2583853 LAWS2009A – Theme 4 Sequestration.pdf

Introduction - Sequestration occurs when a person’s assets are less than liabilities (insolvent). - Purpose of sequestration: The purpose is to secure an orderly and equitable distribution of the debtors’ assets amount to all his creditors. - Concursus creditorum refers to the coming together...

Introduction - Sequestration occurs when a person’s assets are less than liabilities (insolvent). - Purpose of sequestration: The purpose is to secure an orderly and equitable distribution of the debtors’ assets amount to all his creditors. - Concursus creditorum refers to the coming together of creditors. - Advantages of sequestration for the debtor: - It liberates him immediately from all court proceedings instituted by creditors. - Offers him an opportunity, once the insolvency has run its course, of becoming rehabilitated an amassing a new estate free of debt. - Sequestration is regulated by the Insolvency Act 1936. What estates may be sequestrated Estates of the following may be sequestrated: - A natural person. - A deceased person. - A person incapable of managing his or her own affairs. - A partnership (even one whose members are all juristic persons) - A company or body corporate which cannot be wound up under the Companies Act, 2008. - NON-Juristic can be Sequestration, e.g. Clubs and trusts. Exceptions to the above: - An entity or association of persons that is not a juristic person may be sequestrated, if it incurs liabilities on its own name. - Body corporate established in terms of the Sectional Titles Act, 1986 are not a debtor for the Insolvency act, it is in terms of the Sectional Titles Act. - Spouses married in community of property do not have their own estate - They joint together. Therefore, even they carry on a business independently. Both are debtors and will be sequestrated together, for the purpose of the act. Jurisdiction Courts that can hear a sequestration proceeding: - Sequestration must be instituted in a provincial or local division of the high court. - Insolvency diminishes the debtor's legal status and a magistrate's court does not have enough power to grant an order affecting status. When can a court refuse to hear the sequestration proceeding? If the debