Insolvency Law

LWILA2-44

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
Prescribed Resources

Textbook
Sharrock, R., Van Der Linde, K. and Smith,
A. 2022. Hockly's Law Of Insolvency. 10th
edn. Cape Town: Juta.
Print ISBN: 9781485140276
eBook ISBN: 9781485140283
Week 1

1.1 Provide the 1.2 Identify the 1.3 Identify what

different meanings purpose of may be
of insolvency. insolvency. sequestrated.

1.4 Identify which 1.5 Describe the

courts have role of the Master
jurisdiction. of the High Court.
 • South African insolvency law regulates three main types of
insolvency proceedings, namely:
Insolvency • the sequestration of personal estates,
• the winding-up of companies and
law • the winding-up of close corporations.
• Furthermore, the law regulates proceedings which are
aimed at rescuing businesses in dire financial straits.
Insolvency law:
Essential terminology
• Insolvency: When a person is unable to pay his debts (his
liabilities exceeds his assets).
• Liabilities: A liability is something that a person or
company owes, usually a sum of money. Liabilities
are settled over time through the transfer of
economic benefits including money, goods, or
services.
• Assets: In financial accounting, an asset is any resource owned
or controlled by a business or an economic entity. It is anything
(tangible or intangible) that can be used to produce
positive economic value.
• Sequestration: The writing up and sale of assets in an
individual’s estate, payment of debt to creditors, done at the
instance of an order of court.
• Liquidation: The liquidation of a company happens when
company assets are sold when it can no longer meet its
financial obligations.
 • A person is insolvent when he is unable to pay his debts.
• The legal test of insolvency is whether the debtor’s liabilities, fairly
estimated, exceed his assets, fairly valued (liabilities > assets).
• The inability to pay debts is, at most, merely evidence of insolvency.
• A person who has insufficient assets to discharge his liabilities, is not
treated as insolvent for legal purposes unless his estate has been

What is sequestrated by an order of the court.

• A sequestration order is a formal declaration that a debtor is insolvent.
insolvency? • The order is granted either at the instance of the debtor himself
(voluntary sequestration) or at the instance of one or more of the
debtor’s creditors (compulsory sequestration).
• The terms ‘sequestration’ and ‘sequestration order’ should strictly be
used only with reference to a person’s estate.
• A debtor’s estate is sequestrated, not the debtor himself.
• However, both a debtor’s estate and the debtor himself may properly be
described as ‘insolvent’.
 • The main objective of a sequestration order is to secure the
orderly and equitable distribution of a debtor’s assets where
they are insufficient to meet the claims of all his creditors.
• The law proceeds from the premise that, once an order (or
provisional order) of sequestration is granted, a concursus
Purpose of creditorum (‘coming together of creditors’) is established.
• The interests of creditors as a group enjoy preference over
sequestrati the interests of individual creditors.
• The debtor is divested of his estate and cannot burden it with any
on further debts.
• A creditor’s right to recover his claim in full by judicial
proceedings is replaced by the right, on proving a claim against
the insolvent estate, to share with all other proved creditors in
the proceeds of the estate assets.
• Apart from what is permitted by the Act, nothing may be done
which would have the effect of diminishing the estate assets or
prejudicing the rights of creditors
 In Walker v Syfret NO Innes J explained the underlying principle as
follows:
‘The object of the [Insolvency Act] is to ensure a due distribution of
assets among creditors in the order of their preference. . . . The
sequestration order crystallises the insolvent’s position; the hand of
the law is laid upon the estate, and at once the rights of the general
Purpose of body of creditors have to be taken into consideration. No
transaction can thereafter be entered into with regard to estate
sequestrati matters by a single creditor to the prejudice of the general body.
The claim of each creditor must be dealt with as it existed at the
on issue of the order.’
• The law of insolvency exists primarily for the benefit of creditors
and, accordingly, a court will not sequestrate a debtor’s estate
unless it is shown that the sequestration will be to the advantage
of creditors.
• Thus, sequestration will generally not be resorted to if the debtor,
although insolvent, has only one creditor and the latter is already
in possession of a judgment against the debtor.
 • Only an “estate” may be sequestrated in terms of the
insolvency Act.
What may • An estate is usually conceived of as a collection of
be assets and liabilities.
• But a debtor who has only liabilities may be regarded
sequestrat as having an estate for sequestration purposes.
ed? • The joint estate of spouses married in community of
property is an estate for purposes of insolvency.
• A debtor who is married in community of property does not have a
separate estate which can be sequestrated, even where he (or she)
is carrying on a business independently.
• The spouses are both debtors and, on sequestration of their joint
estate, they both become insolvent debtors for purposes of the Act.
 • On divorce, each spouse regains a separate estate which must
obviously be sequestrated separately (sequestration does not
extinguish the liability of the solvent spouse for debts of the joint
What may estate).
• However, if the divorce takes place after a creditor has already
be acquired the right to apply for sequestration of the joint estate,
then the creditor is required to sequestrate the separate estates
sequestrat of both spouses.
• A debtor who is married out of community of property has a
ed? separate estate that can be sequestrated. However, as will be
seen later, the solvent spouse’s assets are also affected by the
order, since they vest in the trustee of the insolvent estate until
the solvent spouse can establish her (or his) title to them.
• A debtor whose estate has been sequestrated may, during his
insolvency, acquire a new estate under a title valid against his
trustee. This new estate may itself be voluntarily surrendered or
compulsorily sequestrated at the instance of a creditor.
 • A ‘debtor’ for purposes of the Insolvency Act is ‘a person
or a partnership, or the estate of a person or partnership,
which is a debtor in the usual sense of the word, except a
body corporate or a company or other association of
persons which may be placed in liquidation under the law
relating to companies’ (section 2).
What or The term ‘debtor’, therefore, embraces the following:

who is a 1.
2.
A natural person.
A partnership—even one whose members are all juristic
debtor? persons.
3. A deceased person and a person incapable of managing
his own.
4. An external company that does not fall within the
definition of ‘external company’ in the Companies Act
of 1973 (old Act).
5. An entity or association of persons that is not a juristic
person, such as a trust.
 Jurisdiction
• Only a Provincial or Local Division of the High Court may
adjudicate upon an insolvency matter.
• In terms of s 149(1), a court has jurisdiction ‘over [a] debtor and
in regard to the estate of a debtor’ if:
• on the date when the application for voluntary surrender or
compulsory sequestration of the debtor’s estate is lodged
with the Registrar of the court, the debtor is domiciled, or
owns property, or is entitled to property, situated within the
jurisdiction of the court OR
• at any time within the 12 months immediately preceding the
lodging of the application, the debtor ordinarily resided or
carried on business within the jurisdiction of the court.
Jurisdiction

• A court having jurisdiction over a debtor may refuse (or

postpone) the surrender or sequestration of his estate if it
appears to the court equitable or convenient that his estate
should be sequestrated by another court within the Republic (s
149(1) proviso).
• The court may order that the matter be transferred to the
other court.
 Jurisdiction
S149(1) – ‘ a court has jurisdiction over a debtor and his estate if:
(a) the debtor is domiciled or has property within the jurisdiction of the court, at the time
the application is lodged;
• A personal right is regarded as being situated where the debtor liable to render
performance is domiciled.
Otto case (exception):
Court held that the location of the right to costs (ordered by court), being
intangible property without any physical existence, followed the domicile of the debtor
liable to pay the costs.
(b) the debtor ordinarily resided or carried on business within courts jurisdiction at any time
within 12 months preceding the lodging of the application. The debtor need not reside or
conduct business for the entire 12 months, it is sufficient for him to have resided or carried
on business in the area for a certain amount of time within the 12 months.
Jurisdiction

• A Magistrate’s Court may preside over prosecutions for criminal offences

under the Insolvency Act, proceedings to set aside voidable dispositions, and
a few other matters, provided, in each case, the ordinary jurisdictional limits
as to offence, person, and amount, imposed by the Magistrates’ Courts Act
32 of 1944, are not exceeded.
 • In this matter Lawclaims (LC) brought an application for the liquidation of Rea Shipping
(RS); and in the alternative for the sequestration of RS.
• RS is a company incorporated in Germany. LC is a creditor of RS. RS failed to pay their
debts owed to LC.
• RS had a ship docked in the Durban harbour. LC thus brought an urgent application to
found jurisdiction (property within jurisdiction of the court).
• This matter raises two questions:
Q1 - Can the South African court liquidate RS? In this regard the court held that in order
Lawclaims to be liquidated by a South African court it is necessary that the company must have been
incorporated in terms of the Companies Act. Due to the fact that RS was not incorporated
v Rea in terms of the Companies Act, the court did not have jurisdiction.
Q2 - Is it possible for the court to sequestrate RS? In this regard what is required to be
Shipping proven is a 2-step process:
1. Prove that RS is a debtor in writing. Since LC could prove this, the court entertained
the application for sequestration.
2. Does the court have jurisdiction? In this regard reference must be made to the
grounds set out in s 149 of the Insolvency Act. The court held that RS met the
grounds required (property within jurisdiction). Once one of these grounds have been
established the court has a discretion on whether or not to sequestrate, the court
may decline if it is of the opinion of the court that the estate should be sequestrated
elsewhere.
The court held that it does have jurisdiction, however it declined
to sequestrate on the basis that the majority of RS's creditors would be
in Germany, therefore sequestration would not be in the interests
of most creditors.
The Master

• A Master is appointed in terms of the Administration of Estates Act 66 of

1965 to each of the areas of the Provincial Divisions of the High Court.
• The Master has a pivotal role to play in insolvency matters.
• One of the most important functions which the Master exercises is the
custody of all documents relating to insolvent estates (s 154(1)).
The Master: 1. Appointment of trustee: One of the primary roles of the
Master's Office in sequestrations is appointing a trustee.
Role in The trustee is responsible for managing the sequestration
process, which includes collecting and selling the assets of
sequestrati the insolvent estate and distributing the proceeds to
creditors.
ons 2. Supervision of sequestration process: The Master's Office
supervises the sequestration process to ensure it's
conducted fairly and transparently. This involves reviewing
reports submitted by the trustee and ensuring that
creditors' claims are handled appropriately.
 3. Protection of Creditors’ Rights: Protecting the rights of
creditors is a key responsibility. The Master's Office
The Master: ensures that all claims are evaluated and that the
distribution of assets is done in accordance with legal
Role in priorities.

sequestrati 4. Public Interest and Compliance: The office also serves the
public interest by ensuring that the sequestration process
ons complies with South African laws and regulations. This
includes safeguarding against fraudulent activities during
the sequestration process.
5. Resolution of Disputes: In cases where disputes arise, the
Master's Office may intervene to provide guidance or make
determinations, especially in matters concerning the
interpretation of legal aspects of the sequestration.
The Master

• For the performance of various functions, the Master is entitled to charge

prescribed fees.
• These are payable to the Department of Justice and Constitutional
Development, either at a Magistrate’s Court or directly into an appropriate
bank account of the Department.
• The Master is a ‘creature of statute’ and, as such, has only the powers granted
to him by the legislature (The Master v Talmud 1960 (1) SA 236 (C) 238).
• He cannot act unless empowered to do so by statute, either expressly or by
necessary implication.
Discussion
1. What is the meaning of Insolvency?
2. What may be sequestrated?
3. What/who is a debtor? Give 5 examples.
4. Which court has the jurisdiction to hear
sequestration applications?
5. Name the 2 types of sequestration applications.
1. What is the meaning of insolvency?

• The Insolvency Act, defines the term "insolvent" as a debtor whose

estate is under sequestration and includes such a debtor before the
sequestration of his estate seen in context.
• The Insolvency Act also defines the term "insolvent estate" as an
estate under sequestration, however the Act does not define the term
"insolvency".
• According to South African case law, the test for insolvency is whether
the debtor's liabilities exceed his assets.
2. What may be sequestrated?

• Only an “estate” may be sequestrated in terms of the insolvency Act.

• An estate is usually conceived of as a collection of assets and
liabilities.
• But a debtor who has only liabilities may be regarded as having an
estate for sequestration purposes.
3. What/who is a debtor?

The term ‘debtor’, therefore, embraces the following:

1. A natural person.
2. A partnership—even one whose members are all juristic persons.
3. A deceased person and a person incapable of managing his own.
4. An external company that does not fall within the definition of
‘external company’ in the Companies Act of 1973 (old Act).
5. An entity or association of persons that is not a juristic person, such
as a trust.
4. Which court has the jurisdiction to hear
sequestration applications?
• Only a Provincial or Local Division of the High Court may adjudicate
upon an insolvency matter.
5. Name the 2 types of sequestration
applications.
The debtor’s estate may be sequestrated in 2 ways:
1. The debtor himself (or his agent) may apply to court for acceptance
of surrender of the estate, also referred to as voluntary surrender.
2. A creditor or creditors (or his or their agent) may apply to court for
the sequestration of the debtor’s estate, also known as compulsory
sequestration.
Week 2
Assessment Criteria:

2.1 List and apply the requirements and application process for procedural requirements for
voluntary surrender.

2.2 Identify the concept of free residue and identify the types of payments which impact the free
residue such as costs of sequestration.

2.3 Define and discuss the court’s discretion regarding the application for voluntary surrender.

2.4 List and apply the requirements for compulsory sequestration.

2.5 Discuss the legal position regarding friendly sequestration.

2.6 Identify the application process for sequestration.

2.7 Define and discuss the court’s discretion regarding the application for compulsory sequestration.
 • The debtor’s estate may be sequestrated in two ways:
• Voluntary surrender: The debtor himself (or his agent)
Sequestrati may apply to the court for acceptance of the surrender
of his estate. Section 3(1).
on • Compulsory sequestration: The creditor(s) (or his
agent) may apply to court for the sequestration of the
debtor’s estate. Section 9(1).
 Who can
apply for • The debtor or his agent (natural person).
voluntary • If an agent applies, he must be expressly authorised to
do so (Ex parte Brown).
sequestratio • The estate of a deceased debtor = the executor.
n? • For the estate of a debtor who is incapable of managing
his own affairs = the curator bonis.
S 3(1) and • In Ex parte Houston, curator bonis acted on behalf of
(2) businessman who disappeared without a trace.
• The partnership estate – all the partners or their agents
(except silent or special partners).
• The joint estate of a spouse married in community of
property – both spouses (s 17(4) of Matrimonial Property
Act).
Requireme
nts for • The court can only accept the surrender of the debtor’s
estate if it is satisfied that:
voluntary 1. The debtor is in fact insolvent.

sequestrati 2. Debtor owns sufficient realisable assets to defray the

costs of sequestration.
on 3. The sequestration will be to the advantage of the
creditors (s 6(1)).
4. The court must be satisfied that the preliminary
formal requirements have been complied with.
1. Debtor’s estate is insolvent
• Liabilities must exceed assets.
• The extent of debtor’s assets and liabilities are generally determined
by reference to statement of affairs he has prepared and filed.
• However, court is not bound by this statement (Ex parte Van den
Berg).
• The test is whether it is established that the debtor is without funds
to pay his debts in full and it is improbable that his assets will realise
enough value for this purpose (Ex parte Harmse).
2. Free residue sufficient to pay costs of
sequestration
• The ‘costs of sequestration’ include the costs of surrender and general
costs of administration.
• Free residue (s 2): That portion of the estate which is not subject to
any right of preference by reason of any special mortgage, legal
hypothec, pledge or right of retention.
• To calculate free residue, the surplus in value of encumbered assets
over the amount of encumbrances must be considered (Ex parte Van
Heerden).
3. Sequestration to be to
advantage of creditors

Debtor must prove that sequestration will be to the advantage of the creditors.
 • Section 4 sets out steps to be followed
Preliminary before applying for voluntary surrender.
formalities • Formal defects do not necessarily
invalidate the application.
Notice of intention to surrender
• In terms of s 4(1) the first thing that must be done is that the debtor must
publish a notice of surrender in the Government Gazette and in the Newspaper
circulating in the district where the debtor resides OR if the debtor is a trader,
then the notice must appear in the newspaper circulating in the area where his
principal place of business is situated.
• The notice of surrender must not be published longer than 30 days or less than
14 days before the date upon which the application is to be heard by the court.
When calculating days, one only takes into account “court days” thus Saturdays,
Sundays and public holidays do not count toward to calculation of this period.
 • The purpose of the notice of surrender is to alert creditors
as to the intended application, in case they should wish to
oppose it.
Notice of • It follows that the notice must be published in a
‘newspaper’ in the usual sense, i.e., a daily or weekly
intention to publication, containing reports on local or foreign
happenings of recent occurrence and of a varied character,
surrender intended for the information of the general reader.
• Ex parte Barton: Notice was published in WC newspaper,
but applicant previously lived in Durban and all creditors
were in Natal. Court postponed application.
 • In terms of s 4(2)(a), within 7 days of publishing
the notice of surrender the debtor is required to
deliver or post a copy of the notice of surrender
to each and every one of his creditors whose
address he knows or can ascertain.
Notice to • The purpose of informing individual creditors is
creditors to afford even more protection in the event that
they wish to oppose the application, as it cannot
be expected that creditors constantly examine
the Government Gazette/newspapers.
 • In terms of s 4(2)(b)(i), the debtor must post a copy of the
notice to every registered trade union that, to his
Notice to knowledge, represents any of the debtor’s employees
(obviously if the debtor is not a trader, then this provision
trade union would not be applicable to him).

and • In terms of s 4(2)(b)(ii), the debtor must give notice to his

employees themselves, either by affixing a copy of the
employees notice to a notice board to which the employees have
access inside the debtor’s premises or, if the employees do
not have access to these premises, by affixing a copy of the
notice to the front gate of the premises, or, failing this, to
the front door of the premises from which the debtor
conducted any business immediately prior to the
surrender.
Notice to • In terms of s 4(2)(b)(iii) the debtor must post a copy of the
notice to the South African Revenue Service (SARS).
SARS
Preparation and lodging of statement of affairs
In terms of s 4(3) the debtor is required to lodge with the master 2 copies of a statement of affairs and the truth and
completeness of the statement of affairs must be verified by an affidavit. The statement of affairs must contain
information like the following:
• A balance sheet.
• A list of immovable assets, the estimated value of the assets and details of any encumbrances (e.g., mortgage bond).
• A list of movable assets, the estimated value of the assets and details of any encumbrances (e.g., pledges, liens,
attachments or if assets purchased by h/p ie instalment sale and not yet paid for in full). If the movable assets are
merchandise/stock-in-trade, they must be valued at the cost price or market value whichever is the lower.
• A list of the debtor’s debtors (ie the people that owe the debtor money) and the full personal particulars of these
debtors.
• A list of creditors, their personal particulars and particulars of their claims against the debtor.
• A list and description of every account book used by the debtor at the time of the notice of surrender or at the time
when he ceased to carry on business.
• A detailed statement of the causes of the debtor’s insolvency.
• Certain personal information about the debtor, e.g., any prior insolvency and rehabilitation.
Preparation and lodging of statement of
affairs
• In terms of s 4(4) upon receiving the statement of affairs the Master may require that any
property mentioned therein be formally valued by a sworn appraiser or any person
designated by the Master for such a purpose.
• In terms of s 4(5) if the debtor resides or carries on business in an area where there is no
master’s office, then the statement of affairs must be lodged with the magistrate of that
district.
• In terms of s 4(6) the statement of affairs lies open for inspection during office hours for
any creditor for the period of 14 days from the date stipulated in the notice of surrender.
It is during these 14 days when any creditor can lodge with the Master (or magistrate as
the case may be) an objection to the voluntary surrender which will be on record when
the application for the voluntary surrender comes before the court. Although not
expressly provided for in the Act creditors also have the right to oppose the debtor’s
application in court.
Stay of sales in execution
• In terms of s 5(1) after publication of a notice of surrender, it is unlawful to sell
any estate property which has been attached under a warrant (writ) of
execution or other process, unless the person organising the execution of the
warrant (ie the sheriff) could not have known of the publication of the notice.
HOWEVER, if the master is of the opinion that the value of the property does not
exceed R5000 he may order that the sale of the attached property go ahead and
direct how the proceeds of the sale must be applied,
OR
if the value does exceed R5000, then the court may order that the sale of the
attached property go ahead nonetheless and direct how the proceeds of the sale
must be applied.
Curator bonis may be appointed
• In terms of s 5(2) after publication of the notice of surrender the Master may
appoint a curator bonis to the debtor’s estate.
• The estate does NOT vest in the curator bonis – he only performs the functions of a caretaker.

• He takes custody of the estate and takes control over it and assumes control over any
business of debtor as well (if the debtor was a trader), as if he were the debtor.
• S 5(2) does not prevent the debtor from alienating his assets or encumbering
them. The appointment of the curator, therefore, does not really go that far in
protecting the interests of the creditors.
 Form and • Once all the preliminary procedural steps have been
complied with, the application for voluntary surrender may
content of be made.
application • The application itself is brought by way of a notice of
motion supported by an affidavit (appendix 1 specimens
for 1.1 and 1.2).
• The purpose of the affidavit is to convince the court that
surrender the 4 requirements for voluntary surrender have been
satisfied.
• The affidavit must be signed and sworn before a
commissioner of oaths who is a person NOT from the office
where the affidavit was drawn up (this thus excludes the
debtor’s attorney).
 Court’s discretion
S 6 lays down the consequences of making an application of voluntary surrender: Either the
application can be accepted in terms of s6(1) OR it can be refused in terms of s 6(2).
According to s 6(1) a court may accept the application of surrender and order that the debtor’s estate
be sequestrated provided that the 4 requirements contained in s 6(1) are met:
1. Firstly, that ALL the provisions in s 4 have been complied with (ie notice of surrender, statement
of affairs).
2. Secondly, that the debtor’s estate is indeed insolvent (the liabilities exceed the assets). The court
will use the financial information from the statement of affairs to determine this (Ex parte
Harmse), but the court is not bound by the statement of affairs and can take a common-sense
approach by looking at the debtor’s situation as a whole (Ex parte Deemter).
3. Thirdly, that ‘the debtor owns realisable property of a sufficient value to defray (pay) all costs of
the sequestration which will be payable out of the free residue of the debtor’s estate’.
4. Fourthly, that the sequestration of the debtor will be to the advantage of the creditors (Ex parte
Henning).
 The court retains the ultimate discretion:
Court’s Even if the debtor has followed all the procedures
correctly and none of the creditors have objected,
discretion the court may still refuse to accept the application of
voluntary surrender.
Withdrawal of notice of surrender
• In terms of s 7(1) a notice of surrender published in the Government Gazette cannot be
withdrawn without the consent of the Master.
• According to s 7(2) an application can be made to the Master for the withdrawal of the
notice from the Government Gazette.
• The Master shall give written consent for the withdrawal (he is obliged) if it appears to
him that the notice was published in good faith AND if there is good cause for its
withdrawal.
• A notice of withdrawal (and of the Masters consent thereto) is then published (at the
debtor’s expense) in the GG and in the newspaper that published the notice of surrender.
• Once this has occurred the notice of surrender is deemed to have been withdrawn.
Compulsory sequestration

The second method is

In the previous lecture we compulsory sequestration. Here
looked at the first method in sequestration is requested by
which a person’s estate could the disgruntled creditors of the
be sequestrated – that is – at insolvent debtor and the debtor
his own request. does not have a say in the
matter.
Compulsor The court may grant the application for the
y compulsory sequestration of the debtor’s estate if
it is satisfied with the following:
sequestrati 1. The applicant has established a claim which
on: entitles him, under s 9(1) to apply for the
sequestration of the debtor’s estate.
Requireme 2. The debtor has committed an act of insolvency
nts or is insolvent.
3. There is reason to believe that it will be to the
advantage of creditors.

The onus of satisfying the court of these 3

requirements is on the sequestrating creditors.
(1) Who is entitled to apply in terms
of s 9(1)?
Compulsory sequestration may be
What is a ‘liquidated claim’?
instituted by:
• A creditor (or his agent) who has • A monetary claim, the amount of
a liquidated claim against the which is fixed by agreement,
debtor for not less than R100. judgment or otherwise.
• Two or more creditors (or their • Examples: claims for the price of
agents) who have liquidated goods sold and delivered, a
claims against the debtor delictual claim for the theft of a
amounting, in aggregate, to not fixed and determinable sum of
less than R200. money.
 (2) Acts of insolvency

• 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.
• 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.
(2) Acts of insolvency

Section 8 of the Insolvency Act

 (a) • In terms of s 8(a), a debtor commits an act of
insolvency if he leaves the Republic; OR if he is
Absence already out of the Republic, remains absent; OR
from departs from his dwelling or otherwise absents
himself (stays in SA but leaves his house and tries
Republic or to hide from the creditors), with the intention of
evading or delaying the payment of his debts.
dwelling • 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.
(b) Failure
to satisfy • In terms of s 8(b) if there is a non-satisfaction of a
warrant (writ) of execution, an act of insolvency
judgment would have been committed.
 (c)
Disposition • In terms of s 8(c) an act of insolvency will be committed if
prejudicing the debtor makes OR attempts to make any disposition of
any of his property which has, or would have, the effect of
creditors or prejudicing his creditors or of preferring one creditor
above another.
preferring • “Disposition” means the act of disposing of assets for
one creditor example, by selling them, or donating them etc.
• NOTE it is only the EFFECT of the disposition that is
relevant – whether some creditors were prejudiced or
preferred (an objective factor).
• The subjective intention of the debtor is irrelevant.
(d) Removal • In terms of s 8(d) a debtor commits an act of insolvency if
of property he removes or attempts to remove any of his property with
intent to prejudice his creditors or to prefer one creditor
with intent above another.
• For this act of insolvency to be proved, the creditor need
to prejudice NOT show that the debtor has disposed of the property,
or prefer 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 s 8(c) is that in this instance the intention of the
debtor is an important and relevant enquiry, whereas the
effect of the removal, on the other hand, is irrelevant.
 • In terms of s 8(e) the debtor commits an act of
insolvency if he makes an arrangement or offers
to make an arrangement with any of his creditors
(e) Offer of for releasing him wholly or in part from his debts.

arrangeme • For the arrangement of the debtor to amount an act of

nt 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).
 • In terms of s 8(f) the debtor commits an act of
insolvency if he, after having published a notice
(f) Failure of surrender of his estate (which has not lapsed
or been withdrawn in terms of s 6 or s 7) –
to apply for • fails to comply with the requirements of s 4(3); OR

surrender • lodges a statement of affairs in terms of s 4(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.
 (g) Notice • In terms of s 8(g), a debtor commits an act of insolvency if
of inability he gives notice in writing to any one of his creditors that he
is unable to pay any of his debts.
to pay • Notice of inability to pay must be in writing, an oral
notification does not amount to an act of insolvency.
 • 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
(g) Notice indicate that he is unable to pay.
of inability • Examples of notices which have been interpreted
as notices of inability to pay:
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.
(h) Inability
to pay
debts after • In terms of s 8(h) a debtor commits an act of
insolvency if he is a trader, and he gives notice in
notice of the Government Gazette in accordance with s
34(1) of his intention to transfer his business
transfer of and is thereafter unable to pay all his debts.
business • Definition of trader (s 2):
• Any person who carries on any trade, business,
industry or undertaking in which property is sold, or is
bought, exchanged or manufactured for purpose of
sale or exchange… (etc.)
(2) Debtor is in fact insolvent

• Instead of (or in addition to) relying on an act of insolvency by the debtor,

the sequestrating creditor may rely on the fact that the debtor’s estate is
insolvent (liabilities exceed assets).
• Factual insolvency may be established –
• directly, by evidence of the debtor’s liabilities and market value of his assets; or
• indirectly, by evidence of facts and circumstances from which the inference of
insolvency is fairly and properly deducible.
(3) Sequestration will advantage creditors

• Before the court can grant a final order of sequestration, it must be

satisfied that there is reason to believe that it will be to the advantage of
creditors if the debtor’s estate is sequestrated.
• ‘Creditors’ means all the creditors / the general body of creditors (Lotzhof v
Raubenheimer 1959).
• It is necessary to compare the position of the creditors if there is no
sequestration vs if there is sequestration.
• Sequestration will only be to the advantage of the creditors if it will result
in a greater dividend to them than would otherwise be the case.
‘Friendly’ sequestration
• 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 (Van Rooyen v Van
Rooyen).
‘Friendly’ sequestration
• 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 (Mthimkhulu v
Rampersad) and the sequestration proceedings are simply an abuse of the
process of the court.
• As such, the ‘friendly’ sequestration process is often abused.
• 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
(Epstein v Epstein).
 Application for compulsory
sequestration
• 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.
Steps prior
to • In terms of s 9(4), before an application of compulsory
sequestration is presented to the court, a copy of the
adjudicatio application and the affidavit(s) must be lodged with the
master and if there is no master at that particular court,
n on then the copies must be lodged with an officer designed
for this purpose.
application • S 9(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.
 Notice

• In terms of s 9(4A) when an application is made, the applicant (i.e., the creditor) must furnish a copy to
several parties:
• 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).
• copies of the application must be sent to the employees themselves by: 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 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 the application was presented.
• a copy must also be sent to the South African Revenue Service (SARS).
• 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 s 9(5) the court, on consideration of
Granting or the application, the master’s (or officer’s) report
refusal of and on the consideration of any further affidavit
that the applicant (i.e., creditor) may have
the submitted in response to that report, may act in
accordance with s 10(a) and –
application • grant provisional sequestration, OR
• may dismiss the application, OR
• postpone its hearing, OR
• make such other order which it deems just.
 • The Insolvency Act envisages two distinct stages in the
process whereby the debtor’s estate is placed under
sequestration.
Granting or • The initial stage: provisional sequestration.
• The second (or final) stage: final sequestration.
refusal of • At both the provisional and second (or final) stage, the
the three requirements must be shown to exist.
application • 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.
 Activi
ty

What is the difference in requirements, between the granting

of provisional sequestration and the granting of the final
sequestration order?
 • In terms of s 10, 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:
• According to s 10(a) the applicant (creditor) has established
a claim against the debtor as set out in s 9(1).
• According to s 10(b) the debtor has committed and act of
insolvency or is insolvent.
Provisional • According to s 10(c) there is reason to believe that it will be
to the advantage of the creditors of the debtor if his estate
sequestrati is sequestrated.
• If one of these 3 requirements cannot be met, the court will not
on grant a provisional compulsory sequestration and the process
ends here.
 Service of rule nisi

• In terms of s 11(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 (give an explanation / defend himself)
as to why his estate should not be sequestrated.
• In terms of s 11(2), if the debtor has been absent from his usual residence or place of
business for 21 days, service of 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 s 11(2A) a copy of the rule nisi must also be served on the following parties:
• any registered trade union of the debtor’s employees
• the debtor’s employees themselves
• a copy must also be sent to SARS
 After the granting of the rule nisi, the
Opposition to debtor and other interested parties
may oppose the application by filing
application affidavits with the Registrar setting
out the grounds of their opposition.
Intervention by In Fullard v Fullard, it was stated that
a creditor is entitled to intervene at
another any stage, either to have the
creditor provisional order set aside, or to
obtain a fresh sequestration order in
his own right and name.
 • In terms of s 11(3) the debtor may
apply to the court and ‘anticipate’ the
return day for the purpose of
discharging (dismissing) the provisional
order of sequestration.
Anticipation of • S 11(3) allows the debtor to apply to the
court and make this return day at an
return day earlier date.
• The court will only grant the application,
if it is satisfied that the provisional
sequestration order would have
inevitably been dismissed had the
debtor waited.
 • According to s 12(1) at the hearing on the return day of the
Final rule nisi, if the court is satisfied that the three requirements
have been met (on a balance of probabilities) it may
sequestra sequestrate the debtor.

tion or • In terms of s 12(2) at the hearing on the return day of the rule
nisi, if the court is not satisfied that the 3 requirements have
dismissal of been proved, it will –
• dismiss the application for sequestration of the debtor’s
application 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.
 Court’s discretion

• Even if the court is satisfied that the requirements for sequestration have been
established on a balance of probabilities, it is not obliged to grant a final order of
sequestration.
• The court has an overriding discretion, to be exercised upon a consideration of
all the circumstances.
• The debtor’s commission of an act of insolvency is an important consideration in
the decision whether his estate should be sequestrated.
• Metje & Ziegler Ltd v Carstens: The commission of an act of insolvency places the
sequestrating creditor in a ‘much stronger position’ than a mere general allegation
of insolvency.
 Setting aside
sequestration order
• Any person aggrieved by a final order of compulsory sequestration,
or by an order setting aside an order of provisional sequestration,
may appeal against the order (s 150(1)).
• The aggrieved person must first obtain leave to appeal from the
appropriate court and go ahead with the appeal promptly.
• No appeal lies against the granting or refusal of a provisional
sequestration order.
Week 3
What will be covered in
today’s lesson?

Assessment Criteria:

2.8 Identify the legal position of the insolvent.

2.9 Explain, in detail, the vesting of the insolvent assets of the insolvent.

2.10 Identify the vesting of the assets of the solvent spouse.

 Introduction

• Sequestration of a debtor’s estate imposes on him a form of

reduction in status – capitis diminution.
• Spencer v Standard Building Society 1931 TPD 481 484.
• Limits capacity to contract, earn a living, litigate and hold office.
• A sequestration order may affect a debtor’s property and that of his
or her spouse, uncompleted contracts and legal proceedings to
which the debtor is a party.
 Contracting

The Insolvency Act does not deprive the debtor of his contractual capacity generally
(MacKay v Fey NO 2006 (3) SA 182 (SCA)

The debtor retains a general competency to make binding agreements

However, to protect creditors, the Act imposes certain restrictions on the debtor’s capacity
to contract
Effect of contract which is not
Prohibited contracts Effect of prohibited contract
prohibited
 1. Prohibited contracts

• The debtor may not make a contract which purports to dispose of any property of his
insolvent estate.
• Without the trustee’s written consent, the debtor may not conclude a contract that
adversely affects (or probably will adversely affect) his estate or any contribution that
he is obliged to make towards his estate.
• “Contribution” refers to one claimable by the trustee under s 23(5) from moneys earned by the insolvent in the
course of his profession, occupation or employment.
• The contribution becomes due to trustee only once the Master has expressed the opinion that these moneys
are not necessary for the support of the insolvent and the dependants.
• Before the Master assesses a contribution, the insolvent need not obtain the trustee’s
consent to contract – Mervis Brothers (Pty) Ltd v Hanekom 1963 (2) SA 125 (T).
 2. Effect of contract which is not
prohibited

• The contract is valid and binding on the parties where the trustee’s consent is
unnecessary or where it is given.
• De Polo v Dreyer 1991 (2) SA 164 (W):
• Although the contract is binding, the insolvent may not enforce performance in
his favour unless the Insolvency Act (or some other statute) specifically gives
him the right to do so.
• In the absence of an empowering statutory provision, the trustee is the proper
person to enforce the claim.
• The insolvent may, on the other hand, enforce payment for work done after
sequestration because s 23(9) expressly gives him the right to recover this
remuneration for his own benefit.
 3. Effect of prohibited contract

• If the insolvent enters into a contract which purports to dispose of estate

property, the contract is voidable at the option of the trustee – it is NOT void.
• The position is the same if the insolvent contracts without obtaining the trustee’s
consent where it is required.
• Assets that the insolvent acquires, and liabilities that he incurs, under the
contract are his own, and he may thus acquire an estate adversely to the trustee.
• Should the trustee choose not to set aside the contract or simply stand by
without voiding it, the contract remains binding upon the parties.
2. Effect of prohibited contract

• If the trustee chooses to set aside a contract, he may recover any

performance made by the insolvent.
• The trustee must also restore to the third party any benefits that the
insolvent has received under the transaction – ‘the appropriate remedy is
restitutio in integrum’.
• Estate Louw v Credit Corporation of SA Ltd 1956 (3) SA 303 (C).
Earning a livelihood
• It is in nobody’s interest that the insolvent or his dependants should be rendered destitute.
• The insolvent is allowed to follow any profession or occupation or enter into any
employment, and he may make whatever contracts are reasonably necessary for this
purpose.
• But he may not, without his trustee’s written consent, carry on, be employed in any
capacity in, or have any direct or indirect interest in, the business of a trader who is a
general dealer or manufacturer (s 23(3)).
• The trustee must decide whether to consent and in this regard, must not follow the
creditors’ instructions, as the determination does not concern the administration of the
insolvent estate.
 Earning a livelihood
• Consent to trade in a particular business does not entitle the insolvent to do anything besides
trade in the manner specified in that type of business, e.g. receiving the benefits of donations
received outside his trade.
• The insolvent may make contracts reasonably incidental to the type of business, including,
apparently, a contract of partnership.
• The insolvent who trades with his trustee’s written consent must record his receipts and
expenditure, that the trustee may claim any surplus unnecessary for supporting the insolvent and
his dependants, and that the Master may issue a certificate about the amount the trustee may
claim.
• If the insolvent pursues a vocation without obtaining consent where it is required, he commits a
criminal offence, and cannot escape liability by saying he did not know that consent was
necessary.
• Any contracts made in the course of the unlawful vocation are voidable if the trustee chooses.
Instituting and defending legal
proceedings
• The fact that a person is insolvent does not necessarily prevent him from being a
party to legal proceedings
• Proceedings which may be brought/defended personally by insolvent
Instituting and defending legal
proceedings

Although the insolvent is divested

of his estate, in general, he retains
a reversionary interest in it
So, he may litigate to ensure that
‘because of the possibility that a
it is properly administered.
residue or surplus of realised
assets over liabilities may, in terms
of s 116 of the Act, accrue to him’.
Questions for Discussion
Discussion
Discuss the ways in which the insolvent is able to
Discuss litigate to ensure that his estate is properly
administered.

The fact that the insolvent has a right to litigate in

matters concerning the administration of the
True / False
estate means that he has a general right to
prescribe how the estate should be administered.

Can an insolvent do anything in the case of an

injustice or irregularity in the administration of the
Explain estate?
(Kruger v Symington NO 1958 (2) SA 128 (O))
Instituting and defending legal
proceedings
Security for costs:
• An insolvent who brings an action in the Magistrate’s Court is obliged
to give security for the costs of the action if the defendant requests it.
• If the insolvent does not give security as called upon by the defendant, the
defendant may apply for the action to be dismissed.
• In the High Court, the position is different:
• If the matter is one for which the Insolvency Act specifically gives the
insolvent the right to sue, he cannot be required to give security for costs,
unless the failure of the action is a foregone conclusion and thus vexatious.
• If the insolvent’s right to sue does not flow from the Act, the court may order
him to furnish security if it considers that the action is reckless and vexatious.
Instituting and defending legal
proceedings
Entitlement to costs:
• If the insolvent sues or is sued personally in a matter in which he is
entitled to litigate, and he obtains an award of costs in his favour, the
judgment for costs belongs to him personally, and he may dispose of
it as he likes.
• Damages for the trustee’s maladministration accrue to the insolvent
estate, but an award of costs against the trustee is for the benefit of
the insolvent – Ecker v Dean 1940 AD 206.
 • An unrehabilitated insolvent is disqualified from
holding a large number of positions – to mention a
few:
• He cannot be appointed as a trustee in an
insolvent estate, and if he is already a trustee
when his estate is sequestrated, he must vacate
his office.
Holding • He is not capable of being a member of the
office National Assembly, the National Council of
Provinces, a provincial legislature or a municipal
council or of the National House of Traditional
Leaders.
• Unless granted an exemption by the court, he is
disqualified from being a company director.

Which other positions can be mentioned?

Vesting of estate in trustee

• The trustee’s function is to –

1. collect the assets in the estate,
2. realise them, and
3. distribute the proceeds among creditors in the order of preference
set by the Act.

To enable the trustee to do this, the Act provides that the effect of a
sequestration order is to divest the insolvent of his estate and vest it in
the Master and later in the trustee once he has been appointed.
Vesting of assets in trustee

• Vesting occurs even in respect of property which has been sold in execution if
the debtor’s estate is sequestrated before the delivery or transfer of the
property concerned.
• Once vesting occurs, the trustee, not the insolvent, litigates in relation to the
insolvent estate.
• The trustee has no beneficial interest in the estate property.
 Estate remains vested
in the trustee until:

Discharge of the The acceptance by creditors

of an offer of composition An order for the insolvent’s
sequestration order by the rehabilitation is granted
court (Mahomed v Lockhat made by the insolvent which
provides that the insolvent’s under s 124(3)
Brother & Co Ltd)
property made be restored
to him

If a trustee vacates his office, is removed from office, or dies, the

estate revests with the Master until a new trustee is
appointed. If there is a co-trustee, the estate remains vested in
him.
Property which falls into estate
• Subject to certain exceptions flowing from the Act and from other
enactments, the insolvent estate consists of the following:
• All property of the insolvent at the date of sequestration, including property
(or its proceeds) in the hands of a sheriff under a writ of attachment; and
• All property which the insolvent acquires, or which accrues to him during
the sequestration, including any property that the insolvent recovers for the
benefit of the estate where the trustee fails to take the necessary action.

Under s 2, ‘property’ means movable or immoveable property.

 Property which falls into estate

Proceeds of an
Insolvent’s title
Solvent spouse’s execution sale held
Foreign assets deeds and his Money
property by an execution
books of account
officer

Property that the

Goodwill of the Debts owed to the
Intellectual insolvent has
insolvent during insolvent during Shares
property rights bought but not yet
sequestration sequestration
paid for

A claim for
Property acquired
Rights of damages against
during
inheritance the trustee for
sequestration
maladministration
 Property which does not fall into estate

Remuneration for Compensation for Compensation for

Wearing apparel,
work done after Pension defamation or occupational
bedding etc.
sequestration personal injury injuries or diseases

Benefits payable to Unemployment Trust

Insurance policies Share in accrual
miner insurance benefits property/funds

Right of labour
Property acquired
tenant to land or Friendly society
with money from
right in land (land moneys and assets
above sources
reform)
Disposal of estate property by insolvent

• An insolvent cannot dispose of property that forms part of his

insolvent estate, but the Act allows for one exception.
• S 25(3) – if the insolvent brings about any act of registration in respect of
immovable property in his estate after the expiry of every caveat entered against
that property by the Registrar of Deeds, the act of registration is valid.
• So, any transfer or other act of registration brought about after the expiry of
the caveat would be void. However, s 25(3) renders the transfer or other act of
registration valid.
• S 25(4) – if an insolvent unlawfully disposes of immovable property or a right to
immovable property which forms part of his insolvent estate, the trustee may,
despite the provisions of s 25(3), recover compensation in respect of the
property or right disposed of.
• Trustee has two possible remedies where the insolvent disposes of immovable
property or a right to immovable property forming part of the insolvent estate:
• Return of the property or right itself
• Compensation in respect of the property or right from insolvent or the person
who acquired it

• Trustee may recover compensation from:

• the insolvent personally
• a person who acquired the property or right knowing it to be part of the
insolvent estate
• a person who did not know that the property or right formed part of an
insolvent estate, but who acquired it without giving sufficient value in return
 Acquisition of new estate during insolvency

• Various property does not vest in the trustee, the insolvent may, during the period
of his insolvency, acquire a new estate and hold it with a title adverse to his
trustee.
• The after-acquired estate can, in turn, be sequestrated.
Vesting of assets of solvent spouse
• The additional effect of a sequestration order under s 21(1), is
to vest the separate property of the spouse of the insolvent
in the Master and later the trustee, as if it were the property
of the insolvent estate, and to empower the Master or
trustee to deal with the property accordingly.
• The transfer of ownership is not intended to be permanent
since the solvent spouse may secure the release of assets
falling within the categories set out in s 21(2).
• But until an asset is released, the solvent spouse has none of
the ordinary powers of ownership over it and cannot, for
example, dispose of it or encumber it.
 Vesting of the
assets of the solvent
spouse
• S 21 was introduced to prevent, or at least
hamper, collusion between spouses to the
detriment of creditors of the insolvent
estate –
• makes it difficult for an insolvent and
spouse to deprive the estate of assets
to which it is entitled by pretending
they are the solvent spouse’s separate
property.
 Harksen v Lane NO & others

• It was argued that s 21 is invalid for violating the solvent spouse’s constitutional rights, in
particular, the right not to have property expropriated without compensation and the
right to equality before the law and not to be unfairly discriminated against.
• The majority of the Constitutional Court rejected the argument.
• Its reasoning may be summarised as follows:
• S 21 cannot be regarded as expropriating the solvent spouse’s property since it does
not contemplate a permanent transfer of ownership to the Master or the trustee.
The purpose of the section is merely to make sure that the insolvent estate is not
deprived of property to which it is entitled.
• It does indeed differentiate between the solvent spouse and other persons who
might have had dealings with the insolvent. Yet this differentiation is legitimate and
does not infringe the right to equality before the law because the section has a
legitimate purpose, and the differentiation has a rational connection to that purpose.
 Harksen v Lane NO & others

• The differentiation of the section amounts to discrimination, but it does not

constitute unfair discrimination because –
• it does not affect a vulnerable group or a group that has suffered discrimination
in the past;
• it is intended to achieve a worthy and important societal goal: protecting the
rights of creditors of insolvent estates; and
• it does not impair the fundamental dignity of solvent spouses or bring about an
impairment of a comparably serious nature.

S 21 is not unconstitutional.
 S 21 - ‘spouse’ has an extended meaning and
includes a wife or a husband married
‘Solvent spouse’ according to any law or custom, also a
person living with a member of the opposite
sex, although not married to her or him

If the joint estate of spouses married in community

of property is sequestrated, both spouses become
S 21 only applies if there insolvents, and so s 21 does not apply.
is a solvent spouse The property of these spouses vests in the trustee under s 20,
including assets which a spouse owns as his or her separate
property and which, therefore, do not form part of the joint
estate
Postponement of vesting

• The Act makes provision for postponement of vesting of some or all of the
solvent spouse’s assets.
• In terms of s 21(10) –
• if the solvent spouse is carrying on business as a trader apart from the insolvent spouse,
or
• if it appears to the court that the solvent spouse is likely to suffer serious prejudice
through the immediate vesting of her property,
the court may, when making the sequestration order, or later, exclude some or all of her
property from the operation of the order for such a period as it thinks fit.
Release of solvent
spouse’s property by
trustee
• Categories of property which must be
released:
• Property owned before marriage to the insolvent
• Property acquired under a marriage settlement
• Property acquired by valid title during the
marriage
• Property protected under certain other
provisions
• Property acquired with proceeds of the above
 • Should the trustee refuse to release property
claimed by the solvent spouse, she may apply to
court for an order to release the property or
stay the property’s sale.
Release by • If the property has already been sold but its
proceeds have not yet been distributed among
court creditors, the solvent spouse may ask for an
order declaring that she is entitled to the
proceeds.
• The court may make any order on the application
it considers just.
 • The solvent spouse cannot surrender her estate
Sequestrati while it vests in the trustee.
on of • Civil proceedings against her are not stayed and if
she commits an act of insolvency, her estate may
solvent be sequestrated by a creditor.
spouse’s • The court may postpone the application for
sequestration or make any interim order it
estate considers just if it is satisfied that the act of
insolvency was due to the vesting…
• If the estate of the solvent spouse is
sequestrated, the right to obtain the release of
the property that belonged to her vests in the
trustee of her estate
Week 4
Collection of estate assets

2.11 Explain the procedure and requirements

for meeting of creditors, proof of claims,
creditor voting and the appointment and
disqualification of trustees.

2.12 Interrogation of the insolvent and

other witnesses.
Questions
Types of for Discussion
Creditors'
Meetings
Second Special General
First Meeting:
Meeting: Meeting: Meeting:

Proof of claims
Directions on
Claims and Proof of claims or
estate
election of a and trustee’s interrogation
administration
trustee. report. of the
.
insolvent.

The first and second meetings are most common, while special and general
meetings are held as necessary.
First Meeting
Questions of
for Discussion
Creditors
When: Convened immediately after the sequestration order (s 40(1)).

Purpose: Creditors prove claims against the estate & elect a trustee.

Notice Published in the Government Gazette 10 days before the meeting

Requirements: (s 40(2)).

Further Notice
Must include the time, date, and venue.
Requirements:

Nedcor Bank Ltd v The Master (2002) emphasised proper notice

Case law:
timing.
Second Meeting of
Creditors
When:
• After the first meeting and trustee appointment (s 40(3)(a)).

Purpose:
• Prove additional claims.
• Receive a report from the trustee on the estate’s condition.
• Provide directions to the trustee on administration of estate.

Notice Requirements:
• Trustee publishes notice in the Gazette and local newspapers.
• Must be published in both English and Afrikaans (s 40(3)(b), (c)).
  Purpose:
Special Meeting of 1. Proof of Claims:
Creditors Trustee convenes the
meeting at the
request of an
interested party
(expenses covered
by the requester).
2. Interrogation of the
Insolvent: The
meeting is called
with the Master’s
consent to question
the insolvent.
This Photo by Unknown Author is licensed under CC BY-SA 117
General Meeting
Creditors

of Creditors:
Purpose:
• Give additional directions to the trustee on issues
not covered in the second meeting.
When Called:
• Trustee can call a general meeting at any time.
• Required if requested by the Master or by
creditors representing 25% of proven claims.
Example: Consideration of an offer of composition (s
119(5)).
Proven claims Not proven claims
118
eneral Provisions relating to meetings
1. Date & Venue:
• The Master sets the first meeting's date; other meetings are scheduled by
the trustee.
• All meetings must be held at publicly accessible venues (s 39(6)).

2. Presiding Officer:
• The Master or a designated public official presides in districts with a Master’s
Office.
• Magistrates preside in other districts (s 39(2)).
• Meetings can be adjourned as needed (s 39(5)).

3. Record of Proceedings:
• Presiding officer keeps a certified record, which is sent to the Master.
• The minutes are prima facie evidence of the meeting's proceedings (s 68(1)).
rivileges and Legal Protections
Privilege of Statements:
• Statements made at creditors' meetings are protected
with the same privilege as court statements (s 39(6)).

Validity of Acts and Resolutions:

• Acts and resolutions taken at properly convened
meetings are presumed valid unless proven otherwise (s
68(2)).

Legal Safeguards:
• Protects creditors and trustees during the proceedings.
 Summary
Creditors' meetings are a vital part of the
insolvency process, ensuring
transparency, creditor participation, and
lawful administration of the estate.

Legal precedents guide meeting

protocols, ensuring proper handling of
claims and directions to the trustee.
 • As a rule, a creditor of the estate has no right to
share in the distribution of the assets, vote on
matters concerning the administration of the estate,
or challenge any of the trustee’s actions, unless he
Proof of has proved a claim against the estate at a meeting
of creditors, i.e., either the first or second meetings
Claims or a special or general meeting.
• Proof of the claim gives the creditor the
required locus standi and at the same time
provides prima facie proof of the existence of the
debt (Grufin Finance Co (Pty) Ltd v Cohen).
 • At the first meeting of creditors, creditors who have
proved their claims may elect one or two trustees.
Election:
• At the first meeting of creditors, creditors who have
proved their claims may elect one or two trustees (s
Election of 54(1)).

the • If more than one person is nominated, the

individual who obtains a majority of votes in both
Trustee number and value must be elected as sole trustee (s
54(2)).
• If one person obtains a majority in value, and
another person a majority in number, both must be
elected trustees (s 54(3)(b)).
Appointment of the Trustee
• The Master may refuse to appoint a trustee elected.
• If he accepts the election, the person must give security to the
satisfaction of the Master for the performance of his duties as
Trustee, the Master will then confirm his election and appoint him as
Trustee by delivering to him a certificate of appointment (valid
throughout SA) and appointment will be put in the Gazette.
 The Master may refuse to confirm the election
of someone as Trustee if:
Refusal to
• He was not properly elected.
appoint • He is disqualified from being a trustee.
the • He failed to give the required security.
Trustee • In the opinion of the Master, he should not
be appointed.
Disqualification of trustees

1. ABSOLUTE DISQUALIFICATION:

• The following people cannot be a trustee:

• An insolvent
• A minor or someone with a legal disability
• A person who resides outside the Republic
• A company, CC or other corporate body
• A former trustee disqualified under s 72
• A person convicted of theft, fraud, forgery, uttering, perjury and sentenced to
a term of imprisonment without the option of a fine or to a max fine of R2000
• Etc.
 2. RELATIVE DISQUALIFICATION:
• The following are disqualified in respect of a certain
estate:
• A person related to the insolvent by blood or
marriage within the third degree
Disqualificat • A person having an interest opposed to the
general interest of the creditors
ion of • A person who acted as bookkeeper, accountant
trustees or auditor of the insolvent at any time during a
period of 12 months immediately prior to the
date of sequestration
• An agent authorised to vote on behalf of a
creditor at a meeting and who acts in terms of
that authority
Remuneration of the trustee
Trustee is entitled to reasonable remuneration for his services, which
must be taxed by the Master according to Tariff B in the Second
Schedule to the Act.

The tariff was last adjusted in 1995, setting a minimum fee of R2 500.

The trustee is not entitled to any remuneration for services rendered

to the estate except that to which he is entitled as a trustee under the
Act.
Interrogation of the insolvent and
other witnesses
To enable the trustee and creditors to investigate the insolvent’s affairs and
ascertain his true financial position, the Act provides for the interrogation of the
insolvent and other witnesses.

The Act also empowers the Master to conduct a private interrogation.

If the trustee merely holds informal discussions to investigate matters which

clearly call for a formal interrogation, he is guilty of a dereliction of duty and may
have his remuneration reduced or disallowed by the Master in terms of s 63(1)
(Thorne v The Master).
 • In terms of s 64(2), the presiding officer at any meeting
of creditors may summon any of the following
persons to appear at the meeting to be interrogated:
• Any person who is known, or on reasonable
Who may grounds believed, to possess or to have been in
possession of property that belonged to the
be insolvent before sequestration of his estate, or
interrogate which belongs or belonged to the insolvent estate
or to the insolvent’s spouse.
d? • Any person who is known or on reasonable
grounds believed to be indebted to the estate.
• Any person who, in the opinion of the presiding
officer may be able to give material information
concerning the insolvent or his affairs (whether
before or after sequestration), any property
belonging to the estate, or the business, affairs, or
property of the insolvent’s spouse.
Interrogation by the Master

• The Act also makes provision for an inquiry to be instituted

by the Master, whenever he believes that the insolvent, the
trustee, or any another person can give information which he
(the Master) considers desirable to obtain concerning the
insolvent, his estate, the administration of his estate, or any
claim or demand against the estate (s 152(2)).
 Week 5
Learning
outcomes
2.13 Identify the procedure of realisation of
estate assets.

2.14 Identify different types of

creditors, the specific order for
preferential and secured creditors and
their significance (ranking of claims).
Realisation of estate assets
The process of realising estate assets of an insolvent individual involves dealing
with the assets of a person who is unable to pay their debts.

The aim is to distribute these assets to creditors fairly.

This process is crucial to ensure that creditors are given the opportunity to
recover as much of their outstanding debts as possible.

The realisation of estate assets involves various steps, including identifying,

valuing, and eventually selling the assets.
 • Creditors' claims play a pivotal role in this
process.
(Creditors are individuals or entities to whom
the insolvent individual owes money.)
• These creditors have legal rights to claim
Realisation of the debts owed to them from the estate
assets of the insolvent.
estate assets • However, not all creditors have the same
priority in terms of payment.
• South African law establishes a ranking
system for creditors' claims, determining
the order in which they are to be paid
from the realised assets.
Manner of realisation

The trustee is obliged to realise the estate assets in the

manner and upon the conditions directed by creditors at
the second meeting of creditors (s 82(1)).

If creditors have not given any directions by the final

closing of the second meeting, the trustee must sell the
property by public auction or public tender.
S 82(6) – items the trustee cannot sell:

• This section is for the benefit of the insolvent – so if he decides to waive

this right, the trustee may sell these items.
• Pactum de non cedendo  a clause that the item may not be alienated
will not be binding on the trustee unless:
• The Pactum itself provides for instances of insolvency.
• The Pactum is contained in a lease.
• The pactum forms part of the contract that created the right in question.
Requirements where assets are sold by
public auction/tender
• Every sale of estate assets by public auction or public tender (whether directed
by creditors or not) must be preceded by notice in the Gazette and any other
notices required by the Master (s 82(1)).
• The notices must accurately describe the assets in question (Muller v De Wet NO
& others 2001 (2) SA 489 (W) 494-5).
• In the absence of directions from creditors as to the conditions of sale, the sale
must be on such conditions as the Master may direct (s 82(1)).
• Sale by public tender in terms of s 82(1):
• Tenderer must submit the tender (in duplicate) in a sealed envelope to the
Master or magistrate specified by Master.
• Master / magistrate keeps them all sealed until the time for submitting
tenders has expired.
• Once open – no more tenders submitted.
• The trustee then selects the best offer / denies them all and goes to public
auction.

E.g. The insolvent, Jack’s BMW needs to be sold. The trustee puts notice in the GG saying the
BMW X5 2014 is available for tender. John, Jabu and Julian all tender their tenders (offers) to
the Master / magistrate. Once the time has expired, the trustee opens them all at the same
time to see if any of the offers are sufficient – if not it goes to auction.
Sale in contravention of the Act
• A sale of estate property in contravention of the provisions of s 82 is nevertheless
valid if the buyer is in good faith when he enters into the contract (s 82(8);
Naude v Serfontein NO en ’n ander 1978 (1) SA 633 (O)).
• ‘Good faith’ here means the absence of knowledge that the trustee has no authority or is
exceeding his authority (Mookrey v Smith NO & another 1989 (2) SA 707 (C)).
• A buyer must produce evidence of his good faith (Muller v De Wet NO & others).
• If the buyer knew that the trustee had no authority, he is not entitled to the
protection of s 82(8), even if he was bona fide about every other aspect of the
transaction and believed that the sale was in the best interests of the estate
(Mookrey v Smith NO & another).
 • The trustee may not acquire estate property himself
unless the acquisition is confirmed by the court (s
82(7)).
• The same prohibition applies to an auctioneer
employed to sell the property in question, and to the
Purchase of spouse, partner, employer, employee, or agent of
assets by either the trustee or the auctioneer.
• Confirmation is required even if the person concerned
Trustee buys, not personally, but in a representative capacity,
e.g., as a trustee.
• As a rule, the court will confirm a sale to the trustee if it
was concluded in an open and bona fide manner, for
instance, if it took place at a public auction that was
adequately advertised, and the trustee’s bid was the
highest obtainable.
 Sale of assets before the second
meeting of creditors
• In general, the trustee is obliged to await the directions of creditors given at
the second meeting before selling the estate property.
• But if at any time before this, he is satisfied that movable or immovable
property of the estate should be sold forthwith, he may make a
recommendation to this effect in writing to the Master, stating his reasons
(s 80bis(1)).
• The Master may authorise the sale of all or a portion of the property and
give directions regarding the manner and conditions of sale (s 80bis(2)).
• If the Master has had notice that the property is subject to a right of
preference, he cannot authorise the sale unless the person entitled to the
right of preference has given his consent or the trustee has guaranteed the
person concerned against loss resulting from the sale.
Discussion
1. When an asset is sold on public tender,
how should a tender be submitted?
2. Can the trustee purchase estate assets?
3. Who will give directions to the trustee on
how the estate assets must be realised?
Types of
creditors
• Concurrent creditors
• Secured creditors
• Preferent creditors
Concurrent creditors

A concurrent creditor does not enjoy any advantage over other creditors of the
insolvent.

Concurrent creditors are paid out of the free residue after any preferent
creditors have been paid.

The ‘free residue’ is defined as that portion of the estate that is not subject to
any right of preference by reason of any special mortgage, legal hypothec,
pledge, or right of retention (s 2).
Concurrent creditors

Should the free residue be

insufficient to meet their
Concurrent creditors all rank
claims, each receives an
equally.
equal proportion of his
claim by way of a dividend.
Secured creditors

A secured creditor is one who holds security for his claim in the form
of a special mortgage, landlord’s legal hypothec, pledge or right of
retention (s 2 ‘security’).

The definition in s 2 contemplates real security only; a creditor

whose claim is secured by suretyship is not secured for purposes of
the Act.
Security (secured creditors)
• Special mortgage: A mortgage is a legal agreement where a bank or financial
institution (creditor) lends money to a borrower (now insolvent) in exchange for a
real security right in the property. This includes movable and immovable
property.
• Landlord’s legal hypothec: A landlord (creditor) who is owed rent has a hypothec
over movable property brought onto the leased premises for use by the tenant
(now insolvent).
• Pledge: A valid pledge is constituted where movable property is delivered to a
creditor on the understanding that he will keep it until his claim has been
satisfied.
• Right of retention: A party (creditor) has a right of retention over specific
property belonging to another (now insolvent), if he has expended labour or
incurred expenses in respect of that property.
Secured creditors
• Secured creditors are to be paid out of the
proceeds of the property subject to the
security.
• If the encumbered property are insufficient to
cover the secured creditor’s claim, he has a
concurrent claim for the balance.
Preferent creditors

The term ‘preferent creditor’ may be used in a wide sense to refer to

any creditor who is entitled to receive payment before other creditors.

A secured creditor qualifies as a preferent creditor in this broad sense.

But the term ‘preferent creditor’ is usually reserved for a creditor

whose claim is not secured but nevertheless ranks above the claims of
concurrent creditors.
 • The Insolvency Act creates preferences in regard
to the following claims:
• funeral and death-bed expenses (s 96);
• costs of sequestration (s 97);
Preferent • costs of execution (s 98);
creditors • salary or remuneration of employees (s 98A);
• statutory obligations (s 99);
• income tax (s 101);
• claims of holders of general bonds and
certain special bonds (s 102).
First pay the secured creditors out of the proceeds from
encumbered assets (secured assets)

The rest of the unencumbered assets are added to the estate

and form the “free residue”

Out of the free residue the preferent creditors are paid

Then the concurrent creditors are paid

 Week 6
Composition and
rehabilitation
2.15 Identify the different types of
composition and list the requirements
for each.

2.16 Discuss the requirements,

procedure and effects of
rehabilitation and the
declaratory order for which an
insolvent may apply.
Composition and Rehabilitation
• For an insolvent to bring an end to the sequestration
proceedings, he/she must first be rehabilitated.
• After rehabilitation, the insolvent will have his/her pre-
sequestration debts discharged, allowing a fresh start.
• The rehabilitation process varies for each insolvent,
depending on factors such as proved claims, available
proceeds to creditors, and any committed offenses.
• Automatic rehabilitation occurs after ten years have passed
from the date of sequestration.
• Alternatively, an insolvent can seek early rehabilitation
through a court order.
Introduction to Composition
Definition: Composition
is a legal mechanism that
allows debtors in financial
distress to negotiate with
creditors to avoid Common-law
insolvency. Compromise: Based on
contract law, requiring
unanimous approval from
creditors.
Types of Composition:
Statutory Composition
(Section 119): A
legislative framework
allowing majority approval
to bind dissenting
creditors.
Common Law Compromise
After the provisional order of sequestration has been granted, the
insolvent can enter into a written agreement with the creditors
and the provisional Trustee to pay the dividends on the claims, on
condition he is released from his debts if any provisional
sequestration order is discharged.

The agreement must be approved by all the creditors

(Prinsloo v Van Zyl) because otherwise, a dissenting creditor
can still apply for compulsory sequestration.

The compromise is signed by each creditor.

Common-Law Compromise
• Basis:
• Rooted in the principles of contract law, requiring voluntary
agreement from all creditors.
• Advantages for Creditors:
• Receive dividends quicker compared to formal sequestration.
• Potentially larger dividends due to reduced costs.
• Advantages for Debtor:
• Avoids the negative implications of sequestration.
• Facilitates a quicker financial recovery.
Statutory Composition (Section 119)

Legal Basis: Binding Nature: Disadvantages:

• Governed by • Approval by a • The debtor
specific majority of remains
provisions in creditors (3/4 by classified as an
insolvency value and unrehabilitated
legislation, number) binds insolvent until
providing a dissenters, certain
structured creating a conditions are
process for debt collective met.
resolution. resolution.
 Key Differences
Common-Law Statutory
Compromise Composition

Legal Basis Law of Contract Statutory Framework

No immediate
Immediate release
Impact on Debtor discharge of
from debts
sequestration order
Requires unanimous Majority binds
Acceptance
consent minority
 Offer of Composition
Notification
Submission Trustee's Creditor
Requirement
Process: Role: Meeting:
s:
• The • Evaluates • A meeting • The notice
insolvent the must be must
debtor likelihood of convened to explicitly
submits a acceptance discuss the reference
written offer and must offer, with a the offer and
to the communicat notice period include all
trustee for e with of 14-28 necessary
consideratio creditors. days. details.
n, at any
time after
the first
meeting of
creditors.
 Terms of Composition
Flexibility:

• The debtor can include various terms, such as

immediate asset reinvestment and total debt release.

Legal Restrictions:

• Where offer provides for giving security, nature of

security must be specified.
• An offer of composition may not be accepted if it
contains a condition that a creditor will receive a benefit
that he would not have gotten had the estate been
wound up in the normal way.
• A condition that makes the offer subject to the
rehabilitation of the insolvent is of no effect.
Acceptance of Section 119 Composition

Criteria for
Importance of
Binding Legal Precedents:
Creditor Voting:
Composition:

Requires
acceptance from Voting integrity is Zulman & Others v.
creditors holding at crucial; improper Schultz: Acceptance
least 75% of the motivations (e.g., based on non-legal
total value and pity) invalidate motivations is
number of proved acceptance. invalid.
claims.
Consequences of Section 119 Composition

Restoration of Trustee's Right to

Binding
Property: Obligations: Prompt
Nature:
Rehabilitation:

All Automatic
concurrent Responsible
revesting of for framing
creditors are property Debtors may
bound, liquidation apply for
occurs accounts and
irrespective without rehabilitation
of their distributing immediately
physical assets.
voting. transfer if under
stipulated. specific
conditions.
Understanding
Rehabilitation
Purpose: Rehabilitation allows debtors to start anew,
discharging all prior liabilities that arose before
sequestration.
Automatic Rehabilitation:
After 10 years of sequestration without court intervention,
debtors are automatically rehabilitated.
Court-Ordered Rehabilitation:
Debtors can seek early rehabilitation under specified
conditions (e.g., successful composition).
Automatic rehabilitation

If the court orders that an

If the insolvent is not insolvent will not
rehabilitated within 10 automatically be
years by the court, he is rehabilitated, the registrar
deemed rehabilitated, must send a copy of the
unless the court, on the order to every registrar of
application of an interested deeds and enter a caveat
party, orders otherwise. against the transfer of any
immovable property.
Rehabilitation by the court within 10
years

The Act sets out the

circumstances and
The insolvent has no
procedures – where the
right to be rehabilitated –
provisions of the Act have
it is in the discretion of
complied with the court is
the court.
not obliged to grant
rehabilitation.
Circumstances for Rehabilitation

Conditions for Early Application:

Composition of at least 50 cents in the Rand.
12-month waiting period post-confirmation of the first
account.
No claims proved within six months of sequestration.
Full payment of all proved claims.
 Court’s Discretion in Rehabilitation
Factors for
Granting with Refusal
Postponement
Conditions: Factors:
:
• Pending • Conditions • Examples:
criminal may be Negligent
proceedings or imposed only business
need for under conduct,
additional extraordinary failure to
information. circumstances. cooperate with
trustees, lack
of
transparency.
 Effect of Rehabilitation

Termination of Limitations:
Sequestration:
Reinstates the debtor’s Does not automatically
legal status, discharging return the debtor’s assets
them from past debts. unless explicitly stated in
the composition.
Declaratory Orders Regarding
Property
• Publish
intention in the
Government
Gazette.
• Notify the
Procedure for
Master,
declaring Applicati
Claiming trustee, and
ownership of
on any creditors
Unclaime assets not
claimed by the Requirem with
d Assets: unsatisfied
trustee or ents:
claims.
creditors.
• Must show that
trustee/credito
rs have full
knowledge of
facts.
Any questions?
Best of luck
with the
Summative
Assessments!