curator bonis, trustee, or master in
writing that he is the rightful owner of the property and that he is reclaiming it (s36(5) IA)
o If the trustee has already sold the property in good faith -> the 3rd party owner can reclaim
the net proceeds of the sale before the trustee’s final account is confirmed
(6) Agricultural credit
- This exemption applies where the debtor is a farmer + the creditor is the Land Bank
- This exemption is regulated by S90 IA and S33 and S34 of the Land Bank Act
- The Land Bank has special rights that allow it to bypass the reqs and restrictions imposed on other
creditors. -> Land Bank can apply to the court to prevent certain property of the debtor from being
vested in the trustee and may also remove such property from the insolvent estate
- The Lank Bank can choose to go along with seq and be treated like other creditors OR it can choose
to enforce its statutory rights under the Land Bank Act
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o If they choose the second option -> the Land Bank can attach and sell the debtor’s assets
over which it has security without having to follow the normal court procedures (prescribed
by the IA) to enforce the debt / realize the asset
o If they choose the first option (or if the court does not grant an order allowing Land Bank to
enforce the first option) -> Land Bank must follow the procedures set in the IA like all the
other creditors
- The Land Bank can do this even if the debtor’s property has already vested in the trustee
- Trustee is not allowed to sell property mortgaged to the Land Bank to secure advances by the Bank,
unless:
o the Bank agrees in writing to that sale or
o has failed to sell that property within 3 months
(7) Property subject to a restraint order
- S36 and s36 of the Prevention of Organized Crime Act excludes property subject to a restraint order
from being included in the insolvent estate
- What if the restraint order was issued after the sequestration order?
o The liquidator is entitled to deal with such assets
o In other words: the trustee is allowed to realize those assets
(8) Assets situated outside of SA / foreign property
- Cross border insolvency is when seq is granted in one jurisdiction (usually the country where the
debtor is domiciled) while the debtor owns property in a different jurisdiction as well
- Foreign property does not constitute property as per the s2 definition in the IA and is not regulated
by the IA rules
o If we cannot follow the IA rules when it comes to foreign property, then what rules do we
look at? -> we have to look at the common law rules of Private International Law
o Is there no other SA legislation we can look at instead? -> no. SA does have the Cross-Border
Insolvency Act 42 of 2000 that came into force in 2003. However, this Act will only take
practical effect once the minister of justice designates certain countries to which the Act will
apply (the minister has not done this yet). The countries that are not designated will still be
governed by the private international law rules. This creates a dual system of law
- Majority of countries/jurisdictions follow a territorial approach to situations like this
o This means that a foreign country will not just accept the ruling or sequestration order from
another country
o In order to deal with the foreign assets, the trustee must first apply to the (foreign) court to
be recognized by the foreign jurisdiction as an appointed trustee of the insolvent estate
o If the foreign court rejects the seq order or does not recognize the appointment of the
trustee -> trustee must consider opening a concurrent insolvency proceeding in the foreign
jurisdiction (in this case, there will be a multiplicity/plurality of insolvency procedures)
- Moveable property in a foreign jurisdiction:
o Vests in the local insolvent estate automatically but only if the seq order is granted by the
court where the debtor is domiciled (the local jurisdiction)
o Why? -> moveable assets follow the debtor
o It is recommended that the trustee apply for recognition to make dealing with the assets in
the foreign land easier for him (recognition = recommended formality)
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- Immovable property in a foreign jurisdiction:
o Does not vest automatically in the (local) insolvent estate
o Why? -> the law of the foreign jurisdiction where the property is situated governs the asset
o It is a requirement that the trustee apply for recognition so that he can deal with the asset. If
the trustee does not obtain recognition -> asset remains vested in the insolvent and NOT in
the insolvent estate (recognition = essential requirement)
- What happens if a foreigner is sequestrated in another country but owns property in SA?
o A trustee appointed in a foreign jurisdiction can apply to the south African HC for
recognition of his appointment in SA
o SA court can also give specific orders or attach certain conditions to the recognition in order
to protect/safeguard the rights and interests of local creditors (e.g. foreign trustee must first
pay all the local SA creditors before taking the rest of the money out of SA to pay the foreign
creditors)
o Securing the interests of local creditors forms part of the territorial approach
o SA courts consider such applications from foreign trustees on the basis of comity and apply
convenience and equity when exercising such discretion
The homestead / family home:
- It can be seen that the family home of the debtor is NOT exempted or protected in SA law
- This means that the debtor’s house can be attached and sold to settle his debts
- This is problematic because the home is a basic necessity that provides shelter to the debtor
(infringes his S26 consti right to housing)
- However, the house is also the most valuable asset that can be used to prove advantage to creditors
(pro-creditor approach)
- So is the lack of a homestead exemption in SA law good or bad? -> There is lots of constitutional
debate around this
- Currently, if the debtor’s home is attached, the only protection he really has is the PIE Act
(Prevention of Illegal Eviction and Unlawful occupation Act)
- Reform is needed
- SA can learn valuable lessons from the UK approach to the homestead exemption
Assets (acquired after sequestration but before rehabilitation) that do not form part of the insolvent
estate:
(1) Inheritance and property bequeathed to an insolvent
Property bequeathed to an insolvent heir:

- If right of inheritance accrues before rehabilitation -> it vests in the trustee of the insolvent estate
(why? Bc the estate has an existing right to receive the inheritance – as opposed to a contingent
right)
- However, the right of inheritance only vests in the trustee if the insolvent heir ACCEPTS the
inheritance (this was held in Wessels NO v De Jager NNO 2000 (4) SA 924 (SCA))
- If he repudiates/rejects it -> the right will not vest in the trustee or form part of the insolvent estate
- This is allowed because repudiation of inheritance is NOT a disposition without value. Why not? Bc
there was no value to start with and there is no loss to the estate if the property is not inherited
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- Can a will contain a provision in terms of which the inheritance should fall to the heir alone and thus
should be excluded from his creditors? -> NO
o A testator is NOT capable of bequeathing an inheritance in such a manner that the
inheritance will accrue exclusively to the insolvent and thus deny the creditors and trustee
rights to the inheritance
- Are there ways to prevent an inheritance from failing into the estate? -> YES
o A testator may include a direction in his will stipulating that in the event of the heir
becoming an unrehabilitated insolvent at the death of the testator, the bequest shall pass to
some other person
Property bequeathed to a spouse of the insolvent:

- If a spouse who is married in community of property to the insolvent gets bequeathed an asset that
is meant for her alone -> it is possible that this asset will fall into her separate estate and not the
joint estate
- HOWEVER, if the spouse is married in community of property and has her own separate estate ->
the assets in this estate will still be available to sell and pay the creditors of the other spouse
o In other words, assets which are bequeathed exclusively to such a woman will vest in the
joint insolvent estate
o This was held in Badenhorst v Bekker NO [1994 (2) SA 155 (N) as well as Du Plessis v
Pienaar NO 2003 (1) SA 671 (SCA)
- In other words, just bc an asset is bequeathed exclusively for the solvent spouse and forms part of
her estate, does not necessarily mean that it cannot be used to settle the debts of the joint estate
- Why? Bc we do not look at where the assets are but we rather look at WHO the debtor is
- The spouse is a co-debtor of the debts/liabilities of the joint estate
- Any clause in a will that says that the separate asset is not available to pay the debts of the joint
estate has NO practical effect against 3rd parties
(2) Pension and damages
- The following things are excluded from the insolvent estate and can thus be retained by the
insolvent debtor:
o Pension (and like benefits) received in return for services provided by him
o Damages for defamation or personal injury suffered by him
o Award made by court order before seq
o Right to damages for medical expenses and loss of earnings + compensation for pain and
suffering arising from personal injury suffered by him
o Damages arises from adultery between the defendant and the spouse of the insolvent
- However, the insolvent is NOT entitled to retain compensation for damages that he suffered in his
business activities prior to sequestration
(3) Salary
- The insolvent may retain his salary/wages/remuneration for work done or professional services
rendered by him but ONLY the amount that is necessary to support himself and his dependents
(S23(9) IA)
- What if the insolvent is earning more than what is necessary to support himself or his dependents?
o Trustee may request the master to certify that he is entitled to the surplus
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o Any surplus income which the master thinks is not necessary for the support of the insolvent
or his dependents -> vests in the insolvent estate
o Only after certification by the master will the trustee be able to claim the surplus income
from the insolvent with a writ of execution issued by the master
o Trustee may also claim the surplus directly from the employer
- This means that the master can order the insolvent to pay a portion of his monthly income to the
trustee (if the insolvent receives a fixed income) (S23(5) IA)
- If the income is earned illegally -> full amount will vest in the trustee
- After sequestration but before rehabilitation -> insolvent is NOT allowed to cede his right to the
earnings
- There is also a duty on the insolvent to keep records of all of his disbursements and assets acquired
o Insolvent must also supply trustee with a statement at the start of every month (if requested
to do so)
o Trustee may inspect these records at all reasonable times
- What happens to assets purchased with the excluded salary money?
o Assets purchased by the insolvent with money he was entitled to retain for his own benefit
do NOT form part of the insolvent estate
o Until such time that the master certifies that the asset was bought with the surplus
remuneration
(4) Indemnification of a third party
- If the insolvent had insured himself against a particular liability and he incurs such liability against a
3rd party -> the 3rd party can claim damages directly from the insurer instead of from the insolvent
estate of the insured person
- What are the implications of this?
o The 3rd party does not need to stand in line as a creditor
o The insurance money will not fall into the insolvent estate but will be paid directly to the
injured 3rd party
(PERSONAL) EFFECTS OF SEQUESTRATION ON THE INSOLVENT
Insolvency Act 24 of 1936:

https://www.mylexisnexis.co.za/Library/Document.ashx?domainID=mprg&format=pdf&documentVersion=n
ull&displayVersion=null
Impact on contractual capacity:

S23(2) IA:
- Insolvent may continue concluding valid contracts EXCEPT for contracts that dispose of property in
the estate
- Contracts that will adversely affect the estate -> prior written consent of trustee is needed
o This indicates that the insolvent has limited contractual capacity (bc someone else’s consent
is needed)
o Trustee must lodge the consent with the master
o No consent -> contract = voidable (by the trustee)
S24(1) IA:
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- If insolvent alienates any property acquired after sequestration for consideration to a 3rd party ->
this alienation will be valid if the 3rd party (alienee) can prove that he was not aware that the estate
was under sequestration (this provision protects innocent 3rd parties)
o But if 3rd party cannot prove this -> alienation will be invalid
Impact on ability to follow certain professions:

- If the insolvent wants to carry on business or be employed in the business of a trader who is general
dealer or manufacturer -> he needs the written consent of the trustee
o This is to protect the general public
o Consent must then be lodged with the master
o Contravention of this rule = offence
o If trustee refuses to consent -> insolvent may appeal to the master whose decision is final
o General dealer and manufacturer are NOT defined in the Act
o But trader is defined as = any person who:
§ Carries on any trade, business, or undertaking in which property is sold or is bought,
exchanged, or manufactured for the purpose of sale or exchange, or
§ in which building operations of whatever nature are performed, or entertainment
planned, or
§ the business of a hotel owner or boarding-house owner,
§ or act as a broker or agent for another person for the sale of any property or the
lease of immovable property
§ except farming or the sale of his own products by a farmer
- an unrehabilitated insolvent can be disqualified from holding certain positions
- An insolvent may follow any profession/occupation EXCEPT for the following (found in the 2018
Roestoff article):
o An estate agent
o Manufacturer and distributor of liquor
o Credit provider, debt counsellor, payment distribution agent
o Dealer in secondhand hoods
o Pawnbroker
o Scrap metal dealer
o Auctioneer
o Financial services provider
o Attorney (unless he can still convince the court that he is a fit and proper person)
o Auditor
o An unrehabilitated insolvent can also not be:
§ A member of the national assembly, provincial legislature, or municipal council
§ A director of a company or close corporation (except with leave of the court)
§ Business rescue practitioner
§ A liquidator of a company or close corporation
§ The trustee of an insolvent estate
§ A member of a statutory board, council or body
Impact on ability to be sued:

- The insolvent may sue or be sued in his own name without reference to his trustee in any matter
relating to status (e.g. in a divorce matter) OR any right in so far as it does not affect his estate (e.g.
in a claim for maintenance)
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module.
- Cession of his earnings (after suing someone) after sequestration will be of no effect
- The insolvent may, for his own benefit, recover any pension to which he is entitled, compensation
for loss or damage bc of defamation or personal injury, and remuneration for work done after seq of
his estate
- The insolvent may also be sued in his own name for any delict committed by him after sequestration
Duties on the insolvent to assist the trustee in order for the trustee to do his job:
- Insolvent must lodge a statement of his affairs immediately upon being served with a final
sequestration order
- He must hand over to the sheriff all records relating to his affairs
- He must keep records of all his income and expenditure
- He must assist the trustee, before the second meeting of creditors, in the collection and transfer of
control of the property in the estate
- Within 14 days of the appointment of the trustee, the insolvent has to surrender all assets of the
estate still in his possession to the trustee, inform the trustee of any records and of the existence
and whereabouts of any assets which are not fully disclosed in his statement of affairs and not
already in the trustee’s possession (non-compliance constitutes an offence)
- The insolvent must also give written notice to the Master and the trustee if he knows that a false
claim has been proved against his estate or suspects that one is about to be proved, must notify the
trustee of the reasons for his insolvency, and keep the trustee informed of his residential and postal
addresses to which all notices ito the Act are to be sent
- Insolvent must attend the first 2 meetings of the creditors as well as all other meetings of creditors
where his presence is requested in writing by the trustee
- Every person who is actually insolvent and/or foresees the sequestration of his estate must not
alienate his assets or pay one creditor to the detriment of others
EFFECT OF SEQUESTRATION ON CURRENT LEGAL PROCEEDINGS AND EXECUTION OF JUDGEMENTS
Impact on pending legal proceedings: (S20(1)(b) IA)

- All civil proceedings instituted by or against the insolvent (except for proceedings regarding a right
or status, insofar as the estate is not involved), are stayed/suspended by sequestration until a
trustee is appointed
- After appointment of the trustee, creditors can continue with the proceedings against the trustee
and/or insolvent estate unless the trustee admits or settles the claim or refers it to arbitration
Impact on execution of judgements: (S20(1)(c) IA):

- Execution of judgement is stayed/suspended unless the court orders otherwise
- What happens to assets already attached and sold by the sheriff? -> the assets and their proceeds
vest in the insolvent estate
- Can the sheriff still pass transfer after the sale?
o No
o the effect that property sold in execution vests in the trustee precludes the sheriff from
passing transfer of the property to the execution purchaser
o SA has an abstract system of transfer
THE EFFECT OF SEQUESTRATION ON THE INSOLVENT’S SPOUSE
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module.
- Everything discussed under this section is dealt with in S21 of the IA
- Upon sequestration (aka when the seq order is granted) -> property of insolvent’s spouse vests in
the master and then the trustee
o This occurs regardless of whether they are married in or out of community of property
(however, for the purpose of this section of work we will be talking about spouses who are
married OUT of community of property)
o The trustee can deal with the solvent spouse’s property until the spouse proves to the
trustee that the property belongs to her
§ It can be seen that upon sequestration, the spouse’s solvent property ‘ostensibly’
belongs to the trustee (although in reality it still belongs to the spouse because they
are not the one being sequestrated)
§ The solvent spouse is NOT sequestrated. Only their assets are affected. The solvent
spouse still has full contractual capacity
o What is the reasoning behind this? -> laid out in Harksen v Lane -> to avoid collusion + to
prevent to prevent the insolvent from hiding his assets in his spouse’s separate estate
- Where the solvent spouse (e.g. wife) sells and transfers her property after the insolvent spouse’s
(e.g. the husband’s) estate is sequestrated -> transfer is voidable
o Trustee may rely on S25(4) IA to reclaim the value received by the solvent spouse
- What is the meaning of “spouse”? -> laid out in S21(3) IA
o “spouse” has an extended meaning
o -> includes a wife or husband that are married (both in the civil and customary sense)
o -> also includes persons (man and women) living together who are not married
o Because of S13 of the Civil Union Act, “spouse” also includes same sex partners who are in a
civil union together
o However, “spouse” does NOT include same sex partners living together who are NOT in a
civil union -> inconsistent with the consti and must be amended
What can the solvent spouse do to protect her property after it has vested in the master and then the
trustee?
(1) Solvent spouse can claim temporary exclusion (s21(10) IA)
- Solvent spouse can, by way of notice of motion, apply to the court for the temporary exemption of
the vesting of her assets in the trustee
- This is only allowed in 2 situations:
o Where the solvent spouse carries on business as a trader (independently from the insolvent)
or
o If the solvent spouse is likely to suffer prejudice due to the immediate vesting of her
property
- In both these instances, the solvent spouse must be willing and able to make arrangements to
secure the interests of the insolvent estate
o In other words, she must put up security to safeguard the interests of the insolvent estate ->
if court is satisfied then they may grant an order to exclude the solvent spouse’s property, or
part of it, for a certain period
o Thereafter, spouse must provide evidence to the trustee regarding her claim to the excluded
property
(2) Solvent spouse can claim permanent release of her assets by the trustee (S21(2) IA)
- Solvent spouse can claim release of her assets by lodging an affidavit. She must prove one of the
following grounds to the trustee:
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module.
o That the property was hers immediately prior to her marriage with the insolvent
o That the property was acquired by her under a marriage settlement ito an antenuptial
contract
o That the property is a policy protected in her favour
o That the property was acquired during the marriage but by a valid title against creditors of
the insolvent (ie. The property must belong to her in her own right)
o That the property was acquired with proceeds/income of any of the above-mentioned
property
- If the spouse proves her title -> trustee must release the property
- If trustee refuses to release the property -> spouse may apply to the court for an order declaring
that the property belongs to her + that the sale of the property must be suspended/stayed
o If her property has already been sold -> she may apply for an order declaring that she is
entitled to the proceeds
o Courts may grant whatever order they deem just
- If trustee releases the property -> it will go back to belonging to the spouse
What happens if the solvent spouse doesn’t take any steps to protect her property? (in other words, what
happens if no release is claimed?)
- If the property is not released, it will vest in the trustee -> trustee can sell the property to pay the
creditors of the insolvent estate (but not immediately)
o The property ‘ostensibly’ belongs to the trustee (although in reality it still belongs to the
spouse)
- If no release is claimed, the trustee cannot immediately sell the property. Ito S21(3) IA, the trustee
can only sell the spouse’s property if the following has occurred:
o The spouse is in the Republic
o The trustee is able to ascertain her address
o The trustee has given her written notice of his intention to sell her property + the trustee
has given her 6 weeks to claim release of the property
o The trustee has invited the creditors of the solvent spouse, by way of notice in the gov
gazette and the local newspaper, to prove their claims within a period of time determined
by the master
- What happens to the solvent spouse’s separate creditors in this instance? (S21(5)-(9) IA)
o They must prove their claims (against the insolvent estate) in the same manner as the
creditors of the insolvent spouse -> entitled to share the proceeds according to their priority
ranking
o Creditors of solvent spouse and creditors of the insolvent have the same rights, remedies,
and obligations as each other except for the fact that:
§ Creditors of solvent spouse do NOT have the duty to contribute
§ And they also don’t have the right to vote at a meeting of creditors
o Creditors of the solvent spouse will receive payment before the creditors of the insolvent
spouse (but internal ranking is still applicable)
o After the property has been sold and the proceeds have been distributed, if there is any
remaining proceeds -> it vests in the insolvent estate -> (concurrent) creditors who have
proved their claims can share in the proceeds but only after the property released has been
“excussed” (executed against)
Is S21 IA constitutionally valid? (look at Evans 1998 Stell LR 359)

97
module.
- It seems unfair that a spouse (married out of community of property) would have her assets vested
in the trustee just to settle her insolvent husband’s debts
- However, the CC in Harksen v Lane says that this section is constitutional + does not amount to
unfair discrimination
- In the past -> the onus was on the trustee to prove that the spouse’s assets ‘ostensibly’ belonged to
- S21 IA has shifted this ^ position
- Now, the onus is on the spouse to prove that her property belongs to her (this is much easier to do
than the previous position)
- There are also things the spouse can do to protect her property from being sold by the trustee
- For these reasons, amongst others, the court has found s21 to be constitutional
What happens if the solvent spouse commits an act of insolvency?

- If the spouse commits an act of insolvency after the vesting of her estate in the master or trustee
AND if the court is satisfied that that her act of insolvency is due to such vesting AND release has
been granted/applied for -> court may postpone an application for sequestration founded upon her
act of insolvency
- S21(11) IA
What is the position regarding donations between spouses?

- A solvent spouse who benefits from a (valid) donation is entitled to a release of such donated
property (S22 Matrimonial Property Act)
- A bona fide donation between spouses (e.g. from solvent spouse to insolvent spouse) are valid
- However, if the trustee is suspicious of the donation -> he can proceed against the spouse and have
the donation set aside as a voidable transaction (impeachable disposition)
o in which case the released property [the donation] can be reclaimed by the trustee
- Further detail provided in Evans 1998 Stell LR 359
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module.
WEEK 8 - ADMINISTRATION OF THE INSOLVENT ESTATE
APPOINTMENT OF A TRUSTEE
- The trustee is responsible for administering the insolvent estate

- Once the sequestration order is given -> estate vests in the master of the HC -> then a trustee is
appointed by the master of the HC -> then the estate vests in the trustee in his official capacity
- Both a provisional and a final trustee must be appointed
- Sometimes it can take long for a trustee to be appointed. If this happens then the applicant creditor
may, at his own cost, prosecute the proceedings until a trustee is appointed
o S14(1) of the Insolvency Act (‘IA’)
o This only happens with compulsory sequestration
o The creditor must be remunerated for doing this work. S14(2) IA says that the trustee must
pay the creditor out of the estate’s funds as a S97 cost
- The trustee has various duties, including:

o He must publish notice of his appointment and his address in the gov gazette
o He must call on the debtors to pay their debts
§ If debtor fails to respond -> trustee must collect the debt himself immediately
o As soon as the sheriff has completed the inventory of all the assets -> the trustee must take
charge of all the moveable property and get it valued
o He must check whether a claim, proved by a creditor at a creditor meeting, is due and
owing. He must notify the master of any disputed claims
o He must open a cheque account for the insolvent estate. All amounts received must be paid
into the account immediately
§ If the trustee fails to do this -> he must pay a fine equal to double the amount
retained by the estate
o He must record all amounts and make these records available to the master.
o He may not use the assets of the estate for any purpose other than for the benefit of the
estate
§ If trustee doesn’t do this -> he must pay a fine of double the value of the asset he
used
o He must call for a special meeting of creditors (upon request by the creditor)
o He must investigate the insolvent’s affairs (including the assets and liabilities of the estate)
and report them at the second meeting of creditors
o He must liquidate and realise (sell) the estate’s assets {if the creditors instruct him to do so).
The proceeds have to be distributed and the contributions (if any) have to be collected
o He must draw up reports (also known as ‘liquidation and distribution accounts’ and
‘contribution account’ [if applicable]). He must lodge these accounts with the master within
6 months of being appointed
o He must ascertain whether the correct information has been included in the sequestration
order
§ If amount is incorrect -> trustee must take all reasonable steps to obtain the correct
information
§ He must then send the correct info to the Registrar of Deeds + the master by means
of a certificate
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module.
- The trustee also has various powers, including:
o He can obtain legal advice to administer the estate
§ He needs authorization by the master to do this
o He can institute legal proceedings for the collection debts
o He can instruct an attorney to act on behalf of the estate
§ If the trustee does not obtain the necessary authorization to do this -> the trustee
will be held personally liable for the costs
o He can grant the debtors an extension of the time for payment of the debts
o He has the power to receive partial payment by a debtor as a full and final settlement
§ If amount is greater than R2000 -> he needs authorization from the creditors
o He can refer to or settle through arbitration
o He can continue with the business of the insolvent
§ Authorization of the creditors or master is necessary
o He can hand a notice to every registrar of deeds to place a caveat regarding the property
MEETINGS OF CREDITORS
- Insolvency proceedings are creditor-centered -> this means that creditors play a directory role ->
they can vote + provide instructions to the trustee
o S53 IA -> creditors may vote upon all matters relating to the administration of the estate.
However, they may NOT vote about the distribution of the proceeds
o S52(6) IA -> creditors may NOT vote on the question of whether steps should be taken to
contest/dispute his own claim/preference
- S40 IA provides for numerous meetings that the creditors may hold
- The first and second meeting of creditors are convened/appointed by the master
- First meeting of creditors:
o Trustee is elected
o Creditors must prove their claims
- Second meeting of creditors:
o Creditors may prove claims
o Trustee must report back on the affairs and condition of the estate (this is one of the
trustee’s duties mentioned above)
- Assets are usually sold after the second meeting
o However, trustee may sell the assets before the second meeting if he obtains consent from
the master
- The Act also makes provision for a general and a special meeting which are convened/appointed by
the trustee (not the master)
- S41 IA makes provision for a general meeting of creditors:
o Trustee must obtain instructions from the creditors at this meeting
- S42 IA makes provision for a special meeting of creditors
o Interrogation of certain persons must occur at this meeting
o Interrogation of who? -> the insolvent (S42(4)) + the claimant (S44(9))
- So there are 4 types of meetings for creditors
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module.
-
- The trustee needs to report on the following (S81(1)):

o Assets and liabilities of the estate
o The cause of the debtor’s insolvency
o Books relating to the insolvent’s affairs
o Whether the insolvent has kept proper records of his transactions
o In what respect the record is insufficient/defective/incorrect
o Whether the insolvent has contravened the Act or has committed an offence
- The creditors may provide instructions (to the trustee) on the following aspects (S81(1)):
o Allowances (ito S97 costs) made to the insolvent and reasons thereof
o Any business he has been carrying on on behalf of the estate
o Any goods he may have purchased for the business
o The result of carrying the business
o Legal proceedings instituted by or against the insolvent which were suspended by the
sequestration order
o Any executory contract for the purchase of immoveable property
o Every existing contract of lease
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module.
o Any matter regarding the administration of the estate
- The master may give guidance in the absence of instructions from the creditors in the following
instance (S81(2)):
o If no directions are given by the creditors, then the recommendations made by the trustee
are deemed to be given if the master approves of this
o The master may give further instructions to the trustee concerning the matters in the report
Voting (by creditors during the creditor meetings):
- A creditor may vote up to the full value of his claim UNLESS the Act expressly requires voting by
number
o Voting by number = every creditor has 1 vote
o Voting in value = vote is determined by the value of the creditor’s claim
§ The bigger the claim = the weightier the vote
- Voting by number (as opposed to value) is required when electing a trustee
- Only creditors who have proved their claims are entitled to vote -> there are exceptions to this
general rule where the creditor who has successfully proved his claim may either be prohibited from
voting, or their vote may be limited
When will creditors who have successfully proven their claim be prohibited from voting:
- A creditor may not vote if his claim is in dispute or if he has a conditional claim against the estate
- A creditor may not vote on a matter if the matter is already governed by legislation that may not be
overridden
- A creditor may not vote if the matter is too close to the creditor’s interest
o E.g.) if his vote determines whether his claim should be disputed or not -> he can’t vote on
this matter
- A creditor may not vote if his claim was ceded to him by another creditor after the commencement
of the sequestration application
o Cession is where the creditor who legally holds the claim against the estate is not the same
original creditor who held the right before the application commenced
- A creditor may not vote if his claim is smaller than R1000 AND the voting is taking place by way of
number (as opposed to value)
When will the votes of creditors who have successfully proven their claim be limited:
- In order to vote according to number (rather than value) -> the creditor has to have a claim of at
least R1000 against the estate
- A secured creditor may only vote insofar as his security does not cover his whole claim
o E.g.) when voting in value: if the secured asset is worth R80 000, but the secured creditor’s
claim is R100 000 -> then the amount that will be used to determine the weight of the
creditor’s vote is R20 000
o Value of secured claim – value of secured asset = value/weight of vote
o R100 000 – R80 000 = R20 000
- Creditors may vote on the manner in which the assets must be realized, but not on the distribution
thereof
o aka they cannot vote on how they will distribute the proceeds between themselves ->
proceeds have to be distributed according to their ranking
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module.
Proving claims (during the creditor meetings):
- Certain creditors are required to prove their claims (S44(1) IA)

o Which creditors? -> Any person or the representative of any person who has a liquidated
claim against the insolvent estate, the cause of which arose before the sequestration of
that estate…”
o In other words, the creditor must have a liquidated claim against the estate + the claim must
have arisen before the date of sequestration
§ Voluntary surrender: date of sequestration = date the insolvent surrendered his
estate
§ Compulsory sequestration: date of sequestration = date of provisional order
(provided that the order is made final later on)
- Proving claims is also important for contribution purposes (S106 IA)

o When the free residue is insufficient to cover the costs of sequestration -> the creditors who
proved their claims are liable to contribute towards the costs (S97 costs)
o Concurrent creditors’ contributions will be in proportion to the size of their claim
o Secured creditors’ contribution will be in proportion to the amount for which he would have
ranked upon the surplus of the free residue (if there had been any)
o Order in which creditors make contributions: applicant creditor -> concurrent creditors (2
types) -> secured creditors who relied solely on their security -> statutory preferent
creditors (only if all the concurrent creditors withdrew their claims) [a recap of contributions
has been provided at the end of this theme]
- Certain creditors do not need to prove claims

