Table of Contents s44

SECTION: 2

Insolvency of Individuals

06319fe4842854be2344db7bec19ed66.doc TABLE OF CONTENTS

Content Page

Section 2 Insolvency of Individuals 17

Overview 19

Types of sequestration 20

Application and administrative process 25

2.3 Consequences of sequestration 38

2.4 Summary 50

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Learning Outcome The following is the Learning Outcome of this Section:

2. Interpret the Insolvency of Individuals

Learning The Learning Objectives are as follows: Objectives On completion of this Section, you will be able to:

2. Interpret the Insolvency of Individuals by:

 Comprehending the types of sequestrations

 Realising the application and administration process of insolvency

 Appreciating the consequences of sequestration

Assessment To demonstrate the achievement of the Learning Objectives, you are required to Criteria meet the criteria and/or provide the following evidence:

Comprehend the types of sequestrations  Differentiate between the types of sequestration  List the requirements for a voluntary surrender  List the requirements for a compulsory sequestration  Name the acts of insolvency that a debtor can commit

Realise the application and administration process of insolvency  Define the role of a Trustee  List the general requirements for an insolvency procedure  Describe the ranking of creditors  Define a preferential claim  Differentiate between voidable preference and undue preference

Appreciate the consequences of sequestration  List the personal consequences of insolvency for the client  Identify the effects of sequestration on the property of spouses  Define the term “composition”  Define the term “rehabilitation of an Insolvent”  List the consequences of rehabilitation

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2.1 Types of sequestrations

Introduction In our current economic climate, people may experience problems due to retrenchment, illness, etc. or attempts to raise their standard of living beyond what is financially realistic.

When a person’s liabilities exceed his/her assets, this is usually evidenced by the inability to pay his/her debts.

The following problems can arise when a debtor cannot pay his/her debts:

 Regarding the creditors: The claims of those who proceed to act against the debtor first may be met in full. Usually the remaining creditors receive very little or nothing at all

 Regarding the debtor: There is a possibility that his/her financial difficulties may never be overcome, because the creditors will always be ready to seize any assets the debtor may acquire

As discussed in Section 1 the Act provides for:

 The sequestration of the Estates of Insolvent debtors

 A fair distribution of the assets among the creditors

Remember: For the purpose of this Unit, the DEBTOR is the CLIENT and the CREDITOR is the Bank.

Voluntary In seeking voluntary surrender, a debtor approaches the Court and applies for surrender the acceptance of the voluntary surrender of his/her Estate. In a Partnership, all the Partners have to apply for the voluntary surrender of their Estates as well as the Estate of the Partnership. voluntary surrender = from a debtor’s point of Sections 3-6 of the Insolvency Act states that the Court may accept the view, is a form of voluntary surrender if the following requirements are met: debt relief  Compliance with statutory formalities. This pertains mainly to the notification of the creditors to enable them to object to the application

 Factual insolvency. The Insolvent has to prove that he/she is indeed Insolvent, in other words that the Estate’s liabilities exceeds its assets

 There must be sufficient assets to cover the cost of the sequestration. These costs include the bringing of the application to the Courts and the fees that have to be paid to the Trustee

 The sequestration must be to the financial benefit of the creditors

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The Court may still use its discretion in refusing the application, even if all the above requirements have been met.

Compulsory In the event of a compulsory sequestration one or more of the creditors may sequestration approach the Court to obtain a sequestration order. In seeking the compulsory sequestration of the Estate of his/her debtor, Section 10 of the Insolvency Act states that the creditor must prove that:

 Security has been given to the Master that all costs of the sequestration would be covered until a Trustee is appointed

 The creditor has a liquidated claim of at least R100 or if the application is brought by 2 creditors, they together have liquidated claims of at least R200 against the Insolvent (Ref. Credit Policy and Process Manual, paragraph 6.19.2.1)

 The debtor is factually Insolvent or has committed an act of insolvency

 There is reason to believe that the sequestration would be to the advantage of the creditors

The Court first grants a provisional sequestration order. This enables the debtor and other creditors to oppose the granting of a final order on the return date.

Both VOLUNTARY SURRENDER and COMPULSORY SEQUESTRATION require proof of advantage or benefit of creditors as a prerequisite for the granting of the sequestration order.

