1

3. COMPULSORY SEQUESTRATION

In the previous chapter we looked at the first method in which a person’s estate could
be sequestrated – that is – at his own request. The second method is compulsory
sequestration. Here sequestration is requested by the disgruntled creditors of the
insolvent debtor and the debtor does not have a say in the matter.

A creditor may have good grounds for suspecting that the debtor’s estate is insolvent,
but unless he has actual knowledge of the debtor’s financial affairs (and can prove it) it
is impossible for him to establish that the debtor is indeed insolvent. Thus the
Insolvency Act has compiled a number of acts and defaults called ‘acts of insolvency’.
If the debtor commits any one of these acts of insolvency the creditor will be entitled to
apply for the compulsory sequestration of the debtor’s estate. The commission of an
act of insolvency by the debtor therefore discards the necessity to prove actual
insolvency.

NOTE: Any creditor can apply for the compulsory sequestration of the debtor’s estate
even though the act of insolvency was not committed against him, but against some
other creditor. Also, if spouses are married in community of property, an act of
insolvency committed by one spouse is considered as an act of insolvency committed
by both spouses and the joint estate can be sequestrated on this basis. The specific
acts of insolvency are laid down in s8 of the Insolvency Act.

Section 8: Acts of insolvency

There are 8 acts of insolvency. A debtor commits an act of insolvency:

- In terms of s8(a) if he leaves the Republic; OR if he is already out of the

Republic, remains absent (ie stays away); OR departs from his dwelling or
otherwise absents himself (ie stays in SA but leaves his house and tries to get
away / hide from the creditors), but in any scenario absents himself with the
intention of evading or delaying the payment of his debts.

Thus, the first act of insolvency essentially arises when the debtor is absent.
HOWEVER, for the creditor to succeed with proving this act of insolvency, the
onus is on him to show that not only is the debtor absent, but he is absent with the
intention to evade or delay payment of his debts.

If this intention cannot be shown, then an application for compulsory sequestration

based on this act of insolvency will not succeed. The reason is because a debtor
may be absent for legitimate reasons, for example, for work, health or family
related reasons.

A creditor can establish this intention in various ways, for example, by showing that
the debtor has taken a large sum of money with him; that he was selling assets
before he left in order to use the proceeds to get away; or the debtor had made an
appointment with a creditor to make payment in respect of a particular debt and left
without keeping the appointment. Generally a court will taken into consideration
the all the suspicious factors and unusual acts committed by the debtor before and
at the time of his absence when deciding if the debtor has committed an act of
insolvency in accordance with s8(a).
 2

- In terms of s8(b) if there is a non-satisfaction of a warrant (writ) of execution, an

act of insolvency would have been committed. Section 8(b) reads as follows:
“If a court has given judgment against the debtor and he fails, upon demand of
the officer whose duty it is [ie the sheriff] to execute the judgment, to satisfy it or
to indicate to the officer disposable property sufficient to satisfy it; OR if it
appears by the return of service made by the officer that he has not found
sufficient disposable property to satisfy the judgment”. (See Moodley v Hedley)

This particular act of insolvency actually covers two distinct acts of insolvency, and
although they are distinct from each other they are linked as the second act can
only be committed if the first one cannot be established:

(1) If a court has given judgment against the debtor and has issued a warrant
(writ) of execution, the sheriff of the court is now allowed to attach assets of
debtor to sell at a ‘sale of execution’ where the proceeds will be used to pay off
the debt to the creditor to whom the debtor is indebted. This warrant of
execution must be served PERSONALLY on the debtor unless the debtor is
married in community of property. If the sheriff serves the warrant on the
debtor he has the opportunity to pay the debt (ie he can satisfy the judgment)
and if he does so, NO act of insolvency has been committed. If the debtor
cannot pay he must indicate to the sheriff (point out) his assets or enough of
his assets which, if sold at a sale in execution, would cover the judgment debt.
If assets of sufficient value (to satisfy the judgment debt) are pointed out the
debtor has NOT committed an act of insolvency. If the debtor cannot point out
sufficient assets (disposable property) to satisfy the judgment debt, the sheriff
will make a return of ‘nulla bona’. In this instance an act of insolvency HAS
been committed and any creditor may apply for the compulsory sequestration
of the debtor’s estate. If property of the debtor is attached but did not realise
an amount sufficient enough to satisfy the judgment debt, an act of insolvency
is also considered to have been committed on the ground that the debtor did
not point out sufficient assets.