o E.g.) S98A(3) IA -> “an employee shall be entitled to salary, wages, leave, or other payments
even though he has not proved his claim ito S44. However, the trustee may require the
employee to submit an affidavit in support of his claim for such salary, wages, leave or
payment”
o Remember: if there are statutory limitations and a statutory preferent creditor does not
receive his full amount -> he does not have to prove his claim (for the outstanding amount)
if he doesn’t want to
o Statutory preferent creditors are listed in theme 4
- Creditors prove their claims by way of affidavit -> which is based on the pro forma form found in the
1st schedule of the IA
- The affidavit must be made by the creditor or another person who has full knowledge of the claim
- The affidavit must contain the following information (S44(4) IA):
o The facts upon which the knowledge of the claim is based
o The particulars of claim (+ attach the agreement on which the claim is based)
o Whether the claim was acquired by cession after the institution of the proceedings
o Whether the creditor holds security for his claim (+ the nature and particulars of that
security and the amount at which the security is valued)
- A claim against the insolvent estate for payment of the purchase of goods sold and delivered to the
insolvent on an open account are NOT submitted as proof UNLESS a statement can be submitted in
support of the claim that shows the monthly total and a description of his purchases (S44(6) IA)
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module.
- The affidavit and supporting documents must reach the office of the person who will preside over
the meeting of creditors -> NO later than 24 hours before the advertised time of the meeting (the
meeting where the creditor will prove his claim)
o The master presides over the first and second meetings
o The trustee presides over the general and special meetings
- How does the creditor know about the meeting?
o The master publishes a notice of the sequestration in the gov gazette (this is how creditors
know about the first meeting) (S40(1))
o The trustee publishes a notice in the gov gazette and a local newspaper (this is how creditors
know about the second meeting) (S40(3)(a))
o The trustee publishes notice in the gov gazette (this is how creditors know about the special
meeting) (S42(2))
- There are remedies for faulty claims (S44(4))

o If a creditor has proved an incorrect claim -> he may correct his claim or submit a fresh claim
provided that the following reqs are met:
§ He needs the written consent of the master
§ The consent needs to be obtained after consultation with the trustee
§ the conditions that the master sees fit must be complied with
- The documents (affidavit + supporting docs) are open for inspection by the creditors, the trustee,
the insolvent, or their representatives
- The claimant may be interrogated and may be asked questions about the claim (S44(9))
- What happens if the claimant fails to appear at the meeting or refuses to submit to the
interrogation?
o If he has already proved his claim -> his claim may be expunged by the master
o If he has not already proved his claim -> his claim may be rejected
- Claims may be withdrawn in terms of S51 IA
- S49 IA deals with claims against a partnership and the individual partners
- How are such claims dealt with when it comes to proving the claims and paying the claims?
o Creditors of the partnership shall not be entitled to prove claims against the estate of a
partner
o Creditors of a partner shall not be entitled to prove claims against the partnership estate
o Commissioner of SARS may prove a claim against the partnership estate iro any sum
referred to in S101(b)
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module.
- What happens when there are balances left over in an estate (be it the partnership estate or the
estate of one of the individual partners)?
o Trustee of the partnership estate shall be entitled to any balance of a partner’s estate that
may remain over after satisfying the claims of the creditors of the partner’s
o Trustee of a partner’s estate shall be entitled to any balance of the partnership’s estate that
may remain over after satisfying the claims of the creditors of the partnership estate
- There is a time-limit on proving claims (S44(1))

o A liquidated claim against the insolvent estate that arose before sequestration must be
proved at any time before the final distribution of that estate
- The claims do not all have to be proved at the first meeting. They can also be proved at the second
meeting
o A claim may not be proved after the expiration period of 3 months from the conclusion of
the second meeting of creditors (S44(1))
- The person who presides over the meeting of creditors accepts or rejects the claims
- All the claims are then delivered to the trustee who checks to see whether the estate truly owes the
amounts claimed to the creditor
- What happens to a claim that was accepted by the presiding officer but rejected by the trustee?
(S45(3))
o The master may confirm the claim, or he may reduce or disallow the claim
o The master must notify (in writing) the claimant of his decision
Election of a trustee (during the first meeting of creditors)
- Election of the trustee occurs at the first meeting of the creditors

- The trustee is elected by the creditors, but he is appointed by the master of the HC
- According to S54 IA, the creditors who have proved their claims may elect one or two trustees
- Provisional trustee:
o The master appoints the provisional trustee based on his discretion (whether or not there
are nominations by the creditors doesn’t matter so much here)
o Minister has discretion when it comes to the appointment of trustees -> confirmed in
Minister of Justice v SA Restructuring and Insolvency Practitioners Association
- Final trustee:
o Creditors elect a final trustee -> master considers the election and checks to see that the
nominated person is not disqualified -> then master appoints the trustee based on the
nominations
- There are 2 ways in which creditors can vote -> in value + by number
o Vote in value -> vote is determined by the value of the creditors’ claims
o Vote by number -> vote is determined by how many creditors there are
- If one person obtains a majority of votes in value, but another person simultaneously obtains
majority vote by way of number -> both will become the trustees (S54(3)(b))
o Example: creditor A has a claim of R50 000. Creditor B has a claim of R10 000. Creditor C has
a claim of R10 000. Creditor D has a claim of R10 000
o Creditor A votes for X to be the trustee. But creditor B, C, and D vote for Y to be the trustee.
o X has majority votes by way of value (R50 000 > R10 000 + R10 000 + R10 000)
o Y has majority votes by way of number (3 out 4 creditors elected him)
105
module.
o In this case, X and Y will be co-trustees
- If 1 person receives majority votes in value and in number -> they will be the sole trustee
- In practice: the master has a panel/list of insolvency practitioners (trustees and liquidators). The
creditors usually elect a trustee from this list and then the master will appoint the trustee
o The Act does not regulate the qualifications of insolvency practitioners
o The master has his own guidelines
Disqualifications to act as a trustee (S55 and S59 IA):

- According to S55 IA, the following persons are disqualified from being trustees:
106
module.
o
- According to S59 IA, the court may declare the following people be disqualified or be removed from
being a trustee:
o If the person accepted or expressed his willingness to accept a benefit from the estate from
a person engaged to perform work on behalf of that estate
o If the person induced a creditor to vote for him at the election by doing the following:
§ Wrongfully including or omitting the creditors name from any record
§ Offering the creditor consideration for his vote
§ Telling the creditor he will abstain from investigating previous transactions of the
insolvent
§ Splitting the claims for the purpose of increasing the number of votes
Interrogations (during the meeting of creditors):
- Interrogations = one of the procedures available under the Act to a sequestrated estate
- Interrogation means that certain persons are questioned and/or compelled to provide insight into
documents that pertain to the insolvent estate
- There are constitutional challenges to such procedures
- This is a formalized procedure with strict rules
- There are different forms of interrogations:
o Questions at the creditors meeting
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module.
o Private interrogations held by the master
o Interrogations held before a magistrate
§ If person fails to show up for this type of interrogation -> they can be sent to prison
o Section 65 interrogations (this is what we will focus on)
- Section 65 interrogations:
o More than just questioning
o Person must take an oath
o Person will be prosecuted for perjury if they lie under oath
o Person must answer all the questions
o If the answer will incriminate the person -> special provision is made for the interrogation to
be held ‘in camera’ + S65(2A) limits the admissibility of incriminating answers in criminal
proceedings
- See sections 64, 65, 66 of the IA
REALISATION (SALE) OF ASSETS:
Sale of assets AFTER the second meeting of creditors:
- The trustee is obligated to sell the assets after the second meeting of creditors (unless the sale is not
necessary to pay all the costs and creditors in full)
- This sale has to comply with the creditor’s instructions
- If no instructions were given -> assets must be sold by public auction or by public tender (bidding)
- S82 IA says: the trustee, auctioneer, their spouses, partners, employers, employees, and
representatives may NOT buy any of the insolvent’s assets UNLESS the court allows it
o Contravention of S82 will be valid ONLY if the buyer bought the asset in good faith
o However, even if the contravention is valid -> the trustee is liable to compensate the
amount of the loss which the estate suffered as a result of the contravention (S82(8))
o S82 does not apply if the assets were sold before the second meeting of creditors
Sale of assets BEFORE the second meeting of creditors:
- Assets may be sold before the second meeting of creditors if:

o It is necessary, AND
o Where the master gives his approval
- If no prior consent was obtained from the master -> sale is void + subsequent ratification would be
insufficient to validate the sale
- E.g.) Fresh produce must be sold as soon as possible
- E.g.) assets may be sold if their price/value suddenly increases (shares)
DRAFTING OF TRUSTEE’S ACCOUNTS
- The trustee has to show the creditors + the master how he administered the estate -> this is done by
way of drawing up accounts and attaching supporting documents
- Accounts are submitted to the master
- Final accounts have to be confirmed before the trustee can pay the creditors
Types of accounts:
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module.
- Liquidation account -> shows the following:
o Proceeds of sold assets
o Amounts paid by the trustee
- Provisional account -> describes:
o The assets that have not been sold
o The debts that have not been collected
o The reasons thereof
- Distribution account -> consists of:
o The encumbered asset account -> shows how the proceeds of the secured assets are to be
distributed
o The free residue account -> shows how the proceeds of the unencumbered assets are to be
distributed
o In practice: the liquidation and distribution account iro particular assets are pooled together
(remember ERF222)
- Trading account -> shows:
o How the trustee conducted the insolvent’s business
o Info on the stock at the date of sequestration
o Monies paid and received in the course of business
o Profits and losses
o If trustee didn’t continue the insolvent’s business -> there won’t be any trading account
- Contribution account -> shows:
o Who must contribute and how much
o How the contribution is calculated
o If there is no contribution payable -> there will not be a contribution account
- Final account -> shows:
o Amount that needs to be contributed
o Which creditors must contribute
o Amount of the creditors’ claims (this is used to determine the pro rata share)
o Amount that each creditor has to contribute
RECAP: Contributions
- Contributions = the money that creditors have to pay when there is not enough money in the
debtor’s estate to cover the s89 and s79 costs
- But which creditors have to pay these costs?
- Liability to pay contributions is determined by 2 factors:
o (1) which costs must be paid?
§ S89 costs? (these encumbered asset costs are paid from the encumbered asset
account)
§ S97 costs? (these sequestration costs are paid from the free residue account)
o (2) the category of creditor
§ Secured creditors who relied on their securities
§ The applicant creditor (this can be a secured or unsecured creditor)
§ Creditors with concurrent claims (normal concurrent creditors + secured creditors
who did not rely on their securities and claimed the outstanding amount from the
free residue as a concurrent claim)
§ Statutory preferent creditors
109
module.
Creditors contribute to the costs related to the account from which that creditor stood to benefit:
- Secured creditors contribute to the s89 costs
- Concurrent creditors (2 types) contribute to the s79 costs

- A secured creditor who relied solely on its security:
o is only liable to contribute to the s89 costs that relate to his specific asset/security (NOT to
other encumbered assets)
o generally not liable to contribute to the s97 costs of the free residue unless there are no
other types of creditors who can paid these costs
Free residue account:

- rules relating to the payment of s97 costs when there is not enough money in the free residue
account are contained in s14(3) and S106 of the IA
o s14(3) IA -> deals with the obligation of the applicant-creditor to contribute
o s106 IA -> deals with the obligation of the other creditors to contribute
- if there is only an applicant creditor and no concurrent creditors -> then the applicant creditor will
have to pay all the s97 costs himself
o there will always be an applicant creditor in cases of compulsory sequestration
o the applicant creditor is the creditor who brings the application to court and set the
machinery of the law in motion
o it does not matter whether the applicant creditor is a secured or unsecured creditor, and it
does not matter whether the applicant creditor proves his claim or not -> the applicant
creditor will always be liable to pay the s97 costs
- if there is an applicant creditor and concurrent creditors -> the applicant creditor and concurrent
creditors will share the s97 costs
o where there is more than 1 creditor liable for these costs -> all the liable creditors share the
costs pro rata (in proportion to their claim)
- if there is no applicant creditor (voluntary surrender) -> then the concurrent creditors will pay these
costs
o even if there is only 1 concurrent creditor -> he will have to pay all the s97 costs himself
- if there is no applicant creditor and no concurrent creditors -> then the secured creditor who relied
solely on their security will pay these costs (even though they did not benefit from the free residue
account)
o in other words, if there is no other type of creditor other than a secured creditor with no
concurrent claim (bc they relied solely on their security) -> then this creditor(s) will have to
pay the s97 costs
- if there were concurrent creditors to begin with who have now all withdrawn their claims AND paid
their contributions -> only then will statutory preferent creditors be liable to contribute
o 2 reqs for this rule to become applicable:
§ (1) there must have been concurrent creditors who proved their concurrent claims
AND
§ (2) these creditors must have withdrawn their claims and paid their shares of the
contribution due
o Even when creditors withdraw their claims, they must still play their part by contributing to
their share of the s97 costs up to the date of withdrawal (why? Bc sequestration was for
their benefit)
110
module.
WEEK 9
UNCOMPLETED / UNEXECUTED CONTRACTS
Difference between a trustee and a liquidator:

- For juristic persons -> a liquidator is appointed
- For natural persons + partnerships + trusts -> a trustee is appointed
- Trustee and liquidator do the same job
COMMON LAW POSITION (SCENARIO 1)

What happens to contracts that an insolvent person has entered into?
- Point of departure = the common law
- The contracts are still valid
- General rule = sequestration/liquidation of a party to a contract does NOT affect the
contract
o This is the general principle applicable to uncompleted contracts
o It means that duties and rights of the parties are not automatically terminated when
one of them becomes sequestrated
- NB - Insolvency does affect the right (remedy) of the solvent party to claim specific
performance against insolvent estate
- Can the solvent party to a contract enforce the contract (with specific performance) against
the insolvent estate that has been sequestrated? -> solvent person cannot enforce the
contract if the trustee has elected not to proceed with the contract
- Ito common law, trustee must make an election to proceed with the contract or not (when
the trustee makes this decision, he must act in the interests of the general body of
creditors)
o If the trustee elects to proceed with the contract -> he must honour all the
obligations ito the contract towards the solvent party
o If the trustee elects not to continue with the contract -> they must repudiate the
contract (NOT terminate or cancel the contract).
§ If you repudiate the contract, its a form of breach of contract
§ Repudiation of contract = a form of breach -> that means that the solvent
party will have the option to cancel the contract or claim damages
§ If the solvent party chooses to claim damages -> this constitutes a concurrent
claim against the insolvent estate
§ It can be seen that the normal contractual remedies are available to the
solvent party except for specific performance (held in Thomas Construction v
Grafton Furniture Manufacturers 1988)
- This ^ is the common law position if no legislation is applicable
111
module.
The need for legislative intervention:
- Strict application of the common law position (stated above) may lead to inequitable and
unjust consequences in respect of the certain transactions such as:
o Sale of immoveable property
o Lease agreements
o Cash sale of moveable property
o Credit sale of moveable property
o Contract of employment
o Transfer of business as a going concern
SALE OF IMMOVABLE PROPERTY