In essence these requirements entail that there should be realisable property in dividend = the sum the Estate which would yield a dividend to the concurrent (unsecured) creditors. of money to be The size of the dividend is not prescribed by the Insolvency Act – various rules of divided amongst practice deal with this requirement. the creditors of the Insolvent Estate Section 6 of the Insolvency Act states that in the event of voluntary surrender the debtor must also prove factual insolvency. However, in compulsory sequestration the creditor may prove either factual insolvency or an act of insolvency by the debtor.

The granting of a sequestration order creates a concursus creditorum (a “concourse of creditors”). It is a collective debt-collecting procedure that leads to the realisation of the Insolvent’s property and the distribution of its proceeds among the creditors in accordance with their ranking. 21 06319fe4842854be2344db7bec19e IB CP 6 LG d66.doc 2. Insolvency of Individuals

Discuss the 2 types of sequestration, namely:

 Voluntary surrender

 Compulsory sequestration

with your Coach or a fellow Learner. Ensure that you can differentiate between the two types.

Make use of the references to the Insolvency Act given in brackets for additional reading.

Use the space below and list in your own words the differences between the two types of sequestration.

Acts of insolvency Certain actions of a debtor are classified as an “act of insolvency”.

Section 8 of the Insolvency Act reads as follows:

Section 8 - Acts of insolvency Extract from A debtor commits an act of insolvency- the Act if he leaves the Republic or being out of the Republic remains absent there from, or departs from his dwelling or otherwise absents himself, with intent by so doing to evade or delay the payment of his debts;

if a Court has given judgment against him and he fails, upon the demand of the officer whose duty it is to execute that judgment, to satisfy it or to indicate to that officer disposable property sufficient to satisfy it, or if it appears from the return made by that officer that he has not found sufficient disposable property to satisfy the judgment;

if he makes or attempts to make any disposition of any of his property which has or would have the effect of prejudicing his creditors or of preferring one creditor above another;

if he removes or attempts to remove any of his property with intent to prejudice his creditors or to prefer one creditor above another;

if he makes or offers to make any arrangement with any of his creditors for releasing him wholly or partially from his debts;

if, after having published a notice of surrender of his Estate which has not lapsed or been withdrawn in terms of Section six or seven, he fails to comply with the requirements of Sub-section (3) of Section four or lodges, in terms of that Sub-section, 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 aforesaid notice as the date on which such application is to be made;

if he gives notice in writing to any one of his creditors that he is unable to pay any of his debts;

if, being a trader, he gives notice in the Gazette in terms of Sub-section (1) of Section thirty-four, and is thereafter unable to pay all his debts.

 Form a small discussion group with a few of your fellow Learners

 Divide the above “acts of insolvency” between yourselves. For example – if there are 4 Learners in the group, assign 2 points to each Learner

 Each Learner to interpret the “acts of insolvency” in his/her own words

 Discuss these interpretations between yourselves

 Use the space below and write down these “acts of insolvency” as interpreted by yourselves

 On completion, discuss any concerns/uncertainties with your Coach

2.2 Application and administration process

Introduction In South Africa we do not have specialised bankruptcy Courts such as those in America and other countries.

Instead, the administration of Insolvent Estates of individuals takes place under the supervision of the Master of the High Court. He will appoint Trustees and give them directions as to certain aspects of the administration of Insolvent Estates.

The High Court is also involved in some of the bankruptcy procedures.

Role, duties and In the case of a debtor, as defined in the Insolvency Act, a Trustee is appointed function of to take charge of the administration of the Insolvent Estate. Trustee Trustees are elected at the prescribed meetings of creditors. The ultimate responsibility of appointing an elected Trustee rests with the Master of the High Court.

Although Trustees need no special licence to be appointed as such under our law, the Master keeps a list of people that are eligible for appointment. Extract from the Act Section 54(1) of the Insolvency Act reads as follows:

(1) At the first meeting of the creditors of an Insolvent Estate the creditors who have proved their claims against the Estate may elect one or two Trustees.

The Insolvency Act regulates the duties and powers of a Trustee. The duties are mainly contained in Sections 18A, 40, 45, 69-72, 76-82 and 91 and the powers in Sections 18B, 73, 77-78(1-(3) and 80(1).

Refer to the Credit Policy and Process Manual, paragraphs 6.19.4.8 – 6.19.4.12.

Read through the paragraphs indicated above in the Credit Policy and Process Manual.

Use the space below and note the role, powers and functions of the Trustee in the space below.

General Many of the insolvency procedures in our country are governed by the ordinary requirements for rules of civil procedure of the High Courts play a significant role. application The wrong choice will waste time and perhaps leave the party facing a higher procedure order involving costs.

Sometimes the relevant legislation prescribes the application procedure, as in sequestration, rehabilitation and winding-up applications.

The Cross-Border Insolvency Act prescribes the application procedures for a foreign proceeding.

Application or motion procedure is usually quicker and cheaper than action procedure. Application procedure is specific and based largely on the exchange of affidavits and then argument in Court by counsel.

There are usually three sets of affidavits involved in an opposed application:

 The founding or initial affidavit affidavits = written  The opposing affidavit statements confirmed by oath for use as evidence  The replying affidavit in Court

General requirements for application procedure, continued

Application Procedure

1. Notice of motion and founding affidavit 2. Supporting affidavits/relevant documentation

3. Motion Court

1. The application procedure begins with the issue of an application, comprising a notice of motion and a founding affidavit.

2. One or more supporting affidavits and relevant documentation could be attached to this notice.

3. The Motion Court hears the application. In this Court the parties’ legal representatives argue on the “papers”. Oral evidence is seldom heard and the legal advisers limit their arguments to points of law and to the allegations contained in the affidavits.

Applications can be brought either ex parte or on notice.

Applications ex parte usually involve an application and founding affidavit only, because the application is not to be served on another party.

The applicant files the application with the Registrar of the relevant Court.

Ex parte applications can be used where the applicant is the only person with an interest in the case, for example an application for voluntary surrender (the creditor must be informed of this application) or for urgent relief (only in very limited instances – the application must often be served on the other party, even if the notice period is very short, for example a few hours).

General Applications on notice involve the applicant (bringer of the application) and the requirements for respondent (the opposer of the application). application procedure, continued Where proceedings could affect the interest of another party, the application is usually brought on notice. The application is filed with the Registrar of the Court and must be served on the respondent, and both are thus informed on the proposed application

 Applications on notice involve an applicant and a respondent

 The applicant files the application with the Registrar of the relevant Court who gets prior notice of the proposed application

 The other party involved will have prior knowledge of the application as the application will be served on him/her

The notice application must be used where the other persons have an interest in the case.

If an application of any kind affect the rights/interests of any person not joined in the proceedings, he/she may intervene through the formal process of intervention.

If another person’s interest will be affected by the order that the applicant seeks, the Court will not grant a final order without giving the respondent the opportunity of stating his/her case (the audi alteram partem rule).

Rule nisi = The Court will grant a provisional order with a return date (a rule nisi), and provisional order of which must be served on the respondent. sequestration The rule nisi calls on the respondent to appear before the Court on a certain date to furnish reasons why the provisional order should not be made final (confirmed). audi alteram In this way, the rule on hearing both sides (the audi alteram partem rule), is partem rule = complied with. hearing on both sides

Refer to the Credit Policy and Process Manual, paragraph 6.19.4.2 – Stopping of accounts on notice of provisional order.

Granting of The authority to grant the sequestration order vests in the High Court that sequestration has the jurisdiction to hear the matter. order Section 149(1)(a) and (b) of the Insolvency Act reads as follows:

Section 149 - Jurisdiction of the Court

(1) The Court shall have jurisdiction under this Act over every debtor Extract and in regard to the Estate of every debtor who – from the Act (a) on the date on which a petition for the acceptance of the surrender or for the sequestration of his Estate is lodged with the Registrar of the Court, is domiciled or owns or is entitled to property situate within the jurisdiction of the Court; or

(b) at any time within twelve months immediately preceding the lodging of the petition ordinarily resided or carried on business within the jurisdiction of the Court:

Provided that when it appears to the Court equitable or convenient that the Estate of a person not domiciled in the Republic be sequestrated elsewhere, or that the Estate of a person over whom it has jurisdiction be sequestrated by another Court within the Republic, the Court may refuse or postpone the acceptance of the surrender or the sequestration.

Section 149(1)(a) makes it clear that the Court will have jurisdiction to hear a sequestration application if the debtor is domiciled, owns or is entitled to property within the jurisdiction of the Court,

where the debtor, within 12 months before the application, resided or carried on business within that area.

Section 149(1) further states that the Court may also refuse to grant a equitable = fair or sequestration order. This may happen if it appears equitable or convenient just that, where the debtor is not domiciled within the Republic of South Africa, his Estate be sequestrated elsewhere,

if it appears that another Court that has jurisdiction over the debtor.

Notice of Section 17 of the Insolvency Act deals with the notice of the sequestration of sequestration the Estate.

Extract Section 17 - Notice of sequestration from the Act (1) The Registrar shall without delay transmit- one original of every sequestration order and of every order relating to an Insolvent Estate or to a Trustee or to an Insolvent, made by the Court, to the Master;

one original of every provisional sequestration order or if a final sequestration order was not preceded by a provisional sequestration order, then of that final order, and of every order amending or setting aside any prior order so transmitted, which was made by the Court to-

the deputy-sheriff of every district in which it appears that the Insolvent resides or owns property;

every officer charged with the registration of title to any immovable property in the Republic; (ii)bis every officer having charge of a register of ships kept at a port of registry appointed as such in terms of paragraph (c) of Section four of the Merchant Shipping Act, 1951, for the registration of ships; [Sub~para. (ii) bis inserted by 5. 1 of Act No.57 of 1951.]

every sheriff and every messenger who or whose deputy holds under attachment any property belonging to the Insolvent Estate.

The Registrar of the High Court must immediately send the following documentation to the Master of the High Court (Section 17(1)(a):

 An original of the sequestration order

 An original of every order made by the Court concerning an Insolvent Estate, a Trustee, or an Insolvent

He must also send the following documentation to the sheriff of every district where the Insolvent appears to reside or to own property (Section 17(1)(b)(i):

 An original of every provisional sequestration order or of every final sequestration order (not preceded by such a provisional order)

 Every original of every order made by the Court amending or setting aside such a prior order

Notice of He must act in the same way as regards: sequestration, continued  Every officer responsible for registering title to any immovable property in the Republic (Section 17(1)(b)(ii)) immovable property = means  Every officer responsible for maintaining a register of ships (Section 17(1) land and every right (b)(ii)bis) or interest in land or minerals which is  Every sheriff who holds attached property belonging to the Insolvent registrable in any Estate (Section 17)(1)(b)(iii)) office in the Republic intended On receiving these orders, or a certificate and a copy of an order sent in terms of for the registration Section 18A of the Act (which concerns details about the Insolvent), each such of title to land or the right to mine official must register the document and note on it when it was received at his office.

In addition, the official responsible for registering immovable property must enter caveat = a process a caveat against: in Court to suspend proceedings  The transfer of all immovable property

 Cancellation or cession of any bond registered in the name/belonging to the Insolvent

If the sequestration order or the certificate in terms of in Section 18A names the Insolvent’s spouse, he must also enter a caveat against that spouse (Section 17(3)).

Similarly, each officer in charge of the ship’s register must enter a caveat against the:

 Transfer of every ship or share in a ship

 Cancellation or cessation of every deed of mortgage of a ship

 Share in a ship registered in the name of or belonging to the Insolvent or spouse (Section 17(3)bis)

Section 17(4) states that on receiving a sequestration order or an order setting aside a provisional sequestration order, the Master must give notice of this order in the Government Gazette.

Sequestration of As in the case of an individual, a Partnership may also petition the Court for the Partnerships acceptance of the surrender of the Partnership Estate as well as the Estate of each of the Partners, for the benefit of the creditors.

Refer to the Credit Policy and Process Manual, paragraph 6.19.2.3.

With the sequestration of a Partnership Estate, the Court sequestrates the Estates of all the Partners simultaneously.

However, by giving security for the payment of all the Partnership debts within a period fixed by the Court, the sequestration of a Partner’s personal Estate can be avoided.

The sequestration of a Partnership Estate or of the private Estate of any of the Partners results in the termination of the Partnership.

Sequestration of All legal proceedings, including applications for the sequestration of a farmer’s farmers Estate, shall be stayed if the debtor applies for assistance under the Agricultural Credit Act.

If there is a reasonable prospect that the application will receive assistance, a certificate will be issued in this regard.

Sequestration of Such an Estate may be sequestrated at the instigation of a creditor, but only after deceased Estates an Executor has been appointed.

Before you continue with the “Administration of an Insolvent Estate”, on the next page, read paragraphs 6.19.5.1 – 6.19.12.6 in the Credit Policy and Process Manual.

Administration of In essence the administration of the Estate runs as follows: the Estate 1. The Master convenes the first meeting of creditors, at which creditors may prove claims and elect a Trustee (Sections 40(1)(2)).

2. The Master then appoints the Trustee (Section 56). Certain prescribed people are disqualified from being appointed as Trustees. The Trustee has a list of statutory powers and duties to perform under the Master’s supervision.

3. The Trustee convenes the second meeting of creditors and also the general meetings or the special meetings (Sections 40(3)). Creditors have to prove their claims against the Estate, and these are either admitted or rejected by the Trustee.

Section 48 of the Act provides for the proof of conditional claims.

Section 50 deals with the inclusion of interest in arrears with regard to an interest-bearing debt as well as the proof of a debt that will become due only after the date of sequestration.

At these meetings, wide statutory powers may also be exercised for interrogating the Insolvent and persons who may provide information to the Trustee (Sections 64-66). These interrogations usually help to locate assets that the Insolvent might have concealed or disposed of.

4. The Trustee must realise the assets (Sections 80bis, 82), and draw up plans for distributing their proceeds among the different classes of creditors (Sections 82, 83). If the Estate funds do not cover the administration costs, certain prescribed creditors have to pay contributions to the Estate (Sections 105, 106).

5. The Trustee is entitled to remuneration according to the prescribed tariffs (Section 63, Tariff B). He/she must give final account of the distribution of the proceeds of the property in prescribed amounts that must be approved by the Master.

Interested parties may object to the Estate accounts before the Master approves them. Sections 107 – 112 deals with the confirmation of accounts and distribution of proceeds of realised assets.

The Trustee must follow the prescribed order of payment. However, if the Insolvent enters into a composition with his/her creditors, that composition governs the finalisation and distribution of the Estate (Sections 119-123).

In the abovementioned discussion, point 3, we discussed the second meeting of creditors as the fact that creditors have to prove their claims against the Estate, and these are either admitted or rejected.’

Reflect back to your own duties in the Credit Department and the handling of claims against the Insolvent Estate of a debtor. If you have never before handled a claim against an Insolvent Estate, talk to one of your colleagues or your Manager. For further information, refer to the Credit Policy and Process Manual, paragraph 6.19.5.3.

Use the space below and describe/list the process followed in the Bank (apart from the minimum requirements of the Act), when you institute a claim against the Insolvent Estate of a debtor.

Ranking of The sequestration order activates the administration procedure (as discussed creditors above) for realising the Estate property and duly distributing the proceeds among the creditors – within their respective classes of ranking. (Only the estates (not assets) of juristic persons are liquidated e.g. assets of close corporations, companies. The estates of sole proprietors, private individuals or partnerships are sequestrated.) As discussed the creditors give instructions to the Trustee on how the assets of the Estate should be realised. This will happen during the 2nd meeting of the creditors.

Assets could be realised through:

 Public auction

 Public tender

 Private sale

After liquidation of the assets, the division among the creditors is conducted according to the order of preference, or statutory ranking.

The assets of the Estate is divided into two groups, namely: encumbered = burden (a person or Estate) with debts,  Encumbered assets especially mortgages  Free residue

An encumbered asset is an asset that serves as real security while others provide personal security for a claim, for example: Real security:  A mortgage bond over fixed property  Special bond over movable property  Pledge  Lien Personal security:  Notarial bonds  Suretyship

The proceeds of each asset are used to extinguish the claim of the secured creditor. If the asset serves as security for more than one claim, the claims will be extinguished in an order of preference.

Example: If there are two mortgage bonds over the same fixed property the one registered first will, as a general rule, enjoy preference above the second.

If the proceeds of the property are not enough to satisfy the claims of both bondholders in full, the 1st bondholder will be paid first and the 2nd will receive the balance, if any, of the proceeds.

The costs of sequestration pertaining to an encumbered asset, are extinguished from the proceeds of the asset before payment to the secured creditor(s). Once all the secured claims have been extinguished, the balance will form part of the free residue. 36 06319fe4842854be2344db7bec19e IB CP 6 LG d66.doc 2. Insolvency of Individuals

Ranking of The free residue consists of all the unencumbered assets of the Estate. These creditors, funds are used first to extinguish preferential claims and after that concurrent continued claims.

Preferential claims are claims enjoying preference above other claims. This Unencumbered = not having an could happen as a result of law, for example claims for income tax or for certain liabilities arrear wages of employees. If there are insufficient funds in the Insolvent Estate to pay all the preferent creditors, those enjoying the highest preference are paid in full before the rest.

Access the Insolvency Act and read Sections – 94-105. Use the space below and list the order in which the various preferent claims are paid out.

Voidable/Undue Sections 29 and 30 of the Act reads as follows: preference

29. VOIDABLE PREFERENCE (Six months) Extract from Every disposition of his property made by a debtor not more than six months the Act before the sequestration of his Estate, or before his death if he is deceased and his Estate is Insolvent, which has the effect of preferring one creditor above another may be set aside by the Court if immediately after making it the liabilities of the debtor exceeded his assets, unless the person in whose favour the disposition was made proves that it was made in the ordinary course of business and that it was not intended to prefer one creditor above another.

30. UNDUE PREFERENCE TO CREDITORS (At a time)

If a debtor made a disposition of his property at a time when his liabilities exceeded his assets, with the intention of preferring one of his creditors above another and his Estate is thereafter sequestrated, the Court may set aside the disposition.

The above extraction from the Act makes it clear that if one creditor receives preference over another creditor, he may be ordered to pay the funds received by him back to the Insolvent Estate. He may then lodge a claim against the Estate along with the other creditors.

Reflect the above on your duties in the Credit Department. Can you list a situation where the above happened? For example a claim was instituted against an Insolvent Estate, but was retracted because of its “preferred status”?

2.3 Consequences of sequestration

Introduction Once a person’s Estate is sequestrated, there are various consequences for the Insolvent.

It affects the Insolvent’s:

 Personal status

 Property

 Civil proceedings instituted by or against him/her

It could also have an impact on certain contracts concluded before the sequestration.

More importantly however, is that it can have vast consequences for the Bank.

Personal There are several personal consequences for the client after the sequestration of consequences of his/her Estate. sequestration Section 23 of the Act contains 14 Sub-Sections on the Insolvent’s rights and obligations during his sequestration.

Access the Act and read carefully through Section 23. Use the space below and list the consequences and/or obligations after the sequestration on the client in your own words.

On completion, discuss your answer with a fellow Learner and your Coach.

The effect of Section 20 states the effect of the sequestrations on the Insolvent’s sequestration on property. the property of the Insolvent  The sequestration divests the Insolvent of his Estate and vests it first in the Master of the High Court and then in the Trustee when appointed divests = deprive, (Section 20(1)(a)) dispossess  It stays civil proceedings against the Insolvent until the Trustee has been vests = bestow appointed, unless the Insolvent may begin them for his own benefit property or power (Section 20(1)(b)) on a person with an immediate fixed right of immediate  It stays execution of judgments against the Insolvent once the sheriff or future becomes aware of the insolvency (Section 20(1)(c)) possession For all these purposes, the Insolvent’s Estate comprises the property mentioned below, except for the provisions in Section 23 of the Act: sheriff = the official  Property at the sequestration date who carries out the execution of  Property that the Insolvent may acquire or that may accrue to him during judgments and other Court the sequestration processes

Civil legal Section 75 of the Act deals with civil legal proceedings against the proceedings Insolvent Estate.

 If these proceedings were instituted against the debtor before sequestration, they lapse three weeks after the first meeting of the creditors has been held

However, if the person beginning the legal proceedings notifies the Trustee of his intentions, or if there is no Trustee, the Master, that he intends going on with them, he may initiate these proceedings within a further three weeks (Section 75(1))

 After the Master of the High Court has confirmed a Trustee’s account in an Insolvent Estate under Section 112, no one may institute legal proceedings against that Estate regarding any liability arising before its sequestration. However, the relevant Court may, by setting conditions that it considers appropriate (subject to Section 112), allow those proceedings to be instituted if it decides that there was a reasonable excuse for the delay in beginning them (Section 75(2))

 The Trustee may, except where statute to the contrary, abide by repudiate = refuse unexecuted contracts entered into by, or on behalf of the Insolvent before to discharge an the date of sequestration, or he/she may repudiate these contracts obligation or debt In general the Trustee has an election to abide by any unexecuted contract or to repudiate it – with particular consequences for the solvent party to the contract.

In certain instances the Insolvency Act and other legislation prescribe specific rules altering this general principle.

 Section 35 deals with the sale of immovable property

 Section 36 deals with the cash sale of movable property

 Section 37 deals with lease contracts

 Section 84 deals with instalment sales transactions

Access the Act and read through the following Sections:

 Section 35 – the sale of immovable property

 Section 36 – the cash sale of movable property

 Section 37 – lease contracts

 Section 84 – instalment sales transactions

Discuss the above Sections with a fellow Learner or your Coach. Note your understanding of each of these Sections in the space below

Section 35

Section 36

continued

Section 37

Section 84

Effects of The sequestration of a person’s Estate also affects the property of his/her spouse. sequestration on property of spouses

“Spouse” is given an extended meaning in the Act and includes spouses married according to any legal system or custom, and a man and a woman who live as husband and wife without being married.

If spouses are married in community of property, their joint Estate is sequestrated and it is therefore compulsory to join both spouses as applicants or respondents respectively. In other words, both will be regarded as Insolvents after the sequestration order has been granted.

By contrast, where spouses are married out of community of property, they have separate Estates, and so it is the Estate of the debtor spouse that should be sequestrated.

However, Section 21 of the Insolvency Act drastically affects this separateness of these spouses’ Estates. This Section provides that the assets of the solvent spouse vest in the Trustee until released by him.

The Trustee will only release the property, if the solvent spouse can prove that the property:

 Belonged to the solvent spouse immediately before marriage, or was acquired before 1 October 1926

 Was acquired under a marriage settlement, but if the Estate is sequestrated within two years of the registration of the ante-nuptial contract, the settlement can be set aside

 Has been acquired during marriage in the solvent spouse’s own right, i.e. an inheritance, or money earned.

 Is safeguarded under the Insurance Act of 1923

 Was acquired with any of the foregoing, its income or proceeds

Now that we have discussed the effects of a sequestration on the client, we need to look at the effects on the Bank.

Talk to your Manager in the Credit Department about the risks involved in the sequestration of a client and the impact thereof on the Bank.

Establish what the consequences are for the Bank and what measures are put in place to minimise or prevent these risks.

Composition In some instances, it may be advantageous to the creditor to make an arrangement with the Insolvent, for example to pay them off over a period of time, rather than proceeding with sequestration.

It is preferable for all the creditors to be bound to the arrangement, since an uncooperative creditor might still apply for the sequestration of the Insolvent’s Estate.

Although it is possible in our common law for a debtor to arrive at a composition with the creditors by reaching an agreement, a special composition procedure is created in the Insolvency Act (Section 119).

The purpose is to bind all the creditors once a prescribed majority of creditors is in favour of the composition.

The Insolvent may at any time after the 1st meeting of creditors, submit a written offer of composition to the Trustee. If the Trustee is of the opinion that the offer might be acceptable to the creditors, he will send a copy of the offer to each of them.

A meeting is then convened at which the creditors will vote on whether to accept the offer or not.

If the composition is accepted by at least three quarters of the creditors who also hold at least three quarters in value of the proved claims, it binds all the concurrent creditors including those who voted against it.

Discuss the above issue of “composition” with your Manager or Coach. Ask them for examples within the Bank, i.e. relevant cases where composition was reach with an Insolvent client.

Use the space below and note key learning points.

Discharge for One of the purposes of sequestration is to enable the debtor to overcome his/her individual financial difficulties and make a fresh start. Insolvents The Act provides for the rehabilitation of Insolvent people.

REMEMBER: A PARTNERSHIP IS NOT A PERSON AND THEREFORE CANNOT BE REHABILITATED.

Rehabilitation means that the debtor’s status is restored – for example, he/she may do business as a general dealer/manufacturer or may act as a director of a company.

The Insolvent will be rehabilitated automatically after 10 years – calculated from the date of the granting of the provisional sequestration order (Section 127A).

Before then, he/she may apply to the High Court for a rehabilitation order (Sections 124 – 126). Usually the Insolvent will remain under sequestration for at least four years before seeking rehabilitation.

In the rehabilitation for individuals, the Master fulfils certain statutory functions, such as making recommendations to Court as regards rehabilitation in certain prescribed instances (Section 124(1)).

Generally the Insolvent obtains a discharge of his/her pre-sequestration debt in so far as it has not been paid in full.

Consequences of Rehabilitation also has its own consequences for the debtor, namely: rehabilitation  His/her status is restored

 The Insolvent’s debts before the sequestration are discharged (Section 129(1)(b)), except debts which arose out of fraud on his/her part

 Property received by the Insolvent after rehabilitation will vest in him/her and not in the Trustee. However, the property left in the Insolvent Estate at the time of rehabilitation, does not revert to the Insolvent. It remains available for the creditors of the Insolvent Estate, unless all claims have been paid in full

Before we continue with the next Section, let us check your knowledge on the consequences of sequestration. Attempt to answer these questions without referring back to the content and your notes.

Question 1 The Insolvent may not, under any circumstances, conclude valid contracts. Motivate your answer.

Answer True  False 

Question 2 The Insolvent may not recover remuneration for work carried out by him. Motivate your answer.

Question 3 The Insolvent is not expected to keep detailed records of any assets received and/or expenses incurred in his occupation or employment. Motivate your answer.

Question 4 Describe the conditions under which an Insolvent may conclude contracts.

Answer

Question 5 The Trustee may access money that is not used for supporting the Insolvent and his dependants. Motivate your answer

Question 6 Describe the effect on the property of the spouse of the Insolvent if he/she is married in community of property.

Answer

Question 7 Where spouses are married out of community of property they have separate Estates. It is the Estate of the debtor spouse that is sequestrated. Section 21 of the Act states that the assets of the solvent spouse vest in the Trustee until released by him.

List the 5 points under which the Trustee will release the property.

Answer

2.4 Summary

Summary Below is a summary of the key learning points of this Section. Read through them carefully and ensure that you understand all the concepts. Discuss any uncertainties with your Coach before you move on to the next Section.

 There are two types of sequestration:

 Voluntary surrender – the client approaches the Court and applies for the acceptance of the voluntary surrender of his/her Estate. In the event of a Partnership, all the Partners have to apply for the voluntary surrender of the Partnership Estate as well as each Partners’ personal Estate  Compulsory sequestration – one or more of the creditors approach the Court to obtain a sequestration order

 Many of the insolvency procedures in our country are driven by the ordinary rules of civil procedure of the High Court. A party must decide which particular Court to approach

 On receipt of notice of a provisional order against a client, all accounts must be stopped. If the Estate of one spouse is sequestrated, the account of the other must also be stopped, unless they are living apart under a judicial order of separation

 All legal proceedings, including applications for the sequestration of a farmer’s Estate, shall be stayed if the debtor applies for assistance under the Agricultural Credit Act. If there is a reasonable prospect that the application will receive assistance, a certificate will be issued in this regard

 Deceased Estates may be sequestrated at the instigation of a creditor, but only after an executor has been appointed

The administration of the Estate runs as follows:

1. The Master convenes the first meeting of creditors, at which creditors may prove claims and elect a Trustee.

2. The Master then appoints the Trustee (Section 56). Certain prescribed categories of people are disqualified from being appointed as Trustees. The Trustee has a list of statutory powers and duties to perform under the Master’s supervision.

3. The Trustee convenes the second meeting of creditors and also the general meetings or the special meetings. Creditors have to prove their claims against the Estate, and these are either admitted or rejected. Section 48 of the Act provides for the proof of conditional claims. The Trustee must realise the assets and draw up plans for distributing their proceeds among the different classes of creditors. If the Estate funds do not cover the administration costs, certain prescribed creditors have to pay contributions to the Estate.

Summary, 4. The Trustee is entitled to remuneration according to the prescribed continued tariffs. He/she must give final account of the distribution of the proceeds of the property in prescribed amounts that must be approved by the Master.

5. The Trustee must follow the prescribed order of payment. However, if the Insolvent enters into a composition with his/her creditors, that composition governs the finalisation of the Estate.

 Once a person’s Estate is sequestrated, there are various consequences for the Insolvent.

It affects the Insolvent’s:  Personal status  Property  Civil legal proceedings instituted by or against him/her  It could also have an impact on certain contracts concluded before the sequestration

 The Insolvent may at any time after the 1st meeting of creditors, submit a written offer of composition to the Trustee. If the Trustee is of the opinion that the offer might be acceptable to the creditors, he will send a copy of the offer to each of them

 Rehabilitation means that the debtor’s status is restored – for example, he/she may do business as a general dealer/manufacturer or may act as a director of a company

 The Insolvent will be rehabilitated automatically after 10 years – calculated from the date of the granting of the provisional sequestration order

On rehabilitation the client’s:

 Status is restored

 Debts which arose before the sequestration are discharged, except debts which arose out of fraud on his/her part

 Property received by the Insolvent after rehabilitation will vest in him/her and not in the Trustee. However, the property left in the Insolvent Estate at the time of rehabilitation, does not revert to the Insolvent. It remains available for the creditors of the Insolvent Estate, unless all claims have been paid in full

 A Partnership can not be rehabilitated in terms of Section 128 of the Act

Use the space below and summarise your own key learning points from this Section.

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