(2) The second act of insolvency under s8(b) only arises if the first one, as
explained above, cannot be established due to the debtor’s ABSENCE, thus
the warrant of execution could not be served on him PERSONALLY. If the
warrant cannot be served on the debtor personally due to his absence the
sheriff cannot give the debtor the opportunity to pay the debt (to satisfy it) or to
point out to him sufficient property / assets which can be attached to satisfy the
judgment debt. This is risky because the sheriff has to rely only on whatever
has can see and has access to and if he cannot find sufficient assets from that
he will make a nulla bona return of service. The nulla bona return of service
will be considered the act of insolvency that will allow the debtor’s creditor(s) to
apply for his compulsory sequestration.

 “disposable property” means movable or immovable property / assets,

corporeal or incorporeal property / assets. Also the property / assets must
not be encumbered as then they would not be disposable, for example,
movables pledged to the government under the Agricultural Credit Act are
not considered “disposable property”, also immovable property subject to a
mortgage bond is not considered “disposable property”. Although, there are
exceptions, for example: immovable property subject to a mortgage bond
 3
will be regarded as disposable property if the creditor is the first mortgagor
(ie the bank).

- In terms of s8(c) an act of insolvency will be committed if the debtor prejudices

one or some creditors or prefers one or some creditors. This section reads that
an act of insolvency will be committed if the debtor 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.

“Disposition” means the act of disposing of assets for example, by selling them, or
donating them etc. This act of insolvency includes actual disposing of property /
assets which prejudices or prefers creditors and attempted disposing of property /
assets.

In the first case – if the property was actually disposed of, the actual EFFECT of
this has to be considered. If evidence can be shown that some creditors were
prejudiced or preferred then an act of insolvency has been established. Examples
are if a debtor’s estate is insolvent and he sells an asset for much less than its
estimated worth thereby prejudicing all his creditors; or if he constantly defaults on
one debt but pays another debt in full. NOTE it is only the EFFECT of the
disposition that is relevant – that is – whether some creditors were prejudiced or
preferred (an objective factor). The subjective intention of the debtor is irrelevant.
It is of no relevance or importance whether the debtor made the disposition in
good faith or by accident or recklessly or mala fide etc.

In the second case – if only an attempt was made to dispose of the property, then
the effect that the disposition would have had, had it occurred needs to be
considered. Here also, it is the EFFECT that the disposition would have had that is
important to establish this act of insolvency and the debtor’s subjective intentions
are of no relevance. (See De Villiers NO v Maursen Properties.)

- In terms of s8(d) a debtor commits an act of insolvency if he removes or

attempts to remove any of his property with intent to prejudice his creditors or to
prefer one creditor above another.

For this act of insolvency to be proved, the creditor need NOT show that the debtor
has disposed of the property, only that he has removed the property – that is
hidden it, concealed it (thus he still owns it). The chief difference between this act
of insolvency and the one under s8(c) is that in this instance the intention of the
debtor is an important and relevant enquiry (the effect of the removal, on the other
hand, is irrelevant).

The debtor must have removed the property with the intention of prejudicing or
preferring creditors. Since intention is a subjective factor (ie the thoughts in the
debtor’s mind) it’s difficult to ascertain, so his intention is thus inferred by looking at
the circumstances surrounding the removal. For example, if a debtor knows that a
warrant of execution has been ordered against him and that a sheriff will be
attaching some of his disposable property in execution of the debt and he moves
some of his more valuable property to another location, like a friend’s house or
rents a storage room, the surrounding circumstances indicate that the debtor is
 4
removing this property with the intention to prejudice or prefer some creditors. In
this example it would be to prejudice creditors as the debtor only removed his
property once hearing of the warrant of execution; what other reasonable reason
could exist as to why the debtor would want to store some of his property
elsewhere? Etc etc…

- In terms of s8(e) the debtor commits an act of insolvency if he makes an

arrangement or offers to make an arrangement with any of his creditors for
releasing him wholly or in part from his debts.