- Immoveable property is one of the exceptions to the common law position
- When it comes to immoveable property -> there are 2 instances in which issues/problems
may arise
o (1) Sequestration / liquidation of the insolvent seller before registration
o (2) Purchaser of the immoveable property becomes insolvent
Sequestration / liquidation of the insolvent seller before registration: (1st issue of sale of
immoveable property)
- Seller is sequestrated/liquidated before registration of the property
- But the purchaser has already paid part/all of the purchase price (so now the purchaser is in
a detrimental position and needs protection -> Alienation of Land Act (ALA) provides 3
forms of protection)
- Insolvent seller estate:
o Still holds ownership of the immovable property
o In terms of the common law: the purchaser only has a concurrent claim of damages
112
module.
S18-22 OF THE ALIENATION OF LAND ACT (SCENARIO 2)
- S18-22 of the Alienation of Land Act (ALA) says that if certain reqs are met, the purchaser
will have certain additional rights they would have had under the common law
113
module.
o Must be residential property
§ If we get a question on commercial property -> then the common law
position applies bc the ALA will only apply to residential property used for
residential purposes
o Purchase price of property must be paid in instalments over 1 year
o The land must be registrable in the deed’s office (transfer of land must be possible)
o The contract must be endorsed in the deed’s office
- When these reqs ^ are met -> S18-22 of ALA applies -> the purchaser may claim the transfer
of that land (this is a form of specific performance)
- If purchaser is not in position to take transfer -> they will have a preferential claim to
repayments of the amounts already paid (these amounts are paid out of the balance of the
mortgage bond)
- But what happens if you don’t pay in instalments?
- Sarrahwitz v Maritz case:
o Case where the immovable property is not paid for in instalments, but the full
amount was paid upfront
o CC held that if you are working with a purchaser who won’t have residence/a place
to stay if the seller gets sequestrated -> then the instalment requirement is
disregarded (if you are dealing with a vulnerable purchaser who may be rendered
homeless by the seller’s insolvency, the instalment requirement is scrapped)
- To answer a question in the test/exam, you discuss the Alienation of Land Act (the
requirements stated in the Act), but then remember that if you are dealing with a
vulnerable purchaser, you must apply Sarrahwitz and state that the ALA will protect those
vulnerable purchasers
S27 OF THE ALIENATION OF LAND ACT (SCENARIO 3)

- When the purchaser has paid 50% or more of the purchase price before the seq of the seller
-> purchaser can claim transfer of the property subject to registering a mortgage for the
outstanding balance
- Sarrahwitz will still apply
S26 OF THE ALIENATION OF LAND ACT (SCENARIO 4)

- ALA says no one is allowed to receive compensation for unregistrable land
- Compensation can only be received when the land is registerable, and the contract is
registered against title
- Sarrahwitz will still apply
114
module.
Purchaser of immoveable property becomes insolvent (2nd issue of sale of immoveable property)
- Trustee or liquidator must elect to either proceed or to terminate contract
- Must exercise election within a reasonable time
- Request to make election is possible
- Failure to make election within 6 weeks = seller can bring application to court ito S35
MOVABLE PROPERTY
- Sale of movable property is one of the exceptions to the common law position
- Can be a cash or credit sale ito the National Credit Act (NCA)
115
module.
116
module.
CASH SALE OF MOVABLE PROPERTY
- Transfer of movables occurs through delivery
- What if you don’t know if it’s a credit or a cash sale? -> presumption in favour of cash sale
(s36(2) IA)
- Ito the law of contract, there is a rebuttable presumption that all sales are cash sales
- Thus, when dealing with a cash sale -> transfer of ownership occurs takes place at the same
time as payment
- Example: you are a supplier who sells your car. It is a cash sale. The person you are selling
the car to is sequestrated. You deliver the car and now the purchaser doesn’t pay you. You
are STILL THE OWNER. You have a right to reclaim your car
- However, beware of s 36 Insolvency Act: if the purchaser doesn’t pay you -> you only have
10 days to reclaim the car. Otherwise ito the IA, ownership will transfer to the purchaser
and then you can’t claim back your car and you will just have a concurrent claim
CREDIT SALE OF MOVABLE PROPERTY

- Common law credit sales must be distinguished from NCA credit sales (instalment
agreements)
- Common law credit sale = If you postpone payment of the property sold -> ownership
immediately passes to the purchaser of the property (default position) UNLESS you reserve
ownership ito the contract
- Once ownership passes to the purchaser and the purchaser doesn’t pay the seller and gets
sequestrated -> the seller won’t have a right to reclaim the property bc they are no longer
the owner -> they will only have a concurrent claim to the purchase price
SALE ITO THE NATIONAL CREDIT ACT (INSTALMENT AGREEMENTS)

- Definition of instalment agreement is in s 1 NCA -> an instalment agreement has the
following elements:
o
- Possession and use is transferred, but ownership only passes when the purchase price is
fully paid OR immediately subject to the right of the credit provider to repossess the object
of sale
- If the purchaser is sequestrated -> credit provider will be able to reclaim the property
117
module.
- But ito s 84 IA: the moment the purchaser is sequestrated -> ownership immediately passes
from the seller into the insolvent estate of the purchaser (seems unfair but creditor does
have compensation)
- But creditor does have compensation: seller’s ownership is replaced with a hypothec which
is a secured claim
- If that asset is sold -> the administration costs for seq will first be paid and then the seller
(creditor) will be paid bc of the secured claim
- Section 84 of the IA ONLY applies when the agreement is subject to the NCA
- Important for creditor to reserve ownership, otherwise ownership will pass ito the credit
agreement
- Summary: there are 2 important positions:
o Seller/creditor reserves ownership and then the purchaser gets sequestrated ->
ownership passes (S84 NCA) (cannot reclaim) (has concurrent claim)
o If ownership passes immediately and creditor only retains the right to claim
possession -> S84 NCA does not apply (bc ownership has already transferred) (can
reclaim) (has secured claim)
LEASE AGREEMENTS
- Leases are not automatically terminated by the sequestration of either parties’ (lessee or
lessor) estates
- Only S37 of the IA regulates lease agreements
- S 37 IA: any stipulations that a lease agreement terminates or is varied when sequestration
takes place is void
- Since there are no other provisions in the IA that apply -> the common law position applies
- Huur gaat voor koop applies (this is a common law principle)
- If lessee becomes insolvent -> lessor can have a secure claim if he attaches the moveable
property on the leased property (hypothec)
Mortgaged properties
- If there is a mortgage bond over the leased property:
- Trustee must sell the property subject to the lease agreement

- If price does not cover the outstanding mortgage, the property can then be sold without the
mortgage bond. NB: this is the position if the mortgage is passed before the lease
118
module.
agreement.
- If lessee is sequestrated -> look at S37 of IA

o Trustee may cancel contract, but lessor will have an unliquidated concurrent claim
for damages
o Upon cancellation -> estate loses the right to claim compensation for improvements
to the leased property unless lessor agrees otherwise
- If trustee does not cancel/repudiate the contract -> Agreement terminates by operation of
law, three months after the appointment of the trustee, unless trustee exercised his or her
election earlier.
- Lessor obtains a tacit hypothec (secured claim) on the property (S85 IA) -> secures lessor’s
claim for rent in arrears which was due before date of seq
- Rent due after date of sequestration -> becomes part of the sequestration costs -> lessor
has preferential claim
- S 37 and s 85 states the lessor’s rights if lessee is sequestrated
Claims of the lessor:
1. Secured claim –> tacit hypothec for arrear rent prior to sequestration
2. Preferential claim -> arrear rent after sequestration including costs of sequestration
3. Concurrent claim -> damages
EMPLOYMENT CONTRACTS
o If employee’s estate is sequestrated -> no effect on employment contract

o If employer’s estate is sequestrated -> S38 IA applies (termination of employment contract after
45 days + a preferential claim) -> but S197 of LRA also applies (additional protection in the
sense that the employee’s contracts will be automatically transferred if the employer’s business
is sold as a going concern -> so employees wont lose their jobs if employer is seq)
o Section 38 of IA
- When employer is seq -> employment contracts are suspended from date of
commencement for 45 days (after 45 days -> they lapse)
- Employees do not have to tender their services
- Employees are NOT entitled to remuneration
- Unemployment Insurance Act 63 of 2001 -> employees are still entitled to the
unemployment benefits under this Act (even though they are not technically unemployed)
o Contracts will terminate 45 days after appointment of a trustee/liquidator, if trustee does not
119
module.
make an election
o Suspended for 45 days and then they lapse
S 98A of the Insolvency Act 24 of 1936 – employee has a preferential claim

S 197 of the Labour Relations Act – transfer of contracts of employment
S 197A of the Labour Relations Act – contracts of employment – terminated or lapsed
(new business owner has to take over the employment contracts)
S 98A – employees have a preferent claim for:

Salaries wages –> Max 3 months and max R12 000
Leave accrued - year of insolvency or previous year –> max R4000
Other forms of paid absence –> Max 3 months and R4000
Severance pay –> R12 000
Contributions to pension fund, provident fund, medical aid or unemployment fund –> Max R12 000
Balance = concurrent claim
SUMMARY
- If you are the trustee/liquidator of an insolvent estate that consists of unexecuted contracts,
the point of departure is the common law
- You have a choice to either proceed with the contract (but make sure insolvent estate can
comply with obligations of the contract) OR other option is to repudiate the contract
- If the trustee repudiates the contract, the remedies for the solvent party is: a claim for
damages as a concurrent claim OR can cancel the contract
- Ito the contract: the solvent party CANNOT get an order for specific performance to enforce
compliance with the contract
- !"#$%&'($)*++*,$-./$0*('%'*,$1*2($34#$/*56$7*5$.--$%802($*7$)*,%5.)%($9)*,%5.)%($
52-.%21$%*$'++*:.;-2$05*025%8<$-2.(2(<$2+0-*8+2,%$)*,%5.)%(=$>$)*++*,$-./$
0*('%'*,$/'--$52(?-%$',$?,@?(%$)*,(2A?2,)2($
120
module.
PRACTICE QUESTIONS
Effects of sequestration on uncompleted contracts
● Answers given during the practical lecture are in blue
Dagny Taggart was sequestrated on 1 April 2022. Ms Bunny Seagull was appointed as her trustee
on 3 April. Kindly advise Bunny on each of the following issues:
1. Dagny owns a small apartment in Sandton, which she leases to Mattias. The lease expires in
December 2022, but the contract includes a clause stipulating that should one of the parties be
sequestrated, the lease will terminate automatically and immediately.
- Ito s 37 of the IA: parties may NOT stipulate in their contract that the lease agreement will
terminate or vary if one of the parties is sequestrated.
- This provision in the contract is void
- Bunny (trustee) has the option to decide whether to proceed with the lease or not
- If they do not proceed, they can repudiate the lease and the lessee (Mattias) will have a
concurrent claim
- Other than s 37, there are no other provisions in the IA that apply to lease agreements,
therefore the common law position applies
2. Dagny rents a premises in the Bellville Industrial Park, where she operates her candle making
business, Dagny’s Candles. The business is not operated as a company but under Dagny’s own
name.
- Now the lessee (Dagny) is being sequestrated

- Three months after the trustee is appointed, the lease agreement will terminate by
operation of law
- UNLESS the trustee exercised his election earlier than 3 months
3. Dagny sold a batch of candles to Candice, who sells candles at her (Candice’s) shop in the
Brooklyn Mall. In terms of the agreement, Candice could take delivery of the candles, which she did
before sequestration, but that ownership remained with Dagny until Candice has paid the full
purchase price, which has not yet happened.
- If you don’t know whether it is a cash or credit sale, there is a rebuttable presumption that
it is a cash sale
- Thus we must assume for this question that it was a cash sale (bc the facts don’t tell us if it a
cash or credit sale)
- Dagny is still the owner and has a right to reclaim the candles
121
module.
- However, beware of s 36 Insolvency Act: if the purchaser doesn’t pay you, you only have 10
days to reclaim the property. Otherwise ito the IA, ownership will transfer to the purchaser
and then you can’t claim back your property bc it is considered to be a credit sale and you
will just have a concurrent claim
- A letter of demand claiming back the candles must be set out by Dagny to Candice within 10
days ito s 36 IA
4. On 28 November 2021, Dagny concluded an agreement in terms of which she purchased a plot of
land in Durban. Registration of the transfer of ownership is scheduled for 1 June 2022.
- Purchased land before sequestration occurred (sequestration of buyer/purchaser before

registration of land)
- Trustee or liquidator must elect to either proceed or to repudiate/terminate the contract
- Must exercise election within reasonable time –> request to make election –> failure to
make election within six weeks –> application to court –> section 35
- If there are damages, there will be a concurrent claim for the damages
5. In 2016, Dagny concluded an agreement in terms of which she purchased a house (the one in
which she lives) from MacKenzie. According to the agreement, Dagny must pay the purchase price
in monthly instalments to MacKenzie. The total purchase price is R1 000 000 and by the time of
sequestration, Dagny has already paid a total of R600 000.
- Purchaser is sequestrated
- Trustee or liquidator must elect to proceed or to repudiate/terminate the contract (trustee
must see what will make the most business sense for the estate and the wishes/instructions
of the creditors must be kept in mind)
Lets say in this scenario the seller was sequestrated:
- Now it is a section 27 ALA scenario, bc purchaser has paid more than 50% of the purchase
price of the land
- Discuss requirements for s 27 ALA
- Sarrahwitz ).(2$/'--$.00-8$>$,*%$*,-8$05*%2)%',B$02*0-2$/&*$.52$;?8',B$',$',(%.-+2,%$
;?%$.-(*$%&2$:?-,25.;-2$0?5)&.(25$$
6. Dagny employs 10 people at her candle making factory. They are all members of CMWU – the
Candle Making Workers Union. It is not yet clear what will become of this business now that Dagny
has been sequestrated. One option is to close it down while another option is to sell it as a going
concern.
122
module.
- As soon as employer is sequestrated, employment contracts are suspended from date of
commencement ito s 38 IA
- Employment contracts are suspended for 45 days and then they terminate
- During the 45 days, trustee has duty to discuss and engage with employees, so employment
contract might not necessarily terminate after 45 days
- When a business is transferred as a going concern, the employment contracts are also
transferred (ito Labour Relations Act)
- Employees have a statutory preferent claim (s 98A) AND the balance of their claims will be
concurrent claims
- C&.%$'7$2+0-*822($1*$/*56$1?5',B$%&2$(?(02,('*,$>$%&2'5$52,?+25.%'*,$7*5$%&'($%'+2$
/'--$7*5+$0.5%$*7$%&2$)*(%($*7$(2A?2(%5.%'*,$
7. Dagny drives a fancy BMW. She purchased in two years ago under an instalment agreement and
still owes R15 000 to the dealership.
- Lets assume credit agreement was ito NCA

- Creditor’s position (BMW dealership) -> what rights do they have?
- Creditor still has ownership transferred to the insolvent estate and is replaced with a
hypothec at time of sequestration (ownership replaced with hypothec at time of seq)
- Effect of hypothec: BMW’s claim is now a secured claim (bc of hypothec)
- S 84 IA
- What if NCA was not applicable?

- Creditor’s (BMW’s) position: ito the common law, the creditor can reclaim the property
- If it is a common law credit agreement, s 84 does NOT apply
- Ownership passes immediately ito a common law credit agreement
- So if ownership immediately passed to Dagny, the creditor will not be able to reclaim the
property
- BUT if they reserved ownership in the contract, they can reclaim
- 2 scenario’s ito the common law credit agreement:
1. D27.?-%$()2,.5'*E$*/,25(&'0$0.((2($'++21'.%2-8$%*$%&2$0?5)&.(25$*7$%&2$
05*025%8$>$)521'%*5$FG334#$52)-.'+$%&2$05*025%8
2. F521'%*5$52(25:21$*/,25(&'0$>$)521'%*5$).,$%&2,$52)-.'+$%&2$05*025%8$
9*/,25(&'0$).,$*,-8$;2$52)-.'+21$'7$'%$&.($;22,$52(25:21=
8. On 15 March 2022, Dagny concluded a contract to purchase a new dalmatian puppy for R5 000.
123
module.
The arrangement is that she can pick up the puppy on 15 April and also pay the R5 000 on that day.
- Puppy is movable property

- Rebuttable presumption it is a cash sale (bc facts don’t stipulate which one it is)
- Trustee will not want to pay R5000 for puppy
- Trustee will mostly likely elect to repudiate this contract
EFFECT OF SEQUESTRATION ON PARTNERSHIPS:
- If partnership estate is sequestrated -> partner’s estate are also sequestrated -> termination
of partnership relationship occurs
- If individual estate of a partner is sequestrated -> dissolves partnership relationship
EFFECT OF SEQUESTRATION ON CONTRACT OF MANDATE
- When the estate of the mandator is sequestrated -> the contract of mandate is terminated
124
module.
WEEK 10 – IMPEACHABLE TRANSACTIONS + VOIDABLE DISPOSITIONS
Introduction:
- Common law remedies and statutory mechanisms sometimes allow assets to go back into
- Sometimes an insolvent can anticipate his insolvency, so he chooses to alienate his most
valuable assets -> prejudice to creditors
- 3 things we must look at:
o Actions that cause insolvency
o Actions that increase insolvency
o Transactions that prejudice creditors (by changing their ranking etc.)
- These sorts of actions ^ violate the concursus creditorium principle (all creditors must be
treated equally)
- Impeachable transactions/dispositions can either be:
o Fraudulent conveyances (where the disposition of property causes or increases the
insolvency) or
o Preferences (where certain creditors are preferred above others)
- Disposition of asset = transfer of asset, donate asset, providing surety for asset etc.
- Remember the affidavit must state that sequestration will be to the advantage of creditors
and proof must be attached to support this allegation
- One way to prove advantage to creditors is by indicating to the court that certain
dispositions were made (without value, undue preferences etc.)
Keep the following in mind:

- There are 5 main/umbrella things an insolvent can do to prevent his assets from forming
part of his insolvent estate -> these actions are called impeachable transactions (these
actions/dispositions occur before the sequestration order has been granted)
o Disposition without value
o Voidable preference
o Undue preference
o Collusive dealings before sequestration
o Voidable sale of business
- If a transaction is set aside as an impeachable transaction -> the asset will go back into the
insolvent estate
- The trustee wants the asset to back into the insolvent estate so that he can sell it and
distribute the proceeds among the creditors
- However, the insolvent or the party who benefited from the impeachable transaction does
not want the asset to go back into the estate (because then the asset/money will be taken
out of their hands and they might get a lower value for it at distribution)
- There are certain remedies/protections available to the trustee to protect his interest of
wanting the asset to fall back into the insolvent estate:
o Actio pauliana
125
module.
o S26 IA (for dispositions without value)
o S29 IA + Gore case (for voidable preferences)
o S30 IA (for undue preferences)
o S31 IA (for collusive dealings)
o S34 (for voidable sale of business)
- If the trustee can prove the reqs for the relevant section -> transaction will be set aside (and
asset will go back into the insolvent estate)
- There are sometimes protections/defences available to the spouse of the insolvent or a
creditor who benefitted from the transaction:
o S27 IA (for dispositions without value between spouses or children)
o Gore case (for voidable preferences)
- If beneficiary can prove these reqs ^ for the relevant transaction -> transaction will not be
set aside (asset will remain with the beneficiary)
- What happens after a transaction is set aside? What are the consequences?
o According to S32(3) IA, the court can declare the transaction void and order the
asset (or the value thereof) to go back into the insolvent estate
o The value of the asset is the higher amount at the time of the disposition or when
the order is made
126
module.
ACTIO PAULIANA
- This is a remedy where you don’t need a sequestration order (this is an exception to the
general rule relating to the other remedies -> you need a seq order before you can rely on
them)
- This is a common law remedy
- Any action aimed at defrauding the creditors can be set aside by the actio pauliana (it does
NOT matter whether the person has been sequestrated or not)
- The following must be proven (for the action to be set aside):
o The assets of the person/debtor alienating the property are diminished by the
alienation (aka there must be less assets than there were before)
o The recipient/beneficiary must not have received his own property/asset to which
he was entitled
o The debtor/alienator must have had the intention to defraud his creditors
§ If the debtor received value for the asset -> the recipient must have been
aware of such intention to defraud (aka they must have acted in bad faith)
o The defrauder must have caused determinantal consequences for the creditors (aka
the alienation must have increased or caused the insolvency of the debtor)
DISPOSITION WITHOUT VALUE (impeachable transaction umbrella no. 1 -> dealt with in S26 IA)
- Transaction occurs -> seq is granted -> transaction is voidable -> need to approach court to
set aside the action ito S26 IA
- Timing is important (2-year period must be kept in mind)
- If you are a trustee who wants to set aside a disposition that was made MORE than 2
years prior to the sequestration:
o Trustee carries the onus of proving that the liabilities of the insolvent exceed the
assets bc of that particular transaction
- If you are a trustee who wants to set aside a disposition that was made LESS than 2 years
prior to the sequestration:
o The person benefitting from the disposition has the onus of proving that the
transaction did not cause the insolvency of the insolvent
- Such transactions are referred to as ‘dispositions’ -> define in S2 of the IA and means = any
transfer or abandonment of property or rights to property, including:
o Sale, lease, mortgage, pledge, delivery, payment, release, compromise, donation, or
any contract providing therefor
o Also includes contract of suretyship
- ‘Disposition without value’ examples -> fraudulent conveyances:
o The person donated something without receiving any value
o Hiding your valuable assets in anticipation of sequestration
127
module.
§ E.g.) You own a R5 million Porsche. You know you are going to be
sequestrated soon. You don’t want the trustee to take away your Porsche, so
you register it in your friend’s name. This is a disposition without value bc
your friend does not pay you for the Porsche. This is money that the insolvent
estate loses.
§ E.g.) If the friend buys your Porsche for R50 000 -> this still constitutes a
disposition without value even though the insolvent receives R50 000. Why is
this a disposition without value? -> bc the value of the Porsche is a lot higher
than what it was sold for. This is money that the insolvent estate lost.
Therefore, this transaction can be set aside by the trustee. There was
intention to reduce the assets in the insolvent estate (which is a prejudice to
creditors)
o The sale of property for a trifling consideration (selling an asset worth R5 million for
R1 million)
o If someone owes me money. I anticipate that I will go insolvent, so I tell my friend
they don’t have to pay me back (aka I waive my right / write it off) -> this is a
disposition without value. Trustee can set this aside and claim the debt.
o If I have a cheque written to me but I cede the right to claim my cheque to my son
during the application of my sequestration -> this is a disposition without value
o If debtor A has creditors C, D and E, and he disposes of numerous assets to these
creditors but only the assets he disposes to E causes an increase in insolvency or
causes his liabilities (R60 000) to exceed his assets (R20 000), can the trustee reclaim
the previous dispositions that the debtor made during that time or only the specific
disposition that led to the increase the debtors insolvency?
§ You have to look transaction by transaction -> what was the effect of that
transaction?
§ The moment that particular transaction caused the liabilities to exceed the
assets -> the transaction can be set aside for the value by which it caused the
liabilities to exceed the assets (R40 000)
o One form of a disposition is giving security. this often occurs in groups of companies.
There is a parent/holding company and a subsidiary company. The parent company
need money and borrow it from the creditor. The creditor says they need security.
parent company doesn’t have security to offer but the subsidiary company has lots
of assets. The small company provides security for the loan. The moment the big
company becomes sequestrated -> the security to the creditor of the parent
company can be set aside as a disposition without value
- Note: repudiation of inheritance by an insolvent heir is NOT a disposition without value

o Why? -> the heir only has a competence to accept the inheritance, he does not have
a right to accept it
o E.g.) If son inherits R1 million but the son is insolvent and then he repudiates the
inheritance -> the trustee cannot set aside the repudiation (bc the right to
inheritance was only a hope, it did not yet vest in the son)
128
module.
o This was held in Wessels NO v De Jager NO 2000 (4) SA 924 (SCA)
- When looking at transactions between the insolvent and his spouse

o The moment the insolvent is sequestrated, the assets of his spouse also vest in the
master and then the trustee (regardless of how they are married) (S21 IA)
o Spouse has to claim back the assets belonging to her (burden of proof rests on her)
o Also includes donations to children -> look at S27 IA (reqs must be met for
transaction not to be set aside)
o When can donations/dispositions between spouses not be set aside? (S27 IA)
§ Donation must be made within 3 months from the date of marriage
§ Spouse (who made donation) got sequestrated after 2 years of registration of
the ante-nuptial contract
o If donation was made ito an ante-nuptial contract -> spouse can attach the ante-
nuptial contract as proof that the asset belongs to her -> will then be released from
VOIDABLE PREFERENCES (impeachable transaction umbrella no. 2 -> dealt with in S29 of IA)
and
UNDUE PREFERENCES TO CREDITORS (impeachable transaction umbrella no. 3 -> dealt with in S30
of IA)
- This is where the conduct of the insolvent interferes with the ranking of the creditors
- What’s the difference between these preferences?
o A s29 voidable preference -> court will look at the effect of the transaction
§ E.g.) did the transaction cause the insolvent’s liabilities to exceed his assets?
§ S29 is only applicable to transaction made within 6 months prior to
sequestration
o A s30 undue preference -> court will look at the debtor’s intention
§ Why did he pay A more than B even though the debts are the same?
§ Trustee must prove this
o It is easier to prove the effect of a transaction rather than the intention of a
transaction
- Applicable case law for this section: Gore NO and Others v Shell South Africa (Pty) Ltd
[2003] 4 All SA 370 (C)
o This case explains what the requirements and defences are for a voidable
preference
o E.g.) you received payment from the insolvent -> trustee approaches you and says
you must pay back that money -> you want to bring up a defence against this claim
of the trustee
o What must the trustee prove?
§ There was a disposition (made within 6 months prior to seq)
§ The disposition was made through a creditor
§ The effect of the disposition (liabilities must exceed assets), and
129
module.
§ The effect happened immediately after the disposition was made
o What should the beneficiary prove in defence? (see further explanation on page 573
of textbook)
§ The disposition was made in the ordinary course of business
• This is an objective test -> look at business customs, trade usages etc.
+ disposition must be legal
§ There was no intention to prefer one creditor above another
• This is a subjective test -> intention of the debtor must be inferred
from the surrounding circumstances
- Also look at Langeberg Koöp Bpk v Inverdoorn Farming and Trading Co Ltd 1965 (2) SA 597
(A)
COLLUSIVE DEALINGS BEFORE SEQUESTRATION (impeachable transaction umbrella no. 4 -> dealt
with in S31 of IA)
- This is where two or more parties are intentionally working together to think about how to
prefer one creditor over another
- Bottom line: all the parties working together have the intention to defraud
- Effect of this transaction if they are caught:
o Those parties who worked together must make good any loss to the insolvent estate
o The court can impose a penalty on them that must be paid
o Those parties will lose their claim against the insolvent estate
VOIDABLE SALE OF A BUSINESS (impeachable transaction umbrella no. 5 -> dealt with in S34 of IA)
- This is where a person has worked hard to get a business up and running -> then they
anticipate they will become insolvent / be sequestrated -> so they donate or sell the
business to someone else to get it out of their estate
- S34 states that if a trader transfers his business to someone else, there is a publication
requirement:
o Transfer must be published not less than 30 days before transfer and not more than
60 days before transfer
o Must be published in the gov gazette -> in both Afrikaans and English
- The moment you advertise the transfer of the business -> all the creditors of the business
can claim (doesn’t matter when the claim becomes due and payable) -> this is to ensure
that the creditors get paid before the business is transferred
Practice question 1
Susan and Hank are married out of community of property and they each have their respective
businesses. Susan makes curtains and Hank has a textile shop. Hank’s estate is sequestrated on 5
May 2020 after his business began to experience financial difficulties in 2018. Hank often gave
Susan fabric to make curtains and only received payment after the client settled Susan’s account
for the curtains. On 5 February 2020, Hank gave Susan fabric to the value of R50 000 for curtains
that she had to make for three different clients (Client A = R20 000, Client B = R15 000 and Client C
130
module.
= R15 000). On 5 March 2020, Client A pays only R10 000 and Clients B and C do not pay at all.
Susan therefore pays Hank the R10 000 and tells him that she doesn’t know when she will be able
to pay the outstanding R40 000. Hank feels sorry for her and writes off her debt by giving her a
letter stating that she does not owe him any amount for the fabric delivered on 5 February 2020.
Identify the type of impeachable transaction that is relevant here and provide comprehensive
reasons for your answer by referring to the facts set out above and what must be proven before
the court will set aside such transaction. Also indicate whether your answer would change in any
way if Hank gave Susan the fabric on 5 February 2018 and the letter on 5 March 2018.
What type of impeachable transaction:

- Debt owed to you constitutes ‘property’ ito S2 IA
- Writing off a debt = a disposition of property (R40 000 owed to Hank) without value
- This is dealt with in S26 of the IA
- R50 000 is owed to Hank. Susan only pays him back R10 000. Hank’s estate has lost out on
R40 000. He writes this off (waives his right to payment) and thus loses R40 000 in value.
Although he receives money, there is a disposition of R40 000.
What must be proven before court will set aside the transaction:
- Susan must prove that this transaction did not cause Hank’s estate to become insolvent (S26
IA)
o If she can prove this -> disposition will not be set-aside
o If she cannot prove this -> disposition will be set-aside
Reason for answer:
- Timing is important
- Timing will give an indication of who bears the burden of proof
- If you want to set aside a disposition that was made LESS than 2 years prior to the
sequestration -> the person benefitting from the disposition has the onus of proving that
the transaction did not cause the insolvency of the insolvent
- Sequestration date = 5 May 2020. Date of disposition = 5 Feb 2020. This is LESS than 2 years
- Therefore, Susan bears the burden of proving that this transaction did not cause Hank’s
estate to become insolvent
What if Hank gave Susan the fabric on 5 February 2018 and the letter on 5 March 2018?
- What will change in your answer -> the burden of proof
- Now the trustee bears the burden of proving that Hank’s assets exceed his liabilities
because of this transaction with Susan.
- Why? -> because the disposition (Feb/March 2018) was made MORE than 2-years before
the date of sequestration (May 2020)
Practice question 2
Johan and Susan got married out of community of property on 1 May 2020. On application by
Catipec Bank, one of Johan’s many creditors, a final sequestration order was granted in respect of
131
module.
Johan’s estate on 1 May 2021. Before his marriage to Susan, Johan was the owner of a holiday
house in Clifton Cape Town. In the year preceding sequestration the following events, which are
relevant with regard to the sequestration of Johan’s estate, occurred:
On 1 June 2020 ownership of Johan’s holiday house in Clifton, Cape Town was transferred to Susan
after registration of the holiday house on Susan’s name in the Deeds Office. The transfer occurred
in terms of a provision in the couple’s (duly registered) ante-nuptial contract that the holiday house
had to be transferred to Susan after conclusion of the marriage. The ante-nuptial contract was
registered in the deeds Office on 1 April 2020.
On 1 August 2020 Johan borrowed an amount of R10 000 from his friend, Tebogo. The agreement
between Johan and Tebogo was that Johan would pay back the money by the end of the year
(2020). When it later became clear that Johan experienced financial problems, Tebogo insisted that
Johan should immediately pay back the money. On 1 September 2020 Johan paid the full R10 000
to her.
Identify all the voidable (impeachable) transactions in the above set of facts. Also explain what
must be proved before the court will set aside the specific transaction and also who bears the
onus of proof.
- Test tip: do not get overwhelmed with the number of transactions. Deal with each
transaction individually. We need to be able to analyse what is relevant to which transaction
- Test tip: the fact that they have provided a date of the marriage indicates that this question
is different to practice question number 1 (which stated that they were married but did not
give the date -> so we know that their marriage was not important in that question)
Identity the voidable (impeachable) transactions:

Transfer of Johan’s holiday house to Susan:
- This is a disposition of property between spouses
- This constitutes a disposition without value (bc Johan did not get any value back from
Susan after donating/transferring his house to her ito the ante-nuptial contract)
- Ito S27 IA, donations (dispositions) between spouses are protected from being set-aside
when the following 2 reqs are met:
o Donation must be made within 3 months from date of marriage
o Spouse (who made donation) got sequestrated after 2 years of registration of the
ante-nuptial contract
- In this case, the facts tell us the following:
o Antenuptial contract was registered in April 2020 (contract said that house must be
transferred to Susan once they are married). Johan and Susan got married in May
2020. Holiday house transferred to Susan in June 2020.
è Therefore, the disposition was made within 1 month from the date of marriage (1st
req has been met)
o Antenuptial contract was registered in April 2020. Hank’s estate was sequestrated in
May 2021.
132
module.
è Hank was sequestrated 11 months after the antenuptial contract was registered (2nd
req has NOT been met)
- Therefore, this disposition (without value) can be set aside by the trustee ito S26 IA because
one of the S27 reqs were not met (both have to be met) (S27 does not protect this
disposition)
- According to S27 IA, Susan bears the burden of proving that the holiday house belongs to
her (she can prove this with the antenuptial contract)
Payment of R10 000 to Tebogo:

- Johan paid Tebogo first. Johan’s conduct has thus interfered with the ranking of creditors
- There are 2 options with this sort of transaction
o It is either a voidable preference ito S29 or
o It is an undue preference ito S30
- S29 is only applicable to transaction made within 6 months prior to sequestration (not
longer)
- In this case, the facts tell us the following:
o Johan was sequestrated in May 2021. He paid Tebogo back in Sep 2020.
o This transaction was made 9 months prior to the sequestration. S29 would only
apply if the transaction was made 6 months prior (so in Dec 2020)
- Therefore, s29 does not apply to this transaction -> we must rely on S30
- Ito S30 undue preference, the intention of the debtor must be proven
- In this case, the facts indicate the following:
o The following things indicate that Johan intended to prefer Tebogo above his other
creditors:
§ The fact that Johan and Tebogo were friends
§ The fact that Johan paid Tebogo back in full
§ The fact that Johan was willing to adhere to Tebogo’s demand despite the
fact that they agreed that he could pay her back in instalments until Dec
- Intention is a subjective test but you measure it against the objective facts that you have
(the circumstances)
- The trustee bears the burden of proving the Johan had the intention to prefer Tebogo over
the other creditors
What happens if Johan paid Tebogo back in Jan 2021?

- Johan paid Tebogo first. Johan’s conduct has thus interfered with the ranking of creditors
- There are 2 options with this sort of transaction
o It is either a voidable preference ito S29 or
o It is an undue preference ito S30
- S29 is only applicable to transaction made within 6 months prior to sequestration (not
longer)
o In this case: Johan was seq in May 2021. He paid Tebogo back in Jan 2021.
o This transaction was made within 5 months prior to the sequestration
o Therefore, S29 applies
133
module.
- A voidable preference ito S29 is easier to prove (just have to prove the effect of the
transaction rather than Johan’s intention)
- Effect of transaction = Johan preferred Tebogo (they agreed to pay in instalments and then
suddenly Johan pays Tebogo everything)
- According to the Gore case, the trustee must prove that:
o There was a disposition -> (Johan paid Tebogo money)
o The disposition was made through a creditor -> (Tebogo was the creditor bc Johan
owed her money)
o The effect of the disposition -> (one creditor was preferred above the rest)
o The effect happened immediately after the disposition was made
Practice question 3
Bakkies Cage was sequestrated on 1 February 2020. He owned a hardware shop as a sole
proprietor, which he bought with funds that he borrowed from ABC Bank. The loan from ABC Bank
had to be repaid in instalments of R15 000 per month.
On 1 December 2019, Bakkies bought stock for the festive season from Ghert. As always, Ghert was
only willing to sell the stock on a cash basis, he required full payment against delivery of the stock.
In order to pay the purchase price of R10 000, Bakkies sold his Ford to Themba for R50 000.
Themba gave Bakkies R20 000 in cash and they agreed that the rest of the money would be due in
instalments of R2 000 at the end of every upcoming month.
Bakkies transferred R10 000 into Ghert’s account and Ghert brought the stock to the shop. Bakkies
did not have any other funds or assets available and could only pay ABC Bank R5 000 that month.
Notwithstanding that Bakkies’s insolvent state continued after paying Ghert, Bakkies chose not to
pay ABC Bank the next two months and rather gave the money to Kiki, because he entered into an
agreement with her to buy a new fridge.
Discuss the transactions between the various parties above. You have to determine whether or
not the transactions can be set aside as impeachable transactions.
Transaction with Ghert:

- Bakkie paid Ghert the full amount but did not pay the bank the full amount owed to them.
He preferred to pay Ghert the full amount rather than the bank.
- This could be either a S29 or a S30 transaction -> depending on how you interpret the facts
AND motive your answer
- Note: if both sections can apply -> it is easier to prove s29 reqs than s30 reqs (test tip)
- If we talk about S29 -> we have to discuss BOTH what the trustee must prove AND the
defences available to the creditor (both of these are set out in the Gore case)
If you say S29 must be applied to the Ghert transaction:

- S29 is only applicable to transactions made within 6 months prior to sequestration (not
longer)
o In this case: Bakkie was seq in Feb 2020. He paid Ghert in Dec 2019.
o This transaction was made within 3 months prior to the sequestration
o Therefore, S29 applies
134
module.
- A voidable preference ito S29 is easier to prove (just have to prove the effect of the
transaction rather than Johan’s intention)
- Effect of transaction/payment to Ghert = Bakkie preferred Ghert above the bank (Bakkie
knew he had to pay the bank R15 000 that month. Ghert wanted R10 000. Bakkie chose to
pay Ghert the full amount he wanted despite knowing that he would then not have enough
money to pay the bank).
- According to the Gore case, the trustee must prove that:
o There was a disposition -> (Bakkie paid Ghert money)
o The disposition was made through a creditor -> (Ghert was the creditor)
o The effect of the disposition -> (Ghert was preferred above another creditor (bank))
o The effect happened immediately after the disposition was made (as soon as he paid
Ghert, he could no longer pay the bank the full amount)
- If the trustee can prove these things -> the onus then shifts to the defendant/creditor
(Ghert). If Ghert does not want his transaction to be set aside, he must prove that he meets
the reqs for the defence if the trustee issues a summons against him for voidable
preference
- According to the Gore case, the beneficiary (Ghert) must prove that:
o The disposition was made in the ordinary course of business
o There was no intention to prefer one creditor above another
- If Ghert cannot prove both of these reqs -> the transaction will be set aside
- If the transaction is set aside -> the court can declare the transaction void and order the
asset or the value thereof to go back into the insolvent estate ito S32(3) IA
Transaction with Kiki:

- Same facts and law as above
- Bakkie chose to pay Kiki rather than the Bank
- You can either say it’s a voidable preference ito S29 OR you can say it’s an undue preference
ito S30
- If the reqs of s29 are met -> it is easier to argue that instead of S30
135
module.
WEEK 11 & 12 – REHABILITATION & CORPORATE INSOLVENCY
INTRODUCTION: COMPANIES
Criticism of our law of corporate liquidation:
- = it is a fragmented system
- It is difficult to determine which laws are applicable to the liquidation of corporate entities
- Neither the 1973 Companies Act, the 2008 Companies Act, nor the Close Corporations Act
are complete wrt insolvent entities.
From an insolvency perspective, the liquidation of a company would differ from that of the
individual because:
- When dealing with individuals, certain assets are exempted from the liquidation process
(e.g. his bed cannot be liquidated). These exemptions do not apply to companies (bc a
company does not need a bed)
- After insolvency, the individual is rehabilitated. This does not apply to a company. After the
winding up process, the company is de-registered, and the company ceases to exist
- Companies are liquidated/wound-up (ito the Companies Act), whereas individuals are
sequestrated (ito the Insolvency Act)
o A trustee is appointed for the individual (natural person)
o A liquidator is appointed for the company (juristic person)
THE STAKEHOLDERS:
- Company = juristic person

o Shareholders are separate from the company. The company is managed by a board
- For insolvency law purposes, we will only be dealing with companies that have been
registered in the Companies Act
- There are a lot of stakeholders involved in a company:
o The master
§ Master’s role in corporate liquidation = responsible for overseeing the
liquidation process, appoints the liquidator, he approves the estate’s
accounts prepared by the liquidator, opens a file for the liquidation,
convenes certain meetings etc.
o The CIPC (keeps the register)
§ CIPC = the Companies and Intellectual Property Commission
o Shareholders of the company
§ Note: if it is a non-profit company (NGO) -> the people are called “members”
(as opposed to “shareholders”)
o Creditors
o Employees
136
module.
o Liquidators
- Must distinguish between whether we are working with a sole proprietor (an individual who
trades as a business) or a company
o If the facts say the person’s name is “ABC Pty Ltd or XYZ Ltd” -> we know that we are
dealing with a company registered ito the Companies Act
o Corporate liquidation applies when we are working with companies
THE LAW: THERE ARE 2 DIFFERENT COMPANIES ACTS:
- Companies Act 61 of 1973 (this is the old Act)

o Link =
https://www.mylexisnexis.co.za/Library/Document.ashx?domainID=mursf&format=
pdf&documentVersion=null&displayVersion=null
- Companies Act 71 of 2008 (this is the new Act)
o Link =
https://www.mylexisnexis.co.za/Library/Document.ashx?domainID=c9uxc&format=
pdf&documentVersion=null&displayVersion=null
- S224 of the 2008 Act repealed the 1973 Act EXCEPT for chapter 14
- We must keep both these Acts in mind when dealing with liquidation
o Especially chapter 14 of the 1973 Act
§ S339 of the 1973 Act -> incorporates insolvency law (some rules from the
Insolvency Act + common law rules) into the liquidation of a company
§ Chap 14 applies to the liquidation of insolvent companies
- It is possible to wind up and liquidate a company that is solvent
o Why? -> sometimes companies are formed for a specific project. Once the project is
completed -> the company will be liquidated
o If the company is solvent -> has to be wound up ito the 2008 Act
o S79 – s81 of the 2008 Act will apply to the liquidation of solvent companies
§ Provides that a company must be liquidated on just and equitable grounds
§
o If you liquidate a solvent company -> creditors will most probably receive 100% of
their claims (paid in full). The surplus assets will go to the shareholders
- Summary of key point: is this company solvent or insolvent?
o Insolvent company -> follow chap 14 of 1973 Act
o Solvent company -> follow S79-81 of 2008 Act
137
module.
PROCESS OF COMMENCING LIQUIDATION:
- You do NOT always have to approach the court when you liquidate a company
- Voluntary liquidation -> no court visitation or order needed
o 2 types of voluntary liquidations
§ Voluntary liquidation by members
§ Voluntary liquidation by creditors
o Voluntary liquidation hinges on a special resolution adopted by the shareholders
o For both types of voluntary liquidations -> shareholders make a decision
- A creditor always has the option to approach the court to liquidate a company (regardless of
whether it is solvent or insolvent). However, they must always have reasonable grounds to
approach the court
- When it comes to the process of liquidating a company:
o Option 1: approach the court
o Option 2: voluntary liquidation
§ Voluntary liq by members OR
§ Voluntary liq by creditors
- Voluntary liquidation by members -> means that the company has enough assets to pay the
creditors in full
- Voluntary liquidation by creditors -> there is not enough assets in the estate to pay the
creditors in full
- Why is it important to distinguish between voluntary liquidation by members and voluntary

liquidation by creditors? -> the protection measures differ
o Voluntary liq by members -> less protection needed for creditors bc there is already
enough assets in the estate to pay the creditors in full
§ Shareholders have the prerogative to appoint the liquidator
§ Role of liquidator -> the only thing that needs to happen is that the assets
must be sold, and the proceeds must be distributed to the creditors
o Voluntary liq by creditors -> more protection needed for creditors bc there is not
enough assets in the estate to pay them in full
§ Creditors have the duty to appoint a liquidator
§ Role of liquidator -> he must protect the interests of the creditors
- From a procedural perspective, the big advantage of voluntary liquidation = less costly,
faster process etc. (bc court visitation and costs is not needed)
- Process of voluntary liquidation by creditors:

o Motion proceedings must be followed (as opposed to action proceedings)
o Motion proceedings -> you work on paper
138
module.
o Notice of motion must be issued (founding affidavit + notice = application)
o Affidavit must contain ALL the facts that constitute a cause of action
§ Affidavit must allege AND prove these facts (via annexures)
Grounds:
- Grounds of insolvency / liquidation -> contained in S344(a)-(h) of the 1973 Act
-
- Page 616 of textbook ^
- Most used ground = S344(f) read with s345 of the 1973 Act -> states that a creditor may
bring an application for liquidation if:
o The company is unable to pay and
o Owes creditors R100 and
o Fails to pay for 3 weeks
- S345 is another ground for bringing a liquidation application -> provides that if a sheriff
sends you a return saying he attached the assets, but the assets are NOT enough to satisfy
the claim in the judgment -> you (creditor) can bring an application to court to commence
with liquidation proceedings on the ground of S345 (not enough assets to satisfy the
judgment)
- If the requirements in S345 and S344(f) are met -> company is deemed to be unable to pay
its debts
139
module.
-
Solvency vs insolvency:
- There is more than 1 type of solvency
- Factual insolvency + commercial insolvency
o Factual insolvency (balance sheet insolvency) -> liabilities exceed assets (cannot pay)
o Commercial insolvency (cash flow insolvency) -> assets exceed liabilities but does not
pay creditors on time
- If we want to liquidate a company and prove that it is insolvent -> we must prove
commercial insolvency
- S344(f) and s345 -> company will be DEEMED insolvent if creditor has not paid R100 or
greater in 3 weeks (= act of insolvency)
Boschpoort Ondernemings (Pty) Ltd v ABSA Bank Ltd 2014 (2) SA 518 (SCA)
- Link =
https://www.mylexisnexis.co.za/Library/Document.ashx?domainID=tk9ad&format=pdf&law
ReportFileName=zb\cc\c1ic\e1ic\x9v8c\y9v8c\7i9ad\gj9ad\tk9ad\01Boschpoort.pdf
- Legal issue: when do you suppose the new Companies Act (of 2008) and when do you use
the old Companies Act (of 1973)?
- Party proved that the company was commercially insolvent. Application was brought ito
Chapter 14 of the 1973 Act
- The respondent argued that they are not insolvent. Applicant should have brought
application ito 2008 Act because the assets exceeded the liabilities (factual solvency)
140
module.
- Court said that alleging factual solvency is NOT a defense. Factual insolvency is taken into
account to determine whether a company can pay its debts, but the ultimate test is
commercial insolvency. The moment commercial insolvency is proved -> chap 14 of 1973
Act can be used to bring the application
- If it is not commercial insolvency -> use the 2008 Act
Issues discussed in this case:
Are the terms ‘insolvency’ and ‘solvency’ defined in the 2008 Act and chapter 14 of the 1973 Act?
- Para 14: the new Act has not defined the meaning of solvent or insolvent
What is the approach of our courts to the following argument: “although a company is
commercially insolvent, it cannot be liquidated because its assets exceed its liabilities”
- Court rejects this argument
- Para 6: even if the assets exceed the liabilities, a solvent company can still be liquidated if it
is just and equitable to do so (as determined by the court)
- Commercial insolvency = inability to pay debts even though the assets exceed liabilities.
- Factual insolvency = inability to pay debts because the liabilities exceed assets.
- even though the application was made in terms of either s 80 or 81 for its winding-up as a
so-called ‘solvent’ company. The deeming provisions concerning the inability to pay its
debts, contained in s 345 of the old Act may be used to establish the insolvency of a
company.
- Para 8: The high court accepted that the appellant’s balance sheet indeed showed that its
assets exceeded its liabilities (a state of affairs which lawyers usually describe as being
‘factually solvent’) but found that it was nevertheless clear that the appellant was unable to
pay its debts (a situation which is, by way of contrast, generally known as being
‘commercially insolvent’).
- The confusion which has arisen as to when a company may be woundup in terms of the new
Act or in terms of the old Act is thus eliminated. The so-called factual solvency of a company
is not, in itself, a determinant of whether a company should be placed in liquidation or not.
- It follows that a commercially solvent company (whether factually solvent or insolvent), may
be wound up in terms of the new Act only; a solvent company cannot be wound up in terms
of the old Act.
- A company is commercially insolvent when it is unable to meet current demands on it, or its
day-to-day liabilities in the ordinary course of business. The test is, therefore, not whether
the company's liabilities exceed its assets, for a company can be at the same time
commercially insolvent and factually solvent
How does insolvency differ from financial distress?

- This was not addressed in the case
- Financial distress is the test in the Companies Act for the commencement of “business
rescue”
- Sometimes there is a reasonable prospect of saving a company
141
module.
- If company is already insolvent -> too far down the line to be saved by busines rescue
process.
- Should you bring an application for liquidation, or should you bring an application for
business rescue? -> important consideration
- Financial distress means that the company is suffering financial difficulties but can be
rehabilitated if it is subject to a rescue procedure or compromise
- The aim of business rescue is to grant the company the opportunity to recover
- The Companies Act defines “financially distressed” in section 128(f), to mean that it appears
to be:
o (i) reasonably unlikely that the company will be able to pay all of its debts as they fall
due and payable within the immediately ensuing six months, or
o (ii) reasonably likely that the company will become insolvent within the immediately
ensuing six months.
- A company is regarded as technically insolvent (and thus financially distressed) if the
liabilities of the company exceed the assets
DRAFTING THE APPLICATION:
Components of notice of motion and the affidavit:
- First paragraph of affidavit: who is the applicant bringing the application? (see S346 of 1973
Act)
- Second paragraph: who is the respondent (the insolvent company owing you money)?
- Third para: this court has the jurisdiction to hear the application.
o Note: since we are dealing with a company, the application cannot be brought to the
magistrate’s court. Has to be brought to the High Court.
o Must state “this is the high court, and within the jurisdiction of this high court, this
company has a registered office or principled place of business”
- Fourth para: state that you approached the master and provided security that you will cover
the costs of this application until a provisional liquidator is appointed (S346(3) or 1973 Act)
- Fifth para: state that you will serve this application on the master (and the other relevant
parties) (S346(4) of 1973 Act)
o Why? Bc the master must open a liquidation file and convene certain meetings after
the order is granted
- Sixth para: state the grounds for the application
o Is this a solvent liquidation ito the 2008 Act? If so, state why you say so (state the
facts)
o Is this an insolvent liquidation ito S344 of the 1973 Act? If so, state the reasons why
you say so (state the facts)
§ For insolvent company, the ground will most probably be inability to pay its
debt (S344(f) read with S345 of 1973 Act)
- All these allegations ^ in the founding affidavit must be proved by annexures and supporting
documents
142
module.
o E.g.) attach the invoice and letter of demand you sent to your client
o All documentary evidence must be attached
- Note: it is unnecessary to prove advantage to creditors
After application is drafted -> it must be served:
- You will first issue this application to the court (the registrar)
- Then you will send it to the sheriff
- The sheriff will serve this application on the registered trade unions of that company
- Sheriff will then send you back copies and a return
- Copies must be stamped and put in the court file
- Notice will be placed on the company’s premises
- Application will be served on SARS
- Application must be served on the company (who is the respondent) (the registered office
or principle place of business)
- Application will also be served on the master (S346(4))
After application is served:
- Go to court
- Court can grant the following orders:
o Accept the application -> provisional and/or final liquidation order
o Dismiss the application
o Adjourn the application with or without conditions
o Any order it deems fit
- The court will always have discretion
- S347(1) of 1973 Act
Date of commencement of liquidation:
- The application has now been granted by the court

- S348 of 1973 Act -> commencement of liquidation is on the date when the court papers are
filed (aka the date of presentation of the application for liquidation)
- Order has a retrospective effect back to the date of the filing
- Remember:
o Sequestration of individuals:
§ Voluntary surrender = date when order is made
§ Compulsory surrender = date when provisional order is made
- Any dispositions of property after the date of filing and any share transactions are void
- Civil proceedings against the company are suspended
- Attachment or execution put in force is void
- Powers and duties of the directors, except for certain residual powers, cease and are vested
in the liquidator
143
module.
Effect of the liquidation order:
- Control of the company (as opposed to the assets of the company) are transferred to the
master and then to the liquidator
- The company remains owner of its property
The end:
- After selling the assets and paying the creditors -> the company is de-registered from the
CIPC’s register + the company is then terminated/dissolved
- S82 and S83 of the 2008 Act
PRACTICE QUESTIONS
FACTS:
QUESTION 1:
Note:
- “Financial distress” -> whenever we see these words it usually means that business rescue
will apply (as opposed to liquidation)
- HOWEVER, since the financial distress is qualified by “it is unlikely that the company will
recover” -> we know that business rescue will NOT apply
- In order for business recue to apply -> there needs to be a reasonable prospect for recovery
Answer to Q1:
- First way company can be wound up = voluntary liquidation (VL) by members of the
company or by creditors
o VL by members -> company has enough assets to pay all the creditors 100% of their
claims
o VL by creditors -> company does NOT have enough assets to satisfy the claims of its
creditors
144
module.
o Who takes the decision to voluntary liquidate? = the shareholders
§ This applies to both VL by members and VL by creditors
o What type of resolution must the shareholder adopt? = a special resolution (as
opposed to an ordinary resolution)
- Second way company can be wound up = application to court (court order)
QUESTION 2
Answer to Q2:
- Commercial insolvency is needed
- Authority = Boschpoort Ondernemings v ABSA
o Test = company is unable to pay their debts on time
o Remember: factual solvency is NOT a defense to commercial insolvency
§ E.g.) The company cannot say “I cannot pay my creditors (indicative of factual
insolvency) but my assets exceed my liabilities so you cannot liquidate me”
- Commercial insolvency is when you have a cash flow problem (meaning you cannot pay
your creditors on time)
QUESTION 3:
Answer to Q3:
- Which law applies? = chapter 14 of the 1973 Act read with S339 (which incorporates the
insolvency law)
- If the Companies Act does not make provision for a particular situation, then you use the
law of insolvency to guide you on the issue (liquidator must refer to the Insolvency Act for
the necessary rules to follow)
o The Companies Act does not make provision for issues such as: voidable dispositions,
unexecuted contracts, and distribution rules of the proceeds of realized assets
How does this position differ from solvent companies?

- S79 -S81 of 2008 Act applies
QUESTION 4:
145
module.
Answer to Q4:
- KLM is unable to pay Nini + a period greater than 3 weeks has elapsed + the claim is
presumed to be over R100 -> S344(f) read with S345 of 1973 Act applies (there is grounds
for liquidation)
- This means that company will be deemed unable to pay its debts -> meaning that the
company is commercially insolvent
QUESTION 5:
Answer to Q5:
- The question is basically asking: can you liquidate the company without the employees
knowing? -> NO because you have to serve it on trade unions, place of business, SARS,
master etc.
- Nini does have the right to know about the liquidation proceedings. A copy of the
application for liquidation has to be served to the relevant parties such as employees.
- This should be done by a copy of the application being affixed on the notice board of the
KLM business premises
MEETINGS
- As soon as the liquidation application has been granted or commences, there will be
meetings
First meeting of creditors:

- Convened by the master (s364(1))
- Purpose of first meeting: to consider the statement of affairs of the company
- If the company is liquidated, the directors of company must complete a specific form in the
Act to give a preliminary view of what’s happening in the company
146
module.
- Master can receive claims of creditors at this meeting. Creditors prove claims at this
meeting
- Liquidators are nominated (by number, class, or value)
- The creditors nominate the liquidator, but the master appoints the liquidator
- Procedure for appointment of liquidator: (page 623 of textbook)
o Master appoints a liquidator by issuing to him a certificate of appointment
o Upon receipt of that certificate, the liquidator must give notice of his appointment
to:
§ The gov gazette
§ The registrar (within 7 days)
o As soon as the liquidator is appointed, the master sends him a copy of the state of
affairs (S363(5) of 1973 Act)
Meeting with the members and/or shareholders of the company:

- This meeting occurs at the same time as the first meeting of creditors (page 622 of
textbook)
- Convened by the master (S364(1))
- Consider statement of affairs (S363)
- Members nominate a liquidator (S364(1)(b))
- Interests of shareholders in liquidation is different to the interests of the creditors
o Usually there will be a liquidator for the shareholders and then a liquidator for the
creditors -> so the separate interests in the company are protected
o Liquidator owes a duty to the company to see that its assets are realized, and its
liabilities are minimized to the best possible advantage of the company
o Liquidator owes a duty to the creditors to see that they suffer the least loss and
receive the best dividend
Second meeting of creditors:

- Convened by the master, but chaired (presided over) by the appointed liquidator
- Consider the S402 report compiled by the liquidator
- Acceptance of proof of claims. Creditors can prove their claims here
o Can be seen that there are 2 opportunities to prove your claim as creditor -> both at
the first and second meeting
- Liquidator will ask for and receive instructions on how to deal with certain assets (this is
where the liquidator gets his mandate. If he doesn’t get the mandate here, a special
meeting must be convened, and this is very costly)
o If there are conflicting directions or no directions -> liquidator may apply to the
master for directions (page 627 of textbook)
When would a creditor decide NOT to prove a claim against the estate?
- Proving claim leads to risk of might having to pay contribution costs
147
module.
- If there is not enough assets left in the free residue to cover the costs of administration of
the liquidation -> costs will be covered by creditors who prove their claims as well as the
applicant that brought the application for liquidation
- If your client is a creditor, it is thus sometimes necessary for you to advise them not to
prove their claim if you can see that there is lots of liabilities and almost no assets
- This is why it is important to consider all the liquidator’s reports at the meetings
If the liquidation process starts, can someone else (shareholder, creditor etc.) bring an
application for business rescue?
- = YES
- Effect: liquidation proceedings are suspended until the business rescue application is heard
THE LIQUIDATOR – POWERS AND DUTIES
General duties of liquidators: (S391)

- Receive statement of affairs from the master (who received it from the directors)
o First task as liquidator
o S363(5)
- Take control and possession of company
o This includes securing the assets
o E.g.) if there is a premises with expensive assets -> the liquidator must secure the
premises by locking it up + appoint security guard + take the informational
documents out of the offices etc.
- Collect debts
- Pay costs in relation to the liquidation
o Liquidator uses the funds in the estate to appoint attorneys, auditors, forensic
investigators
- Pay the creditors
- If there is a surplus -> distribute surplus pro rata to the shareholders/members of the
company
148
module.
Specific duties of the liquidator:
- Must record statements of all monies, goods, books, accounts, and other documents
received by him on behalf of the company
- Change the name of the company to include “In Liquidation” or “In Voluntary Liquidation”
at the CIPC so that members of the public can understand that this company is in liquidation
- Must open a separate current bank account
o Liquidator must deposit all monies received on behalf of the company into this
account
- Open a savings account (to possibly effect an interest-bearing deposit with the bank)
- Liquidator may not withdraw any money from the savings accounts. Withdrawals only from
current account (S394 of 1973 Act)
Reporting on the affairs of the company:

- Liquidator must prepare and submit a S402 report to the general meeting of creditors not
later than 3 months after his appointment. The S402 report concerns the following matters
(page 624 textbook):
o Issued capital and amount of assets and liabilities of the company
o Reasons the company failed
o Ways in which the company has contravened the Act
o Whether any director of the company appears to be personally liable for
damages/compensation/debts/or liabilities of the company
o Legal proceedings against the company
o Whether further enquiry on a matter is desirable
o Whether the company has kept accounting records
o Prospects of liquidation
o Any other matter that the liquidator wants instructions on
- Investigate and report on whether there was any offenses committed ito the Companies
Act, the Insolvency Act, or in general (S400)
o Report these offenses to the relevant authorities (NPA, police etc.)
- Delinquent order (S219)
Powers:
- Can be divided into 3 categories
- (1) Powers that the liquidator can exercise on his own (S386)
o Examples: sign deeds, prove claims, accept or make any bill of exchange, summon a
general meeting of creditors (page 626 textbook)
- (2) Powers that the liquidator can exercise only with the authority of the creditors and/or
members (S386(3))
o Examples: institute legal proceedings, to compromise or admit any claim against the
company, make arrangements with creditors, submit to arbitration any dispute,
carry on or discontinue the business of the company, enforce or abandon a contract
149
module.
for purchase of immoveable property which has not been transferred to the
company
- (3) Powers that the liquidator can exercise with authority from the master (S386(2))
o Examples: terminate any lease, make recommendations to sell property
GATHERING INFORMATION: INTERROGATION OF CERTAIN PERSONS:
- The 1973 Companies Act contains a number of provisions designed to enable the liquidator,
members and creditors of the company to obtain information with regard to the affairs of a
company which is unable to pay its debts
- Purpose of interrogations -> obtain info in order to:
o Get assets back into the estate
o Trace / locate assets
- Members or creditors can inspect the books and papers of a company being wound up
o Court must authorize this
o S360 of 1973 Act
- Directors of the company can be interrogated at the meetings of creditors
o Director has an absolute duty to attend the first and second meeting of creditors
o Any other meetings -> director must attend if the liquidator requires him to do so via
written notice
o S414 of 1973 Act
- The presiding officer may also subpoena any director or officer of the company or any other
person who is known or on reasonable grounds believed to be in possession of any property
of the company, or indebted to the company or who has any material information regarding
the company, to be interrogated at the meeting of creditors (S415 of 1973 Act)
o These people may be interrogated under oath
o Interrogation must be relevant and related to the company’s affairs or property
o Directors are compelled to answer all relevant questions irrespective of whether
they will be incriminated or not
§ If they don’t answer -> they can be jailed
§ These proceedings are also recorded
§ This infringes on constitutional rights but the infringement is constitutional
(right to not incriminate yourself CAN be limited depending on the
circumstances)
§ Liquidation proceedings are there to protect the public interest
- Master or the court may summon the following persons to appear before the court to be
examined: (S360)
o Director or officer of the company
o Any person suspected of having the company in his possession
o Any person indebted to the company
o Any person who the master or court deems capable of giving info concerning the
trade/dealings/affairs/property of the company
o These people ^ may be examined under oath
150
module.
- There are only 2 circumstances under which a party may ask for an interrogation:
o Where the company is unable to pay its debts
o Where there is a winding-up order
§ Remember: there is no winding-up order in voluntary liquidations -> abuse of
system occurs here -> person may commit fraud and then institute VL by
members to escape interrogation)
151
module.
TRACING AND RECOVERY OF ASSETS:
[page 629 textbook]
- If company cannot pay its debts -> the provisions of the Insolvency Act regarding voidable
dispositions of property apply
- Every disposition made after commencement of winding-up of a company which is unable
to pay its debts is void unless the court orders otherwise (S341(2) of 1973 Act)
- Interrogation is a handy tool to trace assets
REALISATION OF A COMPANY’S ASSETS

[page 629-630 textbook]
- Liquidator does not have inherent power to realize the assets of a company -> he needs
authorization from the creditors or members or master
- The order of preference ito the Insolvency Act applies to the application of proceeds of the
assets
- If there is any surplus of the proceeds from the encumbered asset account -> forms part of
the free residue
- The free residue is applied in the following order of preference:
o Payment of costs of winding up
o Payment of claims of creditors
o Division of surplus among the members
Costs of winding up:

- Page 630 of textbook
- These costs are listed in S342 of the 1973 Companies Act. They are similar to the S97 costs
in the Insolvency Act
o Masters fees
o Legal fees
o Fees to draft statement of affairs
o Remuneration of liquidator (he only gets paid after the master confirms his accounts
– see below)
o Maintenance, conservation, realization costs
o Bank charges and postage
o Advertising costs (this incurs bc the creditors meetings have to be advertised)
o Endowment or transfer costs
o Costs of the sheriff
o Salary or wages of person employed by liquidator
- Any balance of the free residue -> goes to defraying the costs of execution
Contributions by creditors:
- If the free residue is insufficient to pay the costs of winding-up -> creditors who have proved
their claims and the creditors who applied for the winding-up (the applicant creditor) are
liable to make good the deficiency
152
module.
- If there are no creditors entitled to share in the free residue -> the creditor who relied solely
on their security must pay
Application of proceeds of a company’s assets:

- Any surplus assets available after payment of the costs incurred in the winding-up and the
various claims of creditors must be distributed among the members according to their rights
and interests in the company (S342(1) of 1973 Act)
THE LIQUIDATOR’S ACCOUNT

[page 631 of textbook]
- Liquidator must lodge an account that details and accounts for his conduct in the winding-
up of the company’s affairs
- The liquidator must lodge the following accounts with the master:
o Liquidation account -> to account for his receipts and payments
o Distribution account -> to account for the distribution of any surplus assets to
members of the company
o Contribution account -> to account for and apportion liability of creditors to
contribute to the costs of winding up (if there are any)
- Liquidators account must lie open for inspection at the master’s office for at least 14 days
o Notice must be given in gov gazette about the inspection
o Master must confirm the account
- After confirmation -> liquidator must distribute the proceeds
o Notice must be given in gov gazette that a dividend will be paid to the creditors
COMPROMISE WITH CREDITORS

[page 638 of textbook]
- Compromise with creditors occurs ito S155 of the 2008 Companies Act
- Compromise with creditors is where the board of the company or the liquidator proposes
an arrangement/compromise of its financial obligations to all of its creditors or members at
a meeting
o Notice must be given to the creditors and the CIPC
- If majority (at least 75%) of creditors (vote by value) support the proposal -> it will be
adopted
- The court may sanction a proposal where it considers it just and equitable to do so having
regard to:
o The number of creditors who were present at the meeting and who voted in fav of
the proposal
o The report of the master
- A proposal sanctioned by the court is final and binding on all the creditors and members of
the company
153
module.
o This is important to bind and clamp-in the creditors who disagree with the
composition (to protect the majority’s vote and interest)
COMPOSITIONS
Define and distinguish between a common law composition and a statutory composition:
- Composition = agreement between insolvent and his creditors ito which the parties agree
that the creditors’ claims will be paid partially or in full, subject to certain conditions, as a
full and final settlement
- Usually occurs when the insolvent cannot pay his debts
- Insolvent person can choose between a common law composition or a statutory
composition
- A statutory composition is made ito S119 of the Insolvency Act (‘IA’)
- NOTE: compromise applies to juristic persons + composition applies to natural persons
- Which creditors are excluded?
Explain the process for the acceptance of a statutory composition
The process is as follows (laid out by S119 of the IA):

- Insolvent may make the creditors an offer of composition at any time after the first meeting
creditors
- The offer is made through the trustee
- If the offer is accepted by 75%+ of creditors (in value and number) -> offer is deemed valid
and binding on all the creditors
- Master must issue certificate to the insolvent to confirm the composition
o Certificate will only be issued where:
§ Security for the payment is given
§ Where payment ito the composition has been made
§ Where no creditor is preferred above another
§ Where the composition does not depend on whether the insolvent is
rehabilitated
§ Where the nature of the security is fully described
Explain the relevance and consequences of a composition:
- Accepting the offer has the effect that all rights and duties of the insolvent and his creditors
are determined by the composition agreement
- The composition will remain valid and binding even after rehabilitation
- Composition payments must be made by the trustee
- The trustee must then prepare a liquidation & distribution account regarding the particular
assets available for distribution ito the composition agreement
154
module.
The following agreements are VOID:
- Acceptance of the composition offer by means of a secret agreement
- Agreement to compensate someone if he supports the offer
- A benefit received ito the compromise is an offence -> beneficiary will be held liable for the
amount of his claim, the value of his benefit, and his share ito the compromise
REHABILITATION
Explain what rehabilitation by means of court order entails and differentiate between the various
requirements for rehabilitation orders
Rehabilitation by means of a court order:

- Note: rehabilitation is different to sequestration. Rehabilitation refers to the ‘fresh start’
that the debtor gets after his estate has been sequestrated
- Insolvent may apply to the court for rehabilitation by way of motion procedure
- Anyone with an interest in the insolvent estate may object to the rehabilitation
- The insolvent must furnish security (with a value of at least R500) to the registrar for any
costs incurred in bringing the rehabilitation application
o The insolvent has a 3 week time period to do this
o Non-compliance with this time period = the application hearing will be postponed
- Insolvent must give notice to the master + the trustee in the Gov Gazette (depending on the
ground the insolvent relies on to bring the application – see below)
- The court may grant the application subject to any conditions it deems fit
- Note: a deceased insolvent estate can be sequestrated, but it CANNOT be rehabilitated
The grounds for rehabilitation / the various requirements for rehabilitation orders:
- These are laid out in S124 of the IA
- The insolvent may apply for rehabilitation (hereafter ‘rehab’) after 12 months have passed
since confirmation of the first trustee’s account
o Insolvent must publish notice of the intended application in the gov gazette at least
6 weeks before the application
o The court will NOT order rehab within 4 years after sequestration without the
master’s recommendation
§ master will only make recommendation if he has received a copy of the
application
§ master recommendation is reviewable ito S151 IA
o S124(2)(a)
- If the insolvent has been sequestrated before -> he may apply for rehab 3 years after the
date of confirmation of the trustee’s first account
o 6 weeks prior notice must be given to the master and creditors -> notice must be
published in the gov gazette
o S124(2)(b)
155
module.
application
§ master’s recommendation is reviewable ito s151 IA
- If the insolvent has been convicted of any fraudulent act or offence -> he may apply for
rehab 5 years after the date of his conviction
o The types of offences are listed further down – see below
o Prerequisite: the conviction and sentence must have already taken place before the
insolvent can apply for rehab
o 6 weeks prior notice must be given
o S124(c)
application
§ master’s recommendation is reviewable ito s151 IA
- If no claims are proved by any creditors + the insolvent has not been convicted of an offense
+ where it is his first time being sequestrated -> insolvent may apply for rehab 6 months
after his sequestration application
o 6 weeks prior written notice must be given to master and trustee
o If creditor did not have a proper opportunity to prove his claim -> rehab application
may be postponed to create opportunity for a special meeting of creditors to be held
so that the creditor can prove his claim against the estate
o S124(3)
- If the parties agreed to a composition AND at least 50 cents in the rand was paid iro all
claims proved against the estate OR where security was given for such payment -> insolvent
may apply for rehab immediately
o Provided that the insolvent gives 3 weeks’ notice of the rehab in the gov gazette
o Copy of notice must be given to the trustee either by:
§ Handing it to him OR
§ Delivering it by registered mail
o S124(1)
o An insolvent who has obtained a composition certificate from the master ito s119
can apply for this
- If all the claims have been paid in full with interest -> insolvent may apply for rehab at any
given time after confirmation of the distribution account
o 3 weeks’ prior written notice must be given to master and trustee
o S124(5)
Explain what a vesting order is
Vesting orders:
156
module.
- In addition to applying for rehab, the insolvent may also apply for an order declaring that
any asset in his estate (that has not been realized by the time the rehab order is granted)
shall vest in him instead of in the trustee
- If the insolvent wants to apply for this vesting order -> he must:
o publish notice of his intention in the gov gazette
o Notify all his creditors whose claims were not fully paid
- If the insolvent does not apply for a vesting order -> the estate property will remain vested
in the trustee after the insolvent is rehabilitated
- If the trustee abandons any of the immovable property -> court may declare that the
property vests in the insolvent when the rehab order is granted (provided that is no
prejudice to the creditors)
Discuss and critique the justification of the period after which rehabilitation by the effluxion of
time occurs
Rehabilitation through the effluxion of time:

- If no previous rehabilitation order has been granted -> An insolvent is rehabilitated
automatically 10 years after the date of sequestration
- Any interested party is entitled to apply to the court (during these 10 years) to prevent the
automatic rehabilitation
o If the rehab is prevented -> the registrar (who is concerned with the registration of
titles of immoveable property) must place a caveat against:
§ the transfer of immoveable property OR
§ The cancellation or cession of every bond registered in the name of the
insolvent
o This caveat will remain valid until the date of rehab
Explain the effect of rehabilitation:
- Sequestration is terminated
- All debts that existed before the date of sequestration are discharged (however, there are
certain exceptions -> e.g. fines must still be paid)
- In other words, the debtor is given a fresh start
- The insolvent regains full contractual capacity
- If there are any debts that are not paid -> trustee may still realise assets under his control &
distribute proceeds even after rehab
Rehabilitation of the insolvent has NO effect on the following parties:

- The insolvent’s sureties
- The creditors who have a right ito a composition agreement
- Partnership estate
OFFENCES
157
module.
List the various insolvency offences which are provided for in the Insolvency Act
S132 – 145 of the IA provides for certain statutory offences (3 categories):
(1) Offences committed by the INSOLVENT
-
- The following offences will result in imprisonment for a period of 6 months to 3 years
without the choice of paying a fine:
o Concealing or destroying books
o Concealment of liabilities
o Failure to keep proper records of books
o Concealment of undue preferences
o Failure to give information or deliver books/assets
o Failure to attend meetings of creditors
o Failure to appear to give evidence
(2) Offences committed by the TRUSTEE:
-
- The following offences will result in a fine of up R500:
o Neglecting to submit an account on time
o Failing to pay an amount owing to the master or a creditor
(3) Offences committed by ANY PERSON:

158
module.
-
- The following offences will result in a fine of up to R500 OR imprisonment up to 6 months
without the choice of paying a fine:
o Failure to testify or giving false testimony
o Acceptance of consideration for illegal acts or omissions
o Obstructing the trustee from fulfilling his duties
__________________________________________________________________________
OVERALL SUMMARY:
159
module.

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ISR310 (INSOLVENCY LAW)

WEEK 1: FOUNDATIONAL CONCEPTS:

PROVIDE AN OVERVIEW OF THE TOTAL FIELD OF INSOLVENCY LAW

- Insolvency law developed as a special debt enforcement procedure in order to provide a

DIFFERENTIATE BETWEEN FACTUAL AND COMMERCIAL INSOLVENCY

EXPLAIN WHAT THE COLLECTION PROCESS ENTAILS

Summary of the process:

EXPLAIN AND DISTINGUISH BETWEEN THE DIFFERENT OPTIONS AVALIABLE TO A NATURAL

- The law of insolvency is mainly regulated by the Insolvency Act

DESCRIBE THE HISTORY OF SOUTH AFRICAN INSOLVENCY LAW

- Basis of South African Insolvency Law = Ordinance of Amsterdam of 1777

- What is the difference between liquidation and sequestration?

Sources of SA Insolvency Law:

Further notes on the liquidation of insolvent companies and close corporations

Right to satisfaction of claim:

Special nature of insolvency law:

Individual debt collection vs collective debt collection:

Nature and purpose of sequestration:

Consumer/personal insolvency vs corporate insolvency:

Underlying policies and principles:

Debt collection/enforcement versus debt relief

REMEDY LAW SCOPE LIMIT ACCESS ISSUES

Costly -> not

‘RECTIFYING AN UNCONSTITUTIONAL DISPENSATION? A CONSIDERATION OF PROPOSED

(1) Natural person’s estate

(2) Deceased estate

Content of the application/affidavit:

2) What additional information is needed to draft the affidavit?

Some creditors receive payment before others:

2 main groups of creditors: -> paid from different pools

Encumbered asset account:

Costs/expenses relating to encumbered assets:

What can we see from this scenario?

Example of where the asset yields enough:

Rule regarding contributions for S89 costs:

Example of where the asset does not yield enough:

General remarks about security:

TYPES OF SECURED CREDITORS:

- S1 of the IA only recognises some forms of securities

(1) Special mortgage

- There are 3 types of special mortgage:

Special mortgage over immoveable property:

(3) Lien (right of retention)

- If a creditor is in possession of another person’s property (moveable or immoveable), on

ACCOUNT 2: THE FREE RESIDUE ACCOUNT

Funeral and deathbed costs/expenses:

Sequestration and administration costs:

Sheriff’s fees/cost of execution:

Income tax of insolvent:

- Asset 2: Motor vehicle

- Claim 2: Donnie Dube -> arrear salary

- Claim 3: commissioner of revenue services (SARS) -> income tax

- Claim 4: Hammanskraal community college -> arrear fees

- Answer: sequestration costs include:

Encumbered asset account:

- A secured creditor who relied solely on its security:

Free residue account:

The sequestration process when it comes to voluntary surrender:

Application for voluntary surrender: