Week 1 – introduction to insolvency law

INTRODUCTION
- 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
- your estate can be insolvent but not necessarily sequestrated BUT your estate
needs to be insolvent in order to be sequestrated
TWO MAIN OPTIONS FOR COLLECTION
- Where a debtor fails to fulfil a contractual obligation or fails to satisfy his
liabilities, each 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
- The value of this is to prevent the creditors from taking everything the debtor
owns
INDIVIDUAL DEBT COLLECTION PROCESS
 This is where a creditor sues a debtor (one creditor)
 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
 Why do we have individual debt collection? -> Sometimes the debtor
disputes the debt and wants to defend himself against the summons.
 Usually, the debtor has enough money to pay the debt, they just don’t pay.
COLLECTIVE DEBT COLLECTION PROCESS
 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)
 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)
 Consequence 1: debtor loses control of his estate -> we bring in a trustee to deal
with this situation
 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
 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)
DEBT RELIEF OPTIONS
 Voluntary negotiations
 Voluntary surrender
 Debt review
 Administration
 Debt intervention
 Discharge = fresh start

DIFFERENT OPTIONS AVAILABLE TO A NATURAL PERSON DEBTOR

 There are a number of debt relief procedures available to a natural person/consumer
debtor who is unable to pay his debts, such as:
o (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
 Next step: debtor must make regular payments to the administrator
+ administrator must pay these amounts to the list of creditors
o (2) Debtor can apply for debt review for debts that amount to credit
agreements as regulated by the National Credit Act 34 of 2005
 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
o (3) Debtor may enter into a voluntary agreement with his creditors
regarding a repayment plan/novation with any or all of his creditors
 Act of insolvency = debtor proposes a release or gives written
notice to creditors of his inability to pay his debts
 After the act of insolvency has been committed -> the creditor may
apply for sequestration of the debtor (this is called compulsory
sequestration)
o (4) If the debtor is insolvent, he can voluntarily surrender the estate if the
prescribed requirements are met (this is called sequestration)
 Next step: assets will be realised, and their proceeds will be
distributed among the creditors ito the Insolvency Act
 Sequestration may eventually benefit the debtor by granting him a
fresh start (this is called discharge)

UNDERLYING PRINCIPLES AND POLICIES + CONCURSES CREDITORIUM

 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
 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 Once 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

DIFFERENTIATE BETWEEN FACTUAL AND COMMERCIAL INSOLVENCY

 Factual/Actual insolvency
o Also called “balance sheet insolvency”
o Liabilities > assets
 o 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)
o Compulsory sequestration -> the creditors ask the court to put the debtor
into the sequestration process
 Commercial insolvency
o Also called “cash flow insolvency”
o Assets > liabilities, BUT their cash flow is of such a nature that the debtor
cannot pay their debt (aka not enough liquid assets)
o Commercial insolvency becomes important when we start looking at
companies
o 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
DIFFERENCE BETWEEN LIQUIDATION AND SEQUESTRATION
 Liquidation has to do with the bankruptcy/insolvency of a juristic person
(companies and close corporations and banks)
o Process of Liquidation is regulated by the Companies Act
o Liquidation (process) = noun (capital L) / liquidation (selling assets) = verb
(lowercasel)
 Sequestration has to do with the insolvency of a natural person or of a
partnership
o Process of Sequestration is regulated by the Insolvency Act
 HOWEVER, the liquidation and sequestration process are the SAME

SOURCES OF 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
 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
o Judgments of the HC and CC + precedents
o Principles of common law
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
o There are 2 Companies Acts -> the 2008 Act and the 1973 Act
o The 2008 Act deals with solvent companies
 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.)
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
o Step 1: start with the 2008 Companies Act -> item 9 of schedule 5 will
refer you to chapter 14 of the 1973 Companies Act
o 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
Week 2 – the application process

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:
 The estate that can be sequestrated
 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
 Some of the meetings that happen between the insolvent, the creditors, and
the trustee occur at the master’s office
 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
 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
woundup 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 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)
 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 about 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
  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:
 Can we sequestrate an insolvent trust? -> the court said yes
 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)
 Therefore, you can sequestrate the estate of a trust because that trust can
be the holder of assets and liabilities
 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
 However, the IA creates a statutory exception to the common law understanding
a partnership is not a separate legal person
 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
  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
 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
 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.

THE SEQUESTRATION PROCESS

 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
 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 must 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 it
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
codebtors, case law 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

 Facts to take into account when you decide how to approach this matter:
o There are 2 clients/debtors -> John and Cathy -> they are co-debtors
married out of community of property -> Their debt amount = R250 000
o 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
o 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
o If Cathy and John were married in community of property -> it would be 1
application
o The manner in which the debt will be divided will firstly depend on what
the contract says
 What additional information is needed to draft the affidavit?
o Cathy and John’s identity numbers, where do they live/where are they
domiciled, what jobs do they have? Etc.

WHICH COURT CAN BE APPROACHED FOR SEQUESTRATION

 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 2competent: -> 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
 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
WEEK 3 – VOLUNTARY SURRENDER
 The debtor must indicate money that is available in the free residue
o Free residue contains unencumbered assets

WHO CAN APPLY FOR VOLUNTARY SURRENDER

Who can apply • Executor of deceased estate
• Debtor
• Representative of the debtor Whose estates is sequestrated
• Both spouses in marriages ICP • Debtor’s insolvent estate
• Partners together for partnership • Communal estate
• Partners alone for personal • Partnership estate
estate
• Individual estates of partners
• Curator bonis for debtor
• Estate of person incapable of
incapable of handling his own
handling own affairs
estate
• Deceased’s insolvent estate
PRELIMINARY FORMALITIES BEFORE APPLYING FOR VS
THE FOLLOWING MUST BE COMPLIED WITH:
1. Notice of intention to surrender;
• Where? Gov.Gazz. & newspaper in the district where the debtor resides or where
his principal place of business is located
• Time? Not more than 30 days, not less than 14 days before the hearing of the
application
• Purpose? To alert creditors of the application & allow them to oppose the
application
• Remember s157(1) – Formal defect, shall not be invalid unless substantial
injustice cannot be remedied by court
• Must be signed by debtor or his attorney
• May be revoked by notice in GG as well as in local newspaper
• Notice may expire if court rejects or if debtor does not continue surrender
2. Notice to creditors / other parties;
• Notice to each creditor, by i.e., post if he knows / get address
• Notice to SARS, every registered trade unions, employees themselves:
• Attach to notice board
• Front gate/door of business of debtor
3. Statement of affairs;
• Prepare and lodge a statement of affairs in the Master’s offices for inspection by
creditors (14 days)
• List movable & immovable property, debtors, creditors, movable assets subject to
security, causes of the insolvency, personal info of the debtor
• Must contain an affidavit made by the debtor verifying the contents of the
statement of affairs
EFFECTS OF NOTICE OF SURRENDER
v Stay/stopped of sales in execution;
• After publication in GG, it is unlawful to sell property attached under writ of
execution, unless person in charge of sale (like sheriff) did not know about
publication
 • However the Master may order a sale to proceed if property does not
exceed R5000
• However, the stay has no effect on civil / criminal proceeding –
attachments in execution of judgements continues even if sale in
execution stops
v Curator Bonis appointed
• Because notice is sent before the seq. order, the debtor can still do with
assets as he pleases. He may e.g sell it or pass mortgage bond over it –
so Master can appoint CB to take custody & control of estate to prevent
the debtor from dissipating his assets after publishing a notice
v Potential Compulsory sequestration
• Debtor commits an act of insolvency if No / wrong statement of affairs /
fails to make application?
v No withdrawal of notice without consent
• Cant withdraw without Master’s consent – must show good cause to
withdraw
v Lapse of notice to surrender
• If court does not accept the surrender
REQUIREMENTS: TO BE PROVED BY THE APPLICANT
1. Debtor’s estate insolvent:
• Liabilities exceed assets – court looks at the statement of affairs to determine
debtors assets and liabilities but is not bound (part of formalities)
• Test? It must be est. that the debtor cannot pay debts in full and assets will get
enough money to pay his debts.
2. Free residue sufficient to pay costs of seq:
• FR is that part of estate not subject to right of preference e.g mortgage, pledge,
legal hypothec
• Costs of seq includes “costs of surrender and costs of administration”
• If there are no assets but only liabilities: No VS but a creditor may still apply for
compulsory sequestrated
3. Sequestration to advantage of creditors:
 • Applicant must show that the creditors as a group will be better off with the seq.
then with the ordinary collection methods, there must be a dividend for each
creditor (not negligible), after paying for the costs of sequestration
• Advantage req is more strenuous in VS then in CS
• In VS applicant has to show that seq will be, whereas in CS applicant has to
show that there is reason to believe that seq will be to the advantage of creditors.
• Why? In VS Debtor has full access to their financial records e.g See statement of
affairs that they completed
• Also to not abuse the process with no benefit to creditors just to escape liabilities
4. Discretion of Court
Where all 4 aspects are proven, the court still has the discretion to sequestrate
the estate or not
 Court has authority to postpone or refuse the application
 Ex parte Ford
o Where all four aspects are proved, the court still has the discretion to
sequestrate the estate or not. The court has the authority to postpone or
refuse the application, where, for example, it was brought with an
improper motive and/or amounts to an abuse of process
 Ex parte Bouwer
o In general, a court will for instance refuse an application where an
application does not disclose detailed reasons for insolvency, the assets,
and the income and expenditure of the applicant
 Ex parte Arntzen
o where the court in rejecting an applicaton for voluntary surrender indicated
that voluntary surrender requires a high level of disclosure since the risk
for abuse is even greater than in friendly sequestrasions, as discussed
below
COURTS DISCRETION
• Even if the court is satisfied that formalities have been met and the requirements
have been complied with, the court still has the discretion to reject the surrender
• The court will consider certain factors that influence the decision to refuse the
surrender e.g:
o Debtor displayed gross extravagance and ran up debts on a pretentious scale

o Debtor had an ulterior motive in applying for VS e.g to avoid paying or to defeat
the rights of a particular creditor
o Debtor failed to give a full and frank account of his financial position in the
statement of affairs
 o The debtor’s papers were deficient in many ways

o The debtors financial problems could be dealt with more appropriately under the
NCA. See Ex parte Ford 2009 (3) SA 376 (WCC).
WHAT HAPPENS IF FORMALITIES HAVE NOT BEEN COMPLIED – S157
• Firstly, why must the notice be sent ito certain time periods?
- allow the creditors enough time to read the statement and decide
whether to oppose the application
- also the time period must not be too long, since the notice has the
effect of preventing sales in execution, thus preventing creditor
from levying execution
• Thus, not meeting the time frames is fatal for the application, it is a formal
defect/irregularity ito s 157 of the Insolvency Act
• But the defect does not invalidate the application unless it has caused a
substantial injustice which cannot be remedied by the court.
• Thus a formal defect can be condoned unless it substantially prejudices
creditors e.g where the statement was not lodged in the Master’s office, notice
was not sent to the creditors personally.
INTERACTION BETWEEN NCA AND IA
• The statement of affairs will indicate the type debt the debtor owes.
• If the debt comes from a credit agreement ito the NCA, the court can exercise its
discretion in deciding whether creditors will be advantaged by a seq. to consider
whether the remedies available in the NCA are not better off than sequestration.
• The court may even refuse to surrender the estate if it is of the opinion the
remedies in the NCA are better suited.
• Thus the court may ask the debtor to indicate whether he/she has gone through
the debt review procedure, if not why not
• If yes, they must provide a report from the debt counsellor the procedure that
was followed ect.
EX PARTE STEERS
 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
o 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.
o Therefore, the applicants applications for voluntary surrender were
refused
QUESTION 1
With reference to the notice of intention to surrender:
1.1 Where must the notice be published?
1.2 List the time restrictions, if there are any?
1.3 What is the purpose of the notice?
QUESTION 2
Alice approaches you for advice, knowing that you study Insolvency Law. A notice for
the surrender of her estate was published in the Government Gazette a while ago, but
she urgently needs cash to pay rent, and wants to sell her cellphone. She wants to
know from you if this is allowed.
QUESTION 3
Even if the court is satisfied that all the requirements have been met and the preliminary
formalities have been observed, it still has the discretion to reject the surrender. What
influences the court toward refusing the application?
QUESTION 4
The requirement of ‘advantage to creditors’ is stricter in that of Voluntary Surrender than
that of Compulsory Sequestration. With reference to Ex Parte Arntzen (Nedbank Ltd as
Intervening Creditor) 2013 (1) SA 49 (KZP), explain the facts and reasoning of the
courts. Remember to refer to relevant legislation in your case discussion.
WEEK 4 – COMPULSORY SEQUESTRATION

PRELIMINARY FORMALITIES BEFORE APPLYING FOR CS

1. Provide security;
• Who? Applicant creditor must give security to the Master
• Purpose? To pay all the seq. costs until a trustee is appointed.
• Obtain a certificate issued by the Master, confirming that security has been
given not more than 10 days before the application for seq.
• Certificate to be filed together with the application
2. Furnish a copy of the application to interested parties;
• By post, hand delivery (provide proof of compliance by means of affidavit in the
application)
• To the respondent debtor: Exception: the court may dispense with the above
req. if in the interest of the debtor or creditors
• To the SARS, trade unions (if no TU, indicate in the affidavit), employees (also
domestic) (if no employees indicate in the affidavit)
• To employees: notice board, affixing a copy to the front gate of premises, or front
door.
 • S 197B(2) of the LRA: To a consulting party: this is the person the employer
would have to consult with in determining whether to dismiss the employees
based on operational req. e.g workplace forum/tradeU.
TO BE PROVED BY THE APPLICANT CREDITOR: S10
1. Liquidated claim:
• “monetary claim” An amount that is certain and determined by order of
court/agreement e.g a claim for the sale of goods sold and delivered
• At least R100 or not less then R200 where more creditors apply jointly
2. Debtor actually insolvent or committed act of insolvency:
• Debtor is insolvent: liabilities exceed assets or
• See s 8 acts of insolvency
3. Reason to believe that seq. will advantage creditors:
• “All creditors” or a “general body of creditors”
• Test: Whether a “substantial portion” of the total of the creditors, determined
according to the value of the claims, will derive advantage from seq. A single
creditor needs to indicate why seq will be more advantageous then execution.
• Note: Waiver of s 82(6) (wearing apperal and bedding) protection to obtain an
advantage:
• Adv to creditors by looking at the following factors:
ü Compare the position of creditors with seq. and their position with no seq.
ü Where 1 creditor threatens to execute to the detriment of other creditors
ü Where property is concealed and/or disposed of might be found after seq.
• There will be no adv. to creditors if no free residue to pay dividends but instead
proved creditors have to pay a contribution or there is no likelihood that more
assets will be found
ACTS OF INSOLVENCY
• S8 (a – h) of Insolvency Act:
(a) Absence from Republic or dwelling: with intent of evading or delay payment of
the debt (applicant must prove the intent), e.g made an appointment to make
payment and then left without keeping it, leaves no address of where to be found
(b) Failure to satisfy judgement: judgment has been given against the debtor: but
the debtor cannot indicate the assets to be sold to execute the judgment or the
 sheriff cannot find sufficient disposable property to satisfy judgment & states this
in his return
(c) Disposition of property that has the effect of prejudicing creditors or
preferring one creditor: where a debtor refuses to pay one debt but pays
another in full or sells an asset below market value but fails to pay his debts
(d) Removal of property with intent to prejudice or prefer: sending money to a
foreign country so that they are not available to pay creditors’ claims (applicant
must prove the intent)
(e) Offer of arrangement: with any of his creditors to release him, wholly or in part
from his debts: however the arrangement must be indicative of the debtor
inability to pay the entire debt
(f) Failure to apply for surrender: after publish. notice or lodges an incomplete
Stat.o. affairs
(g) Notice of inability to pay: written notice sent to creditors indicating inability to
pay debts. An application for debt review is not regarded as a notice of inability to
pay, thus it is not an act of insolvency, S8A of the Insolvency Act. (interaction btw
NCA &Insolvency Act)
(h) Inability to pay debts after notice of transfer of business in the GG: if after
publishing a notice to transfer your business, the debtor who is a trader is unable
to pay all his debts.
FACTORS TO BE INCLUDED IN THE AFFIDAVIT BY CREDITOR
• Full name, address, occupation and status of applicant creditor
• Full name and personal details of the respondent debtor
• The nature, amount and cause of the applicant creditor’s claim
• Allegation of debtor’s actual insolvency or act of insolvency committed with
evidence
• Allegation that there is reason to believe that seq will be to adv. of creditors
• Allegation that security for payment of costs of seq. has been lodged and the
certificate requirement complied with.
• Allegation that notice of application sent to interested parties: the debtor, SARS,
employees, TradeU
SEQUESTRATION ORDER
• In CS, the seq. creditor approaches the court twice:
 1. Firstly to obtain a provisional order of seq. (s10). On making a prov. order, the
court has to simultaneously grant a rule nisi (an order calling on the debtor to
show cause why his estate should not be finally seq. on the return day (s11))
2. Secondly, to have the provisional order confirmed and made final (s12 )
• The same req. apply to both but standard of proof differs:
1. Provisional seq.:court must be of the opinion that prima facie the req. have
been satisfied
2. Final order: the court must be satisfied that the req. have been met on a balance
of probabilities.
• Court’s discretion: even if the court is satisfied that the req. have been satisfied
on a balance of probabilities, it still has the discretion to refuse an order.
FRIENDLY SEQUESTRATION
• Debtor’s estate sequestrated by a friendly debtor, creditor not at arm’s length.
• E.g.: Debtor arranges with friend (to whom he owes debt and is unable to pay)
that he will commit ‘act of insolvency’ (see for example s8(g)) so that friend can
apply for CS.
• Can usually be described as:
• ‘… having certain characteristics, hard to define but easy to recognise,
usually a small loan, respondent in great financial difficulty, they are often
related, the loan is customarily without security. It is seldom evidenced by
a written agreement or subsequently recorded in writing…’
• Courts must be mindful of potential of collusion / malpractice, therefore courts
must scrutinize FS to ensure the interests of creditors & that there is no abuse of
process.
• Why friendly sequestrations?
Ø to avoid the stricter req. in VS : adv to creditors, statement of affairs
VEXATIOUS APPLICATIONS
What are vexatious/malicious applications in CS?
• Vexatious/malicious applications in CS occur if the applicant is not motivated by
the best interests of the creditors as a group, but by hostility towards the debtor;
• if the applicant has no grounds for a sequestration order.
What is the remedy for the aggrieved debtor whose estate has been seq?
• Section 15 of the Insolvency Act
 • provides for compensation to a debtor if a petition for the seq of his estate is an
abuse of the court’s procedure or malicious or vexatious.
• The debtor needs to prove the damage incurred because of the malicious
sequestration application
COST OF PROCEEDINGS
• The successful applicant creditor’s taxed costs of seq. are paid from the free
residue (s97)
• Where the free residue is insufficient to pay for the costs of seq. the applicant
creditor (whether or not they have proved a claim) has to make a contribution so
that the seq. costs can be paid.
• Costs of opposing the seq. are not paid as part of the costs of seq, unless the
court makes such an order e.g court will make such an order if it considers that
the opposition was in good faith or reasonable
SEQUESTRATION OF PARTNERSHIP ESTATES
• S 2 of the Insolvency Act defines a “debtor” as including a partnership or the
estate of a partnership
• If the partnership is seq, the private estates of each partner must be
simultaneously seq also, except:
Ø the private estate of a partner commenditaire (anonymous partner - a partner
who is not involved in the management and business of the partnership).
Ø the private estate of a partner which is a juristic person
• The private estate of a partner will not be seq with the partnership estate if the
particular partner undertakes to pay the partnership debt within a specific time
and provides security for such payment.
• The seq of the private estate of a partner terminates the partnership, by
operation of law. The partnership assets are divided among the partners & the
remaining partners can form a new partnership.
• Because the partnership terminates on seq of the private estate of a partner, a
partnership estate cannot be rehabilitated, thus the partner can only apply for
rehabilitation in his personal capacity (for his private estate) not in his capacity as
a partner.
Voluntary surrender of a partnership:
Ø Applicant partner must publish/send a notice for both partnership and private
estate
 Ø Must prepare a statement of affairs for both partnership and private estate
Ø The surrender of the partnership estate and private estates may be dealt with in
a single transaction.
Compulsory sequestration of a partnership
• If the court seq. the estate of a partnership, it is also bound to seq the private
estate of each partner except:
Ø A partner not residing in the republic
Ø A partner en commandite (anonymous partner)
Ø A special partner in terms of the Special Partnership Limited Liability Act 24 of
1861
• If the private estate of a partner is unable to fully meet the costs of seq. of that
private estate, the balance must be paid out of the partnership estate BUT not
vice versa.
• A partnership estate may be CS on an act of insolvency committed by one of the
partners in his capacity as a partner
Week 6 – consequences of sequestration for the debtor
CONSEQUENCES OF THE INSOLVENT DEBTOR
• Trustee’s function: collect all the assets in the estate, realize them, and distribute
the proceeds among the creditors in the order of preference (see the ranking of
creditors in week 5).
FIRST CONSEQUENCE
1. Vesting provision: S 20(1)(a)
• The effect of the seq of the estate of an insolvent shall be to divest the insolvent
of his estate & to vest it in the Master until a trustee has been appointed, & upon
his appointment, to vest the estate in him.
• The estate remains with the trustee until the discharge of the seq or the
acceptance of an offer of composition by creditors or an order of rehabilitation
• The insolvent estate consists of:
Ø All property of insolvent at the date of sequestration
Ø All the property that the insolvent acquires during seq or that accrues to him
during seq (See property falling into the estate and excluded assets in week 8)
Ø What is property?: S 2 of the Insolvency Act defines property as:
Ø “movable or immovable wherever in RSA, including contingent interests in
property
Ø GR: property situated outside RSA is not included in the insolvent estate.
Ø Exception: movable prop. situated in a foreign jurisdiction that the insolvent
owns at the time of his seq or he acquires afterwards, during seq falls into
insolvent estate, provided he is domiciled in the jurisdictional area of the court
that seq him.
Ø What is immovable property?: land & every right or interest in land or minerals
which is registrable in a deeds office in RSA.
Ø What is movable property?: every kind of property & every right or interest
which is not immovable.
Ø Cryptocurrency — constitutes movable property (Bester v Mirror Trading
International (Pty)Ltd) t/a MTI (in liquidation) 2024 (1) SA 112 (WCC).
SECOND CONSEQUENCE
2. Legal Status of the insolvent
 • Seq reduces the status of the insolvent which limits his capacity to contract, earn
a living, litigate and hold office.
2.1 Contractual capacity
Seq does not per se take away the insolvent capacity to contract but it limits it:
1. The debtor may not enter into a contract which disposes of any of his insolvent
estate
2. Without the trustee’s written consent the insolvent may not conclude a contract
which adversely affects his estate or any contribution that he is obliged to make
towards his estate
• Such contract becomes voidable at the option of the trustee. The trustee may
elect to continue with the contract (thus it becomes binding on parties) or set it
aside (thus, recover performance made by the debtor & also restore to the third
party any benefit received by the insolvent)
• S 24(1) Protection to third parties who contracted unaware of debtor’s
insolvency:
• Valid
• Onus on the third party to prove: when he receive the prop, he was unaware and
no reason to suspect that debtor was insolvent
• applies to new assets which came into insolvent’s possession after
sequestration
2.2 Earning Capacity
The insolvent is allowed to follow any profession or occupation or to enter into any
employment contract BUT he may not without the written consent of the trustee carry
on, be employed in any capacity in, or have any direct or indirect interests in the
business of a trader who is a general dealer or manufacturer
• The definition of a ‘trader’ is very wide, it includes any person who carries on
any trade, business, industry, or undertaking in which property is sold, bought,
exchanged, or manufactured for purposes of sale or exchange, or in which
building operations of whatever nature are performed.
• It also includes anyone involved in public entertainment, or who acts as a broker
or agent for any person in the sale or purchase of any property or the letting or
hiring of immovable property.
• However, it excludes an insolvent involved in farming operations.
• A ‘general dealer’ refers to a trader operating in a fixed place of business in a
variety of goods and wares.
 • A ‘manufacturer’ refers to a trader who operates any kind of fabrication work.
• An insolvent who disregards this will be guilty of an offence and liable to
imprisonment
2.3 Hold office
In terms of the Constitution, an unrehabilitated insolvent cannot be a Member of:
• the National Assembly,
• the National Council of Provinces
• the provincial legislature or municipal council
• National House of Traditional Leaders
An insolvent is also disqualified from being a:
• trustee in an insolvent estate,
• liquidator of a company or close corporation
• director of a company or a co-operative
• business rescue practitioner
• Credit provider, debt counsellor or payment distribution agent ito NCA
• board member of the Land and Agricultural Development Bank,
• member of the governing board of the National Credit Regulator
• registered manufacturer or distributor of liquor.
A person employed in these positions or who holds these offices is required to vacate
the position or office should his estate be sequestrated in terms of the Insolvency Act.
2.4 Capacity to institute & defend legal proceedings
• Where legal proceedings relate to property in the insolvent estate, the trustee of
the estate, not the insolvent, is the person to deal with the estate, to administer it,
to sue in respect of it, and to defend actions concerning it.
• However, under the exceptional circumstances ito s 23 of the Insolvency Act, an
insolvent can sue or be sued in his or her personal capacity.
Ø matter relates to status, e.g divorce
Ø claim is to recover remuneration for work done or professional services rendered
by him or on his behalf after the sequestration of the estate;
Ø claim is for a pension to which he is entitled for services rendered;
 Ø claim is for compensation in respect of loss or damage that he or she has
suffered because of defamation or personal injury;
Ø matter concerns a delict committed by him or her after the sequestration of his or
her estate; and
Ø matter relates to a right that does not affect the insolvent estate, for example, a
right to receive maintenance from the insolvent or the right not to be unlawfully
dispossessed of property.
3. Obligations on granting a sequestration order
After granting the seq order,
• the debtor will receive the final seq order
• The debtor as well as his spouse (if married OCOP) must lodge a statement of
affairs within 7 days of service if not already done so.
• The debtor must hand over all docs & records pertaining to his affairs
• The Registrar must send a copy of the seq order to every:
Ø sheriff of every district in which the insolvent seems to reside or carry on
business
Ø Registrar of titles of immovable property in RSA
Ø officer having charge of & official register of ships and
Ø official who is holding any of the debtor’s property under attachment
• Every officer having charge of an official Register of ships or Register of Deeds
must enter a caveat against any transfer of ownership by the insolvent or the
cession or cancellation of any mortgage registered in his name or his spouse.
• Every sheriff must attach & make an inventory of the movable property of the
insolvent estate which is in his district and which is not in the possession of a
person who claims to be entitled to ito a right of pledge lien.

CONSEQUENCES FOR THE SOLVENT SPOUSE

1. Vesting Provision S 21(1)
• The additional effect of a seq. order is to vest the separate estate of the solvent
spouse in the Master & later in the trustee.
• S 21(13) defines a “spouse” as:
o wife or husband in the legal sense; but also a
 o wife or husband according to any law or custom, and also

o a person living with a member of the opposite sex although not married;
and
o same sex partners in a civil union as defined in the Civil Union Act 17 of
2006
o S 21 applies only to marriages in terms of an antenuptial contract (out of
community of property)
o Applies only to an existing relationship

• Purpose of S 21: Harksen v Lane

• to prevent collusion between spouses
• to make it difficult for spouses to deprive the estate of assets to which it is
entitled
• Help the trustee determine which assets belong to the insolvent estate
2. Exemption/postponement of the vesting
• S 21(10) provides for a postponement of the vesting of some or all property if:
• Solvent spouse carries business as a trader apart from the insolvent, or
• It appears the solvent spouse is likely to suffer serious prejudice through
the immediate vesting of her assets with the trustee
• Court will grant the temporary exemption if it is satisfied that:
- Solvent spouse is willing or able to make arrangements to protect the interests of
the insolvent estate
• During the period of exemption, the solvent spouse must apply for a
release of the assets
3. Release of solvent spouse assets S 21(2)
• Transfer is not permanent – release of property set out in s21(2)
• Trustee must release property if it falls in the following categories: S21(2)
a) property owned before the marriage to the insolvent or before 1 October 1926
b) property acquired by the spouse under a marriage settlement (before marriage
to current spouse)
c) property acquired during marriage by valid title against creditors of insolvent
 - To provide the solvent spouse with a valid title, the transaction by which she
acquired the property must have been genuine and concluded in good faith. If
it was a simulated/collusive transaction intended to deceive/defraud creditors, the
trustee may disregard it.
- A key factor in determining the question of good faith is whether the parties, at
the relevant time, were aware of the alienator’s actual or imminent insolvency.
- S 22 of the Matrimonial Property Act, donations between spouses valid -
however, such donations are subject to be set aside ito S 26 as dispositions not
made for value.
d) Property protected under certain other provisions: now obsolete
e) Property acquired with proceeds of the property mentioned above or with the
income or proceeds thereof.
 Should the trustee refuse to release the property, the solvent spouse may apply
to the court for an order declaring that the property belongs to her.
 If release was not claimed and the property does not seemingly belong to
the solvent spouse, the trustee may sell the property together with the insolvent
estate.
 However, if release was not claimed but the property seemingly belongs to
the solvent spouse, the trustee may not immediately sell the property. The trustee
must give the solvent spouse written notice of intention to sell the property and
afford the solvent spouse 6 weeks to claim release
 The creditors of the solvent spouse must prove their claims in the same manner
as creditors of the insolvent estate,
 If release is not claimed, the trustee will sell the solvent spouse’s assets and
distribute the proceeds amongst the solvent spouse’s creditors who have proved
their claims. The balance of the proceeds vest in the insolvent estate.
 If the solvent spouse commits an act of insolvency because of the vesting of her
assets in the insolvent estate, the court may postpone the seq application based
on that act of insolvency, provided that the assets have been released or release
has been applied for.
CONSTITUTIONAL CHALLENGE: HARKSEN V LANE
Facts:
A solvent spouse alleged that s 21 violated the equality clause because it differentiated
between solvent spouses and other spouses & constituted an expropriation without
compensation (s8 & 28 of the Interim Constitution).
Majority judgment:
 Ø s21 did not amount to expropriation:
• There was difference between expropriation & and depravation of property in the
section;
• as divesting was temporary to ensure the estate not deprived of property entitled
to
• adequate mechanisms for a solvent spouse to get the property back
• it served the purpose of preventing collusion between spouses in marriages
OCOP
• As to s8 the court held that 2 enquiries were to be answered:
1. Does the provision differentiate between people or categories of people?
2. If so, did the differentiation bear a rational connection to a legitimate
governmental purpose?
Ø If differentiation served no government purpose, then violation-provision served
the governmental purpose of preventing collusion between spouses in marriages
OCP and assists the trustee to identify which assets belong to the insolvent
estate.
MAJORITY JUDGEMENT
Ø Differentiation had to be proved to be unfair even if based on a prohibited ground
in the Constitution.
Ø Test for unfairness based on the impact of the discrimination on the complainant
and others in his or her situation.
Ø If discrimination justified under s33 (s36 of Constitution)
• S33 test the provisions if they serve a legitimate purpose based on equality,
freedom and human dignity and shows that there is a rational connection
between the differentiation it creates and its stated purpose
• Court held that s21 had a rational connection to the governmental purpose of
trying to stem illegal transfers of property to solvent spouses at the expense of
creditors.
• The majority also said that the provision sought to overcome the usual difficulties
attendant to the process of determining the ownership of assets belonging to
spouses who are married out of community of property
• Thus, s21 was found to be constitutional
4. Obligations on granting a sequestration order
After granting the seq order,
• The sheriff will serve a copy to the solvent spouse
• The solvent spouse must lodge a statement of affairs with the Master within 7
days of service.
SELF TEST QUESTIONS = NB FOR 2nd ONLINE QUIZ
Question 1
Zuko, an insolvent, gives private music lessons to T. (Shortly before his estate was
sequestrated, Zuko took music classes in the evenings at the Noise Academy and
qualified as a part-time music teacher).
With the consent of the trustee of the insolvent estate, Zuko entered into a partnership
agreement with S. The partnership sells cosmetics.
Zuko also entered into an agreement with L, one of his clients, that L would buy his
(Zuko’s) spa bath for R3 000. L is unaware that Zuko is insolvent.
T is in arrears with two months of her tuition fees for the music lessons.
Zuko also has not received his share of the profits in the partnership as agreed on in the
partnership agreement.
Zuko wishes to stand as a candidate in the coming provincial elections and to act for the
Fight party. His trustee is of the opinion that he should not begin his political career at
this stage.
Zuko approaches you for legal advice.
a. He requests that you recover the outstanding tuition fees and his share of the
partnership profits due to him. May he collect these debts for his personal
benefit?
An insolvent may exercise his or her trade or profession (s 23(3) of the
Insolvency Act). Zuko may therefore give music lessons. The insolvent may for
his or her own benefit recover remuneration for professional services which he
rendered after sequestration (s 23(9)). Zuko may therefore give instructions in his
own name for the recovery of the arrear tuition fees.
A contract concluded by an insolvent is valid and binding on the parties.
However, the insolvent may claim fulfilment of the contract only if the Insolvency
Act or another Act specifically empowers him or her to do so. Because there are
no statutory provisions that grant it, Zuko has the right to claim outstanding
partnership profits for his own personal benefit, but he may not give instructions
for the recovery of this debt.
b. Explain to Zuko whether he must inform his trustee that he (Zuko) has sold his
spa bath to L.
 An insolvent may not conclude a contract for the alienation of assets belonging to
the insolvent estate (s 23(2)). If the insolvent concluded a prohibited contract it
will be voidable at the option of the trustee. The trustee may decide that the
contract is binding on both parties (by not setting it aside), or he may withdraw
from the contract. If the trustee sets the contract aside he may recover the
performance already rendered by the insolvent, but he also has to return any
benefit that the insolvent obtained from the contract. The contract that Zuko
concluded with L is therefore voidable. Zuko’s trustee may therefore either
uphold the contract or withdraw from the contract and reclaim the spa bath.
Zuko’s trustee will then have to return the R5 000 that L paid for the spa bath.
c. Argue, giving reasons, whether it would make a difference to your answer in (b)
above if Zuko had received the spa bath as a birthday present after the date of
sequestration of his estate.
Yes, it would make a difference to the answer. Section 24(1) governs the
situation where an insolvent purports to alienate, for valuable consideration,
without the consent of the trustee of his or her estate, any property which he or
she acquired after the sequestration of his or her estate. If the other person
proves that he or she was not aware and had no reason whatsoever to suspect
that the estate of the insolvent was under sequestration, the alienation will
nevertheless be valid. L may therefore retain the spa bath if she can prove that
she was not aware that Zuko was insolvent and that she purchased the spa bath
for value.
d. Explain whether Zuko’s trustee may interfere with Zuko’s intended political
career.
An unrehabilitated insolvent may not be a member of the provincial legislature (s
106(1)(c) of the Constitution). The trustee’s opinion that Zuko cannot now begin
his political career is therefore correct.
Question 2
Zuko and Thandi are married out of community of property and profit and loss. On the
birth of their first child, Zuko donates his old Mercedes Benz motor vehicle to Thandi,
and then buys himself a very flashy new BMW motor vehicle. The following year, Zuko’s
estate is sequestrated. Explain the position regarding the Mercedes Benz that Zuko
donated to Mpho.
Under section 21(1) of the Insolvency Act, the property of the solvent spouse (Thandi)
vests in the trustee of the insolvent estate. In terms of section 21(2)(c), however, the
trustee must release property if it is proved that it was acquired during the marriage by a
title valid as against creditors of the insolvent’s estate. Donations between spouses are
allowed (s 22 of the Matrimonial Property Act). Accordingly, Thandi is entitled to the
release of the Mercedes Benz. (Nevertheless, the possibility exists that the donation of
this vehicle could be set aside as a disposition without value in terms of s 26.)
Question 3
Indicate whether the following statement is true or false and provide an explanation. “A
solvent wife will not be able to obtain the release of property which was donated to her
by her husband while she knew that he was going to apply for the voluntary surrender of
his estate.”
This statement is true. The solvent wife will not be able to prove that she acquired the
property by valid title during the marriage (s 21(2)(c)). She will not be able to prove that
she acquired the property in good faith because an important factor in determining the
question of good faith is whether the parties, at the relevant time, were aware of the
alienator’s actual or imminent insolvency. If the husband, to the knowledge of his wife,
was intending to apply for the voluntary surrender of his estate, it is probable that he
was actually insolvent at the time that he donated the property to his wife
WEEK 7 - Constitutional Issues and Insolvency Law
COETZEE ARTICLE
Aim: to measure the SA natural person insolvency system against the right to equality
ito both the SA constitution and PEPUDA
SA has 3 statutory debt relief measures
1. SEQUESTRATION PROCEDURE: INSOLVENCY ACT
 Discharge of pre-insolvency debt on rehabilitation
 Primary SA debt relief measure – asset liquidation process
 Access req: advantage to creditors
 Lack of assets results

2. ADMINISTRATION ORDER: S74 OF MCA

 Alternative relief measures – classified as repayment plan
 No discharge of debt
 Access req: only debtors with less than R50 000 in outstanding debt
 Debtor needs steady income
 Thus, those with outstanding debt of more than R50 000 are excluded
 Disposal income required, thus administration makes a distinction between
debtors with income and debtors without income
 End date: when all admin costs and listed creditors have been paid in full

3. DEBT REVIEW PROCEDURE: S86 OF NCA

 Alternative relief measure – classified repayment plan
 No discharge of debts
 Access req: only applies to credit agreements ito NCA & agreements ito
which credit providers have commenced individual enforcement procedures
are excluded
 Debtor needs steady income
 Disposal income required, thus draws a distinction between debtors with
income & debtors without income
 End date: upon issuing a clearance certificate …

 NINA debtors are excluded from 3 dept relief options