For the arrangement of the debtor to amount an act of insolvency the arrangement
must indicate that the debtor admits liability to the full amount of the debt, AND
the arrangement must indicate that the debtor is unable to pay the debts from
which he seeks to be released (even if this not done expressly but tacitly). If the
debtor denies liability altogether, or disputes the amount owing, or merely asks for
an extension of time to pay, he does not commit an act of insolvency in terms of
s8(e).

- In terms of s8(f) the debtor commits an act of insolvency if he, after having
published a notice of surrender of his estate (which has not lapsed or been
withdrawn in terms of s6 or s7), fails to comply with the requirements of s4(3);
OR lodges a statement of affairs in terms of s4(3) which is incorrect or
incomplete in any material respect; OR fails to apply for the acceptance of the
surrender of his estate on the date mentioned in the notice of surrender as the
date on which the application is to be made.

Three acts of insolvency are embodied in s8(f). After publishing a notice of

surrender (which has not lapsed or been withdrawn):

(1) The debtor fails to comply with s4(3) which requires him to lodge a statement
of affairs with the master; OR

(2) The debtor lodges his statement of affairs with the master, but the statement of
affairs is incomplete or incorrect in a material respect. What would be material
incorrect information or incomplete information? The Act gives no indication as
to what would be considered ‘material’, but the fall back enquiry would be the
EFFECT it would have on creditors. If any of them would suffer prejudice or if
one / some would gain a preference over others the incorrect or incomplete
information would be material; OR

(3) The debtor fails to make an application to the court for the voluntary surrender
of his estate on the date that he indicated he would make the application in the
notice of surrender. For example, in the notice of surrender the debtor states
that he shall make the application on the 5 th January, but that date comes and
goes and no application is made then the debtor has committed an act of
insolvency.

NOTE: if a creditor wishes to rely on a s8(f) act of insolvency as a ground upon

which to bring an application of compulsory sequestration of the debtor’s estate,
the creditor has to act QUICKLY. This act of insolvency can only be established if
the notice of surrender has not been withdrawn by the debtor or if the notice of
 5
surrender has not lapsed. As will be remembered from our discussion under
‘voluntary surrender’ a debtor has 14 days of grace after the date that he
indicated would be his application date in his notice of surrender with which to
make an application to the court for voluntary surrender. If the debtor fails to make
an application on the date that he has indicated, the creditor must make the
application for compulsory sequestration within the 14 day grace period otherwise
the notice of surrender lapses and a s8(f) act of insolvency cannot be established
as it cannot be brought if a notice of surrender has been withdrawn or has
LAPSED.

- In terms of s8(g) a debtor commits an act of insolvency if he gives notice in

writing to any one of his creditors that he is unable to pay any of his debts.

Notice of inability to pay must be in writing, an oral notification does not amount to
an act of insolvency. The inability to pay can be in respect of any one of the
debtor’s debts. Although the debtor must have intended to give notice of his
inability to pay, it is not the intention of the debtor when giving notice that must be
looked at to determine if a s8(g) act of insolvency has been committed. The test is
rather: whether a reasonable person in the position of the creditor, having the
same knowledge of the relevant circumstances, have interpreted the notice
to mean that the debtor cannot pay his debts? [Test was laid down in Court v
Standard Bank of SA; Court v Bester 1995 (3) SA 123 (A)].

If a reasonable person in the position of the creditor being aware of the same
circumstances would have interpreted the notice to mean that the debtor cannot
pay, then the notice would amount to an act of insolvency. If this is the case then
the debtor cannot argue that he has accidentally used inappropriate words in the
notice, or that it was not his intention that the notice be interpreted as an inability to
pay.

Also it is important to note that if a debtor is merely unwilling to pay his debts, an
act of insolvency cannot be established, he must indicate that he is unable to pay.
Examples of notices which have been interpreted as notices of inability to pay:

 Where the debtor indicates that he is not in a position to pay immediately and
offers to pay off the debt in instalments.

 Where a debtor sends a circular (newsletter) to all of his creditors stating that
although his assets exceed his liabilities, he was unable to pay at present, but
was confident that he would pull through if given enough time and announced
that he would hold a meeting of creditors.

 A notice where the debtor announces that he has no assets and that none of
his creditors are receiving payment and that he was also unable to pay that
particular creditor.

An example of a notice which would not amount to an act of insolvency would be if

the debtor states in the notice that: “If you [ie the creditor] do not continue to
supply me with bricks I shall not be able to carry out my contracts with my clients
and I shall have to stop payment”.
 6
Note: Distinguish: Act of insolvency under s8(e) = an arrangement for RELEASE
of debt in whole or in part. Act of insolvency under s8(g) = letter of inability to pay
which may or may not be accompanied by an offer to pay the debt of in
instalments.

- In terms of s8(h) a debtor commits an act of insolvency if he is a trader and he

gives notice in the Government Gazette in accordance with s34(1) of his
intention to transfer his business and is thereafter unable to pay all his debts.

See definition of ‘trader’ in s2 of the Act.

If a trader wishes to transfer (ie sell) his business, s34(1) provides that he has to
publish a notice of this transfer in the GG and in 2 issues of an Afrikaans and 2
issues of an English newspaper circulating in the district in which the business is
carried on. The notice must circulate for not less than 30 days and not more than
60 days before the date of the transfer. Bottom line: the trader has to give notice
of his intention to sell / transfer his business. According to s34(2) as soon as the
notice is published every liquidated liability (ie debt sounding in a fixed amount of
money) of the trader in connection to the business which become due at some
future date shall fall due immediately, if the creditor concerned demands payment
of the debt.

Thus if a trader advertises that he will be selling his business [in terms of s34(1)]
and if one or some creditor(s) demand payment of future debts now [because of
the operation of s34(2)] and the trader is unable to pay these debts now, he has
committed an act of insolvency in terms of s8(g).

NOTE: The court considers the capacity of the trader to pay his debts at the time
of and immediately after the notice of transfer has been published and NOT the
trader’s possible capacity to pay after he has received the purchase price of the
business. (See SA Spice Works v Spies.)

It must be remembered that unwillingness or a refusal to pay does not amount to

an act of insolvency; the trader must be unable to pay. (See SA Spice Works v
Spies.)

Actual insolvency

As an alternative to OR in addition to proving an act of insolvency, a creditor may also

apply to the court for the compulsory sequestration of the debtor’s estate on the
ground that the debtor is in fact insolvent. The creditor can do this by providing
evidence from which a court can make a fair and proper deduction of insolvency. This
can be done in various ways, for example, establishing the market value of the
debtor’s assets and weighing it against known liabilities; if warrants of execution have
been issued against him in the recent past (and perhaps one or some have not been
satisfied) and if he has orally admitted to being insolvent etc etc. The court will
consider the facts collectively and decide whether the evidence is strong enough to
point to actual insolvency.

As mentioned in the beginning of this chapter, actual insolvency is rather difficult to

prove as creditors will not ordinarily have access to the debtor’s financial statements
 7
and debtor’s are not in the habit of disclosing personal financial information to their
creditors. Hence, the acts of insolvency were established for this very reason.

Section 9: Petition for sequestration of estate

- In terms of s9(1) a creditor who has a liquidated claim against the debtor of not
less than R100 (the Act still states that the claim must not be less than ₤50);
OR two or more creditors who have liquidated claims in aggregate (ie
collectively) amounting to not less than R200 (the Act states ₤100), can apply
to the court for the compulsory sequestration of a debtor who has committed an
act of insolvency or who is insolvent.

 A ‘liquidated’ claim means one sounding in a fixed (determined) amount of

money – thus not a claim that the debtor should transfer property (like a
vehicle) or a claim for specific performance (ie that the debtor must do
something in terms of a contract, like complete the building of a house). These
are not liquidated claims as they are not claims sounding in money. A claim
against the debtor for an ‘unassessed’ (undecided) claim of damages is also
not a liquidated claim as the claim is unassessed meaning it is not fixed or
determined. (see Le Roux and another v Trustees (for the time being) of the Sevenus
Family Trust where the claim was held to be not a liquidated one).

- The application of compulsory sequestration is brought by way notice of motion

supported by an affidavit (which serves to confirm and verify the facts in the
application) [precedent = Appendix 1 specimen 2.1 and 2.2]. S9(3)(a) of the Act states
that the application must contain all the information as laid down in s9(3)
namely:

o In terms of s9(3)(a)(i) the full personal particulars of the debtor must be set out
and, although not required by the Act, the personal particulars of the creditor,
together with an averment that the court has jurisdiction to hear the matter and
that the creditor has locus standi (capacity) to bring the application.

o In terms of s9(3)(a)(ii) the marital status of the debtor and if he is married the
full personal particulars of the spouse.

o In terms of s9(3)(a)(iii) a description of the amount, cause and nature of the

claim.

o In terms of s9(3)(a)(iv) an indication as to whether the claim is secured, and if

so, the nature and value of any such security.

o In terms of s9(3)(a)(v) the application must state the act of insolvency upon
which the application is based (and support it by attaching some evidence to
the application if possible, for example the nulla bona return of service or the
notice of inability to pay), or otherwise allege that the debtor is in fact insolvent
(and attach any prima facie proof of this to the application).

o In terms of s9(3)(b) the application must be accompanied by a certificate of the

master given not more than 10 days before the date of the application. The
certificate functions as confirmation that sufficient security has been given for
 8
the payment of all fees and charges necessary for the prosecution of all
sequestration proceedings and of all costs of administering the estate until a
trustee has been appointed; or if no trustee has been appointed (and the
compulsory sequestration order is not granted)it pays for all fees and charges
necessary for the discharge of the estate from sequestration. [Read with s14
below]

o In terms of s9(3)(c) if the creditor cannot provide the information as described

in s9(3)(a)(i) and s9(3)(a)(ii) he must state the reason why he was unable to do
so.

- In terms of s9(4) before an application of compulsory sequestration is

presented to the court a copy of the application and the affidavit(s) must be
lodged with the master and if there is no master at that particular court, then the
copies must be lodged with an officer designed for this purpose. S9(4) further
states that the master (or officer as the case may be) may inform the court of
any facts that would justify the postponing of the hearing of the application or
the dismissing of the application. If the master (or officer) reports such
information to the court, the master (or officer) will also have to give a copy of
that report to the creditor bringing the application for compulsory sequestration.

- In terms of s9(4A) when an application is made the applicant (ie the creditor)
must furnish a copy to several parties:

o According to s9(4A)(a)(i) one such party is every registered trade union, that as
far as the applicant (ie the creditor) can reasonably ascertain, represents the
employees of the debtor (obviously if the debtor had no employees this section
will not be applicable).

o According to s9(4A)(a)(ii) copies of the application must be sent to the

employees themselves by:

o In terms of s9(4A)(a)(ii)(aa) EITHER by affixing a copy on a notice board

located on the debtor’s premises somewhere where both the creditor and the
debtor’s employees have access; OR in terms of s9(4A)(a)(ii)(bb) if there is no
access to the premises, by affixing a copy of the application on the front gate or
the front door of the premises from which the debtor conducted his business.

o In terms of s9(4A)(a)(iii) a copy must also be sent to the South African

Revenue Service (SARS).

o According to s9(4A)(a)(iv) a copy must also be sent to the debtor himself

UNLESS the court, at its own discretion, is of the opinion that it would be in the
interest of the debtor or the creditor to dispense with this requirement. (For
example if it is an urgent application and giving notice would waste time, or if
the creditor would suffer irreparable harm).

- In terms of s9(4A)(b) the person who carried out the provisions in s9(4A)(a)(i) –
(iii) must make an affidavit that he duly complied with these sections (ie he duly
stuck up a copy of the application to a notice board on the premises of the
debtor where the employees had access etc) and the applicant (creditor) must
before or during the hearing of the application furnish the court with this
affidavit.
 9

- In terms of s9(5) the court, on consideration of the application, the master’s (or
officer’s) report and on the consideration of any further affidavit that the
applicant (ie creditor) may have submitted in response to that report, may act in
accordance with s10 (and grant provisional sequestration), OR may dismiss the
application, OR postpone its hearing, OR make such other order which it
deems just.

THE GRANTING / REFUSAL OF THE APPLICATION OF COMPULSORY

SEQUESTRATION:

The Insolvency Act envisages two distinct stages in the process whereby the debtor’s
estate is placed under sequestration. The initial stage: provisional sequestration and
the second (or final) stage: final sequestration.

The initial stage is when the matter (by way of the application, affidavit and supporting
documents) first comes before the court and the rationale of this preliminary stage is
to afford the creditor a simple and speedy remedy for preserving the debtor’s estate
and enforcing his claim. Having only one step, ie, final sequestration would be time
consuming and the debtor may squander his assets in the meantime.

After certain intermediate steps have been taken the matter once more comes before
the court for the granting or the refusal of a final sequestration order. The court
CANNOT grant a final order of sequestration unless a provisional order has been
granted and this initial step in the procedure cannot be done away with.

At both the provisional and second (or final) stage three substantive facts – which
are actually requirements – must be shown to exist (ie besides the procedures being
complied with etc) and these three requirements are identical in each case. Should
any one of these three requirements not be established the application will fail. The
only difference between the requirements in the two stages is the standard of proof.
In the initial stage the creditor must prove prima facie the existence of the three
requirements. In the second (or final) stage the creditor must prove the existence of
the requirements on a balance of probabilities.

Section 10: Provisional sequestration

- In terms of s10, if the estate of a debtor is being presented to the court for
compulsory sequestration, then if the court is of the opinion that the following 3
requirements have prima facie been met, it can order that the debtor’s estate
be PROVISIONALLY sequestrated:

o According to s10(a) the applicant (creditor) has established a claim against the
debtor as set out in s9(1). Thus the creditor must show he has a claim of at
least a R100 or at least R200 if there are 2 creditors and the claim must be
liquidated (see above for meaning); AND

o According to s10(b) the debtor has committed an act of insolvency or is

insolvent. Thus the creditor must in addition show that one of the acts of
insolvency in s8(a)-(h) has been committed or that the debtor is actually
insolvent (we have already dealt with this in detail above); AND
 10

o According to s10(c) the creditor must show that there is reason to believe that
sequestration will be to the advantage of the creditors if the debtor’s estate is
sequestrated.

 “reason to believe” is of significance here because the Act does not require the
applicant (creditor) to prove that the sequestration will indeed be to the benefit
of the creditors, only to show that there is reason to believe that it will be. The
Act has come to the aid of the applicant (creditor) as it would be difficult for him
to obtain detailed information regarding the debtor’s financial position as only
this information would ultimately settle the question of whether it is in fact to the
advantage of the creditors. (See Meskin & Co v Friedman).

 In the phrase “advantage of the creditors”, ‘creditors’ does NOT mean one
creditor or some of the creditors, but the general body of creditors. BUT also
note that when determining if the ‘general body of creditors’ will derive an
advantage the courts put more emphasis on the amount or value of a creditors
claim. For example, if there are 8 creditors and 6 have claims of between
R2000-R3000 and submit that the sequestration will not be to their advantage;
but the other two creditors have claims of between R40 000-R50 000 and the
sequestration is to their advantage, the court will most likely grant the
sequestration order. Even though the two creditors were the minority in
number they are considered to be the ‘general body of creditors’ as the amount
of their claims outweigh the claims of the 6 creditors (even though the 6
creditors are more in number – it is the amount of the claim that matters). See
also Fesi v ABSA Bank Ltd where the court held that a single creditor who was
owed 96% of the total debt of the estate represented the ‘general body of
creditors’.

 In the phrase “advantage of the creditors”, ‘advantage’ means that some

monetary benefit will result to the creditors, and there must be a reasonable
prospect of this occurring. It is not necessary that the applicant prove that the
debtor has assets at the time the application is brought, but he must shown that
there is a reasonable possibility that, once the relevant provisions of the
Insolvency Act can apply fully to the debtor and enquiries can be conducted,
some assets will be revealed / discovered for the benefit of the creditors. (See
Meskin & Co v Friedman). If there is no prospect of a not-negligible dividend that
can be paid to the creditors then sequestration will not be to their benefit (see
Le Roux and another v Trustees (for the time being) of the Sevenus Family Trust).

If one of these 3 requirements cannot be met the court will not grant a
provisional compulsory sequestration and the process ends here. If the 3
requirements were met and all the procedural papers and documents were in
order, the process goes forward to the next step (not the second / final stage
yet).

Section 11: Service of the rule nisi

- In terms of s11(1) if a court grants a provisional sequestration order it must

simultaneously grant a rule nisi calling upon the debtor on a specified day to
appear (referred to as ‘the return day’) and to show cause (ie give an
explanation as to why / defend himself) as to why his estate should not be
sequestrated finally.
 11

- In terms of s11(2) if the debtor has been absent from his usual residence or
place of business for 21 days service or the rule nisi will be effected by affixing
a copy thereof to or near the outer door of the buildings where the court sits
and shall be published in the Government Gazette. The court may alternatively
direct some other mode of service.

- In terms of s11(2A) a copy of the rule nisi must also be served on the following
parties:

o In terms of s11(2A)(a) any registered trade union of the debtor’s employees.

o In terms of s11(2A)(b) the debtor’s employees themselves by either affixing a

copy on a notice board located on the debtor’s premises somewhere where
both the creditor and the debtor’s employees have access; OR if there is no
access to the premises, by affixing a copy of the application on the front gate or
the front door of the premises from which the debtor conducted his business.

o In terms of s11(2A)(c) a copy must also be sent to SARS.

- In terms of s11(3) the debtor may apply to the court and ‘anticipate’ the return
day for the purpose of discharging (dismissing) the provisional order of
sequestration. Remember that according to s11(1) the debtor is given a
specified date stating when he must come back to court to defend his case. On
this day the court will decide whether to make the order final or to dismiss the
provisional sequestration order. S11(3) allows the debtor to apply to the court
and make this return day at an earlier date.

The court will only grant the application (ie application to ‘anticipate the return day’)
if it is satisfied that the provisional sequestration order would have inevitably
been dismissed had the debtor waited. HOWEVER, the court can only be
satisfied that the provisional sequestration order would have in any case been
dismissed IF:
(a) all the creditors have been notified of the application to anticipate the return day
and there is no valid objection to the dismissal of the provisional sequestration
order OR
(b) if it is obvious to the court that from the circumstances that the creditors will not
oppose the dismissal of the provisional sequestration order.

- In terms of s11(4) for the purposes of s11(2A)(a) and (b) the sheriff must attest
to the compliance thereof.

Section 12: Final sequestration or dismissal of application for sequestration

- According to s12(1) at the hearing on the return day of the rule nisi, if the court
is satisfied that the following three requirements have been met (on a balance
of probabilities) it may sequestrate the debtor finally:

o According to s12(a) the applicant (creditor) has established a claim against the
debtor as set out in s9(1); AND
 12

o According to s12(b) the debtor has committed an act of insolvency or is

insolvent; AND

o According to s12(c) there is reason to believe that it will be to the advantage of

the creditors if the debtor’s estate is sequestrated.

- In terms of s12(2) at the hearing on the return day of the rule nisi, if the court is
not satisfied that the above 3 requirements have been proved on a balance of
probabilities, it will dismiss the application for sequestration of the debtor’s
estate and set aside the order of provisional sequestration; OR [sometimes] the
court may ask the applicant (creditor) to furnish the court with further proof of
any of the facts mentioned in the application and postpone the hearing (without
making any final decisions) until a reasonable date.

Section 14: Applying creditor to prosecute sequestration proceedings until

trustee appointed [To be read with s9(3)(b) above]

- In terms of s14(1) the creditor making the application for compulsory

sequestration has to pay the costs thereof until such time as a provisional
trustee or trustee is appointed. [Remember, according to s9(3)(b), 10 days before
making the application to the court the applicant (creditor) has to pay the costs in advance by
offering up something to the court as security, usually its money, but it can be anything of value
and the master has to issue a certificate of proof that security was duly given for the costs?
S14 lays down the substantive law for the procedural rule found in s9(3)(b)]

- In terms of s14(2) the trustee is obliged to refund the creditor his costs
(although it will be taxed according to certain tariffs) and this refund will come
from the first available funds of the debtor’s estate available for this purpose
(ie the from the free residue) as set out in s97. (Interesting: this section ranks
the various sequestration costs to be paid out of the free residue of the debtor’s
estate and refunding the creditor’s is not one of the priorities!). Thus if there is
no funds available for this purpose, the creditor does not get a refund.

- In terms of s14(3) in the event that the creditors get nothing when the estate is
sequestrated (if the free residue is totally insufficient) and in fact actually have
to contribute to the costs of sequestration (as governed by s106), the creditor
bringing the application for compulsory sequestration (whether he has proved
his claim against the estate or not) is liable to contribute that which he would
have been obliged to contribute had he proved his claim and not a lessor
amount!

The creditor bringing the application could argue that he should contribute less to
the cost of sequestration in the event of there being insufficient free residue by
virtue of the fact that he has paid the initial costs of sequestration [as required by
s14(1)] and since there is insufficient free residue he will probably not be
reimbursed [as provided for in s14(2) since there is no money available]. But
s14(3) does not allow for this kind of argument.

Setting aside and appeal procedures

 13
Self-study. See Hocklys pp 28, 52-53 and Mars 154-159.

So-called ‘friendly sequestrations’

A friendly sequestration takes place where a creditor, because he is sympathetic or

favourably disposed towards his debtor (perhaps the creditor is a friend or family
member of the debtor) applies for the compulsory sequestration of the debtor’s estate.
The debtor and creditor usually arrange that the debtor will commit an act of insolvency
and on this basis, the creditor applies for the debtor’s sequestration. Such an
agreement to commit an act of insolvency and leading up to an application for the
sequestration of the debtor’s estate is perfectly valid. In fact, the approach of our courts
is that an agreement to sequestrate between creditor and debtor is not objectionable,
provided the creditor’s claim is a genuine one and sequestration is indeed legally
justifiable in the circumstances (see Van Rooyen v Van Rooyen)

HOWEVER, at the same time, it must be acknowledged that a friendly sequestration is

often collusive in nature, amounting to little more than a manoeuvre by the debtor to
stave off creditors and gain time to free himself from his financial difficulties (see
Van Rooyen v Van Rooyen; Mthimkhulu v Rampersad).

All too often the applicant is not a genuine creditor, or is well aware that sequestration
holds no benefit for creditors generally, or has no intention of proceeding any
further than a provisional sequestration order (see Mthimkhulu v Rampersad) and the
sequestration proceedings are simply an abuse of the process of the court (see
Evans article).

Some abuses commonly encountered in friendly sequestration applications are:

 Reliance on a non-existent claim; or
 Inclusion of non-saleable assets or overvaluing of assets to convince the court that
creditors will receive an appreciable dividend; or
 Repeated requests for extensions of the return date for finalisation of the
sequestration order.

In view of this, it is imperative for the court to scrutinise an application by a friendly

creditor with particular care to ensure that the requirements of the Act are not
undermined and that the interests of creditors generally are protected (see Epstein v
Epstein).

The court in Mthimkhulu v Rampersad laid down some guidelines that other courts,
when faced with applications for friendly sequestrations, can follow to prevent the
abuse of the process of the court. Familiarise yourself with these guidelines and
their purpose.

STUDY the prescribed article to learn more about how debtors and creditors enter
into collusive agreements to launch false friendly sequestration proceedings which
abuse the court process. Did you have any idea that this kind of abuse was
occurring? Do you think this kind of abuse is on the rise? Why, how so? Is this
kind of abuse, in your opinion, a serious exploitation of the “insolvency machinery”,
or do you think that it is acceptable? Explain. What is the courts’ reaction to this
kind of abuse? Discuss.
 14

*Note: Some parts of these notes are an adaptation of:

R Sharrock ‘Insolvency’ in LAWSA 2ed vol 11 (2008) Durban, LexisNexis Butterworths.