BANKING AND INSOLVENCY

LAW
Presented by Dr K Mpofu
WORD OF THE DAY
• If you don't know where you are going, any road will get you
there.
Lecture objectives
• The lecture provides the duties and responsibilities of:
• 1. The insolvent debtor.
• 2. The trustee
The duties of the debtor
• Disclosure of All Assets and Liabilities
• The debtor must fully disclose all assets and
liabilities, including property, bank accounts,
investments, and debts owed. Complete and truthful
disclosure is critical to ensure that the trustee can
identify all assets for liquidation.
• Case law: In Ex parte Collie 1911 TPD 39, the court
emphasized the importance of full and honest
disclosure by the debtor, ruling that the non-disclosure
of material assets undermines the sequestration
process and can lead to the annulment of the
sequestration order.
Surrender of the Estate

• The debtor must surrender control of their estate to the

appointed trustee. This involves handing over any
movable and immovable property, along with any
financial records or documents that pertain to the
insolvent estate.
• Case law: In Coetzee v Coetzee (1915) WLD 12, the
debtor’s failure to hand over financial records and
documents was deemed non-compliance with the
requirement to surrender the estate. The court held that
such failure could result in penalties or delay in
finalizing the sequestration process.
Cooperation with the Trustee

• The debtor has a duty to cooperate fully with the

trustee appointed by the Master of the High Court.
• This includes:
• Answering questions about the debtor's financial affairs.
• Providing access to records and documents.
• Assisting in identifying and locating all the assets of the
estate
Attendance at Creditors'
Meetings
• The debtor is required to attend creditors' meetings if requested by the
trustee or creditors.
• These meetings provide an opportunity for creditors to question the debtor
about the financial situation, assets, and any relevant transactions before
sequestration.
• Providing a Statement of Affairs
• The debtor must submit a statement of affairs detailing their financial
situation, which includes a full list of assets, liabilities, income, and
expenses. This statement is filed with the Master of the High Court and
serves as the foundation for the sequestration process.
• Case law: In Ex parte Pillay 1955 (4) SA 223 (N), the debtor’s failure
to provide an accurate statement of affairs resulted in delays in the
sequestration process. The court emphasized the importance of submitting
accurate and complete financial information.
 6. Refrain from Preferential
Payments
• The debtor must not make any preferential payments to certain creditors
before the sequestration order. Doing so would unfairly benefit certain creditors
over others and can lead to such payments being reversed by the trustee.
• Case law: In Goode, Durrant & Murray v Hewitt 1908 TS 862, the court
set aside a payment made by the debtor to a favored creditor shortly before
sequestration, stating that such preferential transactions are unlawful and harm
the interests of other creditors.
7. Attend the Section 152 Interrogation
• The debtor may be summoned to a Section 152 interrogation in terms of the
Insolvency Act. This formal examination is conducted by the trustee, creditors,
or the court, and the debtor is required to answer questions under oath
regarding their financial affairs.
• Case law: In Kessel Feinstein v Parkstein 1992 (2) SA 573 (C), the court
ruled that the debtor’s refusal to cooperate during the Section 152 interrogation
constituted a failure to comply with the duties imposed by insolvency law. The
debtor's evasive responses negatively affected the outcome of the proceedings.
 Protection and Maintenance of Estate Property
• The debtor has a duty to protect and maintain the property of the estate before
it is handed over to the trustee. The debtor must not intentionally damage or
dispose of assets that belong to the estate without the trustee's permission.
• Case law: In Sampson v Union Government (1918) CPD 100, the court ruled
against a debtor who attempted to dispose of assets after the sequestration order
had been issued. The debtor was held liable for the loss of estate property.
• 9. Avoid Incurring New Debt
• The debtor should refrain from incurring any new debt during the sequestration
process without the approval of the trustee or court. Any new financial obligations
could negatively affect the sequestration process and creditors' interests.
• Case law: In Ex parte Lloyd 1937 WLD 72, the court held that a debtor who
incurred new debt during sequestration without proper authorization acted in
violation of the Insolvency Act, leading to further legal consequences.
Consequences of Non-
Compliance:
• If a debtor fails to fulfill these duties, they may face
serious consequences, including:
• Imprisonment for contempt of court or non-cooperation.
• Refusal of discharge from bankruptcy, prolonging the
financial restrictions imposed by sequestration.
• Reversal of transactions, such as fraudulent or preferential
payments made before sequestration.
• Personal liability for losses caused to creditors through
concealment or failure to surrender assets.
DUTIES OF THE TRUSTEE
• 1. Take Control of the Insolvent Estate
• The trustee must immediately take control of the insolvent estate,
which includes all the assets belonging to the insolvent debtor at the
time of sequestration.
• This involves securing the debtor's assets and preventing any further
depletion or transfer of the estate.
2. Investigate the Affairs of the Insolvent
• The trustee is required to investigate the financial affairs of the
insolvent individual or company. This includes:
• Determining the causes of insolvency.
• Identifying all assets and liabilities.
• Reviewing the debtor’s financial transactions to ensure that no fraudulent or
preferential payments were made before sequestration.
 3. Realization of Assets
• The trustee must collect and realize (sell) the assets of the
insolvent estate, converting them into cash to maximize the
amount available for distribution to creditors.
• Assets should be sold at a fair market value, often through public
auction or private sale, depending on the asset type.
• 4. Examine and Verify Claims
• The trustee must examine and verify the claims submitted by
creditors against the insolvent estate.
• This includes determining the validity and accuracy of claims,
ensuring they are legitimate, and classifying them into categories
(e.g., secured, preferent, and concurrent claims).
• Any disputes over claims must be resolved by the trustee, and if
necessary, referred to the Master of the High Court or the court.
5. Convene and Attend
Creditors' Meetings
• The trustee is responsible for convening and attending
meetings of creditors.
• These meetings serve the following purposes:
• Reporting on the administration of the estate.
• Allowing creditors to submit and prove their claims.
• Providing updates on the realization of assets and expected
distributions.
• Allowing creditors to vote on important decisions, such as how
to proceed with the estate or how to deal with specific assets.
6. Distribute Proceeds to
Creditors
• After realizing the assets, the trustee is responsible for
distributing the proceeds to creditors according to the
legal order of preference:
• Secured creditors (those with collateral).
• Preferent creditors (such as unpaid employees and certain
tax claims).
• Concurrent creditors (unsecured creditors, paid
proportionally based on available funds).
• The trustee prepares and submits a liquidation and
distribution account detailing how the funds will be
distributed among creditors. This account must be
approved by the Master of the High Court.
 7. Submit Liquidation and Distribution Account
• The trustee is required to prepare and file a liquidation and
distribution account with the Master of the High Court.
• This account details:
• The assets realised.
• The claims admitted.
• How the proceeds are to be distributed among creditors.
• Once the account is filed, it is made available for inspection
by creditors and other interested parties, usually for a period
of 14 days.
8. Deal with Preferential and Voidable
Transactions

• The trustee has the duty to investigate and, where appropriate,

set aside any voidable transactions or preferential
payments made by the debtor before sequestration.
• Transactions that unfairly benefited certain creditors over
others or involved the fraudulent disposal of assets can be
overturned by the trustee to ensure equitable distribution
among creditors.
• 9. Report to the Master of the High Court
• The trustee must report to the Master of the High Court
regularly on the progress of the sequestration. These reports
ensure that the trustee is managing the estate properly and in
accordance with the law.
10. Duty of Care and Good Faith

• The trustee must act with a high degree of diligence, honesty,

and good faith in managing the insolvent estate. They are
fiduciaries, meaning they must prioritize the interests of the
creditors above their own and avoid any conflicts of interest.
• If the trustee acts negligently or dishonestly, they can be held
personally liable for any loss suffered by the creditors or the estate.
• 11. Attend Interrogations
• The trustee must attend interrogations of the debtor if ordered
by the court or the Master.
• These interrogations are designed to uncover any concealed assets
or transactions and to gather information about the debtor’s
financial conduct.
11. Finalization of the Insolvent
Estate
• Once all assets are realized, liabilities are settled, and
the final distribution is made to creditors, the trustee
must ensure the proper closure of the estate.
• A final report is submitted, and any remaining balance
(if any) is returned to the debtor, though this is rare in
compulsory sequestration cases.
Consequences of Breach of
Duties:
• If the trustee fails to fulfill their duties, they can face
serious consequences, including:
• Removal from office by the Master of the High Court.
• Personal liability for losses to the estate caused by
negligence or misconduct.
• Criminal prosecution in cases of fraud or dishonest
conduct.