Voluntary Surrender Applications

Voluntary Surrender Applications

• Voluntary surrender differs from compulsory sequestration regarding requirements, proof standards, and procedures, but both lead to a sequestration order.

Who Can Apply?

• Natural Person: The insolvent debtor or their agent can apply per Section 3(1) of the Insolvency Act.
• The agent needs express authorization in a power of attorney to start or participate in sequestration, as shown in Ex parte Brown 1951 (4) SA 246.
• Deceased Debtor: The executor of the estate can apply per Section 3(1) of the Insolvency Act.
• Person Lacking Legal Capacity: A curator bonis, managing the estate of someone unable to handle their affairs, can apply per Section 3(1) of the Insolvency Act.
• In Ex Parte Houston 1958 (1) SA 448 (N), the court allowed a curator bonis to apply for a businessman who disappeared.
• Partnerships: All partners residing in the Republic can apply, except en commandite partners or special partners under the Special Partnerships Limited Liability Act 24 of 1961.
• The Special Partnerships Limited Liability Act covers limited partnerships, limiting liability for non-managing partners.
• In Ex Parte Bester & Another 1937 CPD 45, the court required all partners or their agents to apply, as one partner isn't an agent for all others under s3(2) of the Insolvency Act.
• Spouses in Community of Property: Both spouses must apply, as required by s17(4) of the Matrimonial Property Act 88 of 1984.
• The court can request the petitioner or others to appear and be examined, according to s3(3) of the Insolvency Act.

Substantive Requirements for Sequestration

• Insolvency Act Requirements: All sequestration proceedings need substantive requirements and procedural formalities.
• Section 6(1) of the Insolvency Act: The High Court can accept surrender if procedural formalities are met, the estate is insolvent, has enough realisable property to cover sequestration costs, and sequestration benefits creditors.

Three Substantive Requirements

• Debtor's Estate is Insolvent: Total liabilities exceed asset value.
• Estate Has 'Free Residue': Enough to cover sequestration costs.
• Sequestration Benefits Creditors: As per s6(1) of the Insolvency Act.
• 'Realisable property' refers to debtor-owned property that can be sold during estate administration.
• The debtor must prove these substantive requirements.

Debtor's Estate is Insolvent

• Insolvency is determined by comparing total liabilities to asset value.
• A 'Statement of Affairs' is submitted, but the court isn't bound by its valuations (Ex parte van den Berg 1962 (4) SA 402 O).
• The court must be satisfied of the debtor's insolvency, regardless of what the Statement of Affairs indicates.
• In Ex Parte Greefe 1940 (2) PH C80 (C), the court accepted surrender based on a sworn appraiser's valuation showing a deficiency, despite the Statement of Affairs showing a surplus.
• In Ex Parte Deemter 1962 (2) SA 288 (E), the court deemed the debtor insolvent due to lawsuits and unsuccessful liquidation attempts, despite the Statement of Affairs indicating solvency.
• Ex parte Harmse 2005 (1) SA 323 (N) requires the court to be satisfied that the debtor cannot fully pay their debts and that asset realisation won't satisfy them.
• In Ex Parte Harmse 2005 (1) SA 323 (N), the court ruled that letters from estate agents/valuers weren't sufficient evidence of insolvency.
• The applicant must prove their insolvency on a balance of probabilities.
• 'Balance of probabilities' is the civil case standard of proof where the court weighs the evidence.
• 'Prima facie' means something is accepted as correct until proven otherwise.

Sufficient 'Free Residue'

• Costs of Sequestration: Includes surrender costs and general administration costs per s97 of the Insolvency Act.
• S97 Costs: Sheriff's charges, Master's fees, taxed sequestration costs, and curator bonis/trustee remuneration.
• The debtor must have sufficient realisable property to cover these costs from the estate's free residue, as per s97 of the Insolvency Act.
• 'Free Residue' Definition: Portion of the estate remaining after claims are paid.
• Section 2 of the Insolvency Act defines it as the portion not subject to special mortgage, pledge, legal hypothec, or right of retention.
• Special Mortgage: Defined by s1 of the Security by Means of Movable Property Act 57 of 1993.
• Legal Hypothec: A right established by law over a debtor's corporeal property.
• Right of Retention: A 'lien' that allows retaining physical control of property as security for payment.
• A debtor lacking assets cannot surrender their estate (Ex Parte Collins 1927 WLD 172), but compulsory sequestration might be possible (Miller v Janks 1944 TPD 127).
• An insufficient residue will lead to refusal of the application (Ex Parte v Swanepoel 1975 (2) SA 367 (O)).
• A guarantee to the Master cannot fix an insufficient residue (Ex Parte Theron 1923 OPD 46).
• If the 'free residue's' sufficiency is uncertain, the court can grant surrender if there's a guarantee for costs to the Master's satisfaction.

Benefit To Creditors

• The debtor must prove the sequestration 'will be to the advantage' of creditors (s6(1) of the Insolvency Act).
• There must be a pecuniary benefit to creditors.
• A substantial portion of creditors will benefit from sequestration.
• Sequestration must yield at least a not negligible dividend.
• If the debtor can only cover sequestration costs, there's no advantage to creditors.
• Debtors can renounce protection of movable assets under s82(6) of the Insolvency Act to enhance their estate.
• Section 82(6) excludes essential items from the sale of movable property.

Preliminary Procedures/Formalities

• S4 of the Insolvency Act: Requires publishing a notice of intention to surrender.
• The applicant must publish this notice in the Government Gazette (GG) and a local newspaper circulating where the debtor resides or operates their business.
• The 'principal place of business' is where the administrative functions occur.
• A 'trader' is anyone conducting business involving the sale or manufacture of property (s2 of the Insolvency Act).
• A 'newspaper' is a publication informing the public on events.
• In Ex Parte Barton 1926 CPD 252, the court ordered publication in a KZN newspaper because that's where the applicant's debtors were, even though the applicant published in a Western Cape newspaper.
• The notice must be published 14-30 days before the application date.
• The 30-day limit prevents abuse of the process.
• The 14-day limit gives creditors time to review the statement of affairs.

Notice To Creditors And Other Parties

• Within 7 days of publishing the notice, the applicant must send copies to creditors, trade unions/employees, and the South African Revenue Services (SARS) per s4(2)(a)-(b).
• Debtors can prove compliance with these notifications via an affidavit, as per Ex parte Harmse.
• Notice to creditors is meant to protect those who may want to oppose the application.
• Ex parte Wassenaar states that creditors aren't expected to continually check the GG.
• Failure to notify each creditor can invalidate the application, but the court may condone non-compliance.
• Ex parte Hetzler found that posting 4 days before publication wasn't a fatal error, emphasizing that substantial compliance with the notice period is important.
• The debtor must also notify employees via noticeboards, the front gate, or the front door of the business premises.
• Send a copy of the notice to SARS by post.

Notice Contents

• The notice must resemble Form A in the Insolvency Act's First Schedule and include:
  • Debtor's full name and address
  • High Court details
  • Application date
  • Statement of affairs inspection details for 14 days
  • Master's office location for inspection, or Magistrate's Court details if applicable
• If no Master's office is in the district, the Statement of Affairs must be available at the Magistrate's Court.

Statement Of Affairs

• Contains a balance sheet.
• Includes a list of immoveable assets with estimated values and mortgage details.
• Includes a list of moveable property.
• Lists debtors' addresses and debt information, including whether debts are 'good', 'bad', or 'doubtful' (detailed information needed, not just "sundry debtors" - Ex parte Silverstone).
• Lists creditors, addresses, claim details, and security held.
• Lists accounting books used by the debtor.
• Provides a detailed statement of the insolvency cause.
• Includes the debtor's personal information, such as prior insolvency and rehabilitation.
• Features a sworn affidavit by the debtor (or agent) affirming the Statement of Affairs' accuracy.
• The Master can direct a sworn appraiser to value property per s4(4) of the Insolvency Act.
• The Statement of Affairs must be materially correct and complete.
• Its purpose is to inform the public and creditors of the debtor's financial state to protect their interests.

Legal Position

• No definitive answer to non-compliance question.
• Each case is evaluated based on its own circumstances and impact on creditors.
• Factors considered include:
  • Is the provision peremptory/imperative or discretionary/permissive?
  • If peremptory, non-compliance is fatal.
  • If discretionary, non-compliance isn't automatically fatal and if there has been substantial fulfillment of the requirements and whether creditors were prejudiced.
• Peremptory provisions use words like 'shall' or 'must'.
• Discretionary provisions use words like 'may'.
• Defective compliance with peremptory provisions usually leads to dismissal.
• Courts have been lenient, condoning defects with substantial compliance and no creditor prejudice.
• Does non-compliance amount to a defect/irregularity under s157(1) of the Insolvency Act?
• Failure to comply with requirements doesn't invalidate unless substantial injustice results and cannot be fixed by a court order.
• Failure to strictly comply is fatal if the provision is peremptory and doesn't amount to a formal defect under s157(1) of the Insolvency Act.

Effects Of Publishing A Notice Of Intention To Surrender

• Selling attached property is unlawful once the notice is published per s5(1) of the Insolvency Act, unless the person executing the writ was unaware of the notice.
• Exceptions:
  • If the property's value doesn't exceed R 5 000. 00, the Master can order the sale and direct proceeds.
  • If the value exceeds R 5 000. 00, the creditor must apply to court for approval.
• The court may authorize the sale if it benefits the general body of creditors.
• The court may direct what happens to the proceeds of the sale.
• The prohibition continues until the day of application/its adjudication.
• The prohibition doesn't affect other civil and criminal proceedings.
• Civil actions and criminal prosecutions can proceed, but sales in execution are stayed.
• A sale violating s5 is illegal, and the debtor can resist proceedings, even if the application is refused later.
• If ownership is transferred to the buyer, the trustee must prove the buyer acted in bad faith and knew the sale was unlawful to reclaim the property.
• The Master may appoint a curator bonis to manage the debtor’s estate to prevent the debtor’s irresponsible actions.

Potential Compulsory Sequestration

• A debtor commits an act of insolvency under s8(f) of the Insolvency Act by:
  • Failing to lodge a statement of affairs
  • Lodging an incorrect or incomplete statement
  • Failing to apply to court on the appointed date
• Committing an act of insolvency allows creditors to apply for compulsory sequestration.

Withdrawal Of Notice

• A person can withdraw a notice of surrender after applying to the Master per s7(1) of the Insolvency Act.
• The Master will consent if the publication was in good faith and there's good cause for withdrawal.
• The notice is withdrawn when the withdrawal notice is published in the GG and the local newspaper.

Lapsing Of Notice

• A notice of intention to surrender lapses under s6(2) of the Insolvency Act:
  • Upon withdrawal under s7
  • If the court doesn't accept the surrender
  • If the application isn't made within 14 days of the stated application date

Application For Surrender Of The Estate

• The application is brought via a Notice of Motion supported by a founding affidavit/s & annexures with full disclosure of facts.
• The affidavit must contain:
  • Applicant's full name, address, occupation, and status.
  • Court jurisdiction details and applicant's locus standi per s3 of the Insolvency Act.
  • Allegation that the applicant is insolvent, supported by the Statement of Affairs.
  • Explanation of insolvency's cause, stating it was due to misfortune, not fraud.
  • A statement that there are sufficient assets to cover sequestration costs from the 'free residue'.
  • A statement that surrender benefits creditors, accompanied by supporting facts.
  • Applicant's income details.
  • Disclosure of additional relevant information.
  • A statement that s4 formalities have been met.
• The affidavit's purpose is to convince the court that requirements for voluntary surrender are satisfied.

Acceptance Of Surrender By The Court

• According to s6(1) of the Insolvency Act, the court will only accept the surrender if its is satisfied that:
  • S4 formalities have been complied with.
  • The debtor's estate is insolvent.
  • If the sequestration will be to the advantage of the general body of creditors.
  • The debtor owns sufficient realizable property to defray/ cover the costs of the sequestration out of the ‘free residue’ of the estate.
• If doubt exists about 'free residue' sufficiency, the court may refuse surrender unless the applicant provides a guarantee or security for costs to the Master's satisfaction.
• If the 'free residue' is insufficient, the surrender will be declined, even if security costs can be provided.

Acceptance Of Surrender By The Court - Continued

• Debtors must provide expert evidence, such as an evaluation from an estate agent, if assets are immovable property and their sale will yield a dividend to creditors.
• The expert must state their opinion, the facts they rely on, and the reasons for their opinion.
• Because estate surrender involves a financial inquiry, the applicant's current income is crucial in deciding if creditors will benefit.

Sequestration Of A Partnership

• Section 13 of the Insolvency Act addresses partnership sequestration.
• In terms of s13(1) of the Insolvency Act, when a court sequestrates a partnership, it must also sequestrate the personal estate of each partner, except en commandite or special partners.
• A partner's estate won't be sequestrated due to partnership sequestration if they've committed to paying the partnership's debts within a court-determined period and have provided security for payment.
• A partnership estate won't be sequestrated unless s4 formalities have been met for each partner's separate estate (s13(3) of the Insolvency Act).
• The court must accept the sequestration of each partner's personal estate, even if those partners aren't insolvent or haven't committed an act of insolvency.
• If a spouse in community of property is a partner and the partnership is sequestrated, the court must sequestrate:
  • The partnership
  • The joint estate between the spouses
  • The estate of the other partners

Other Important Issues

• Notice of motion, affidavits, and annexures must be filed with the Registrar before the hearing date.
• A copy of the application must be provided to a 'consulting party' in terms of s189 of the Labour Relations Act 66 of 1995.
• In some courts, a Master's report must be obtained and filed before the hearing.
• A creditor can oppose an application, regardless of their claim's size or if the debtor disputes it.
• Opposing creditors must deliver opposing affidavits before the application date.
• The debtor can reply via an affidavit.

Documents And Procedures Before The Court

• The following documents must be with the court prior to the commencement of the hearing:
  • Notice of motion + supporting affidavit/s
  • The debtor’s statement of affairs
  • Where applicable any sworn valuation
  • Proof of publication in the Government Gazette + newspaper
  • Proof by affidavit that the applicant has delivered the notice as required
  • A certificate from the Master that the statement of affairs has been availed for inspection
  • Any report by the Master
  • Any opposing affidavits by creditors
  • The debtor’s replying affidavit
• Parties are usually represented by counsel, and the court can call people to appear before it (s(3(3) of the Insolvency Act).
• Substantive requirements in s6(1) must be satisfied to accept estate surrender.
• Acceptance of voluntary surrender means the debtor's estate is sequestrated, and the debtor is declared insolvent from the court order date.
• If the court refuses surrender, the debtor reverts to their position before publishing the surrender notice.

Court Discretion

• A court isn't bound to accept voluntary surrender, even if all formalities are fulfilled.
• Instances where the court has exercised its discretion to refuse surrender:
  • Reckless spending by a debtor even after judgement made against him
  • Debtor’s creditors willingness to re-negotiate payment terms
  • Ulterior motives motivating the voluntary surrender
  • Lack of frank + full disclosure by a debtor
  • Debtor’s application deficient in material respects
  • Debtor’s financial woes can be addresses in terms of the National Credit Act 34 of 2005

Costs Of Surrender

• Surrender costs are part of the sequestration costs.
• Attorney fees + expenses- creditor who unsuccessfully oppose the application bear their costs, but court has the discretion to order that these be paid out of the estate.

Setting Aside A Sequestration Order

• There's no appeal if a court refuses surrender, but a court order accepting surrender can be appealed by anyone aggrieved by it (s150(1) of the Insolvency Act).
• The appeal is adjudicated like all appeals in civil matters (s150(2) of the Insolvency Act).
• The appeal doesn't suspend the order, but no property from the sequestrated estate can be realized without the insolvent's written consent (s150(3) of the Insolvency Act).
• The Court may rescind or vary its order s149(2) of the Insolvency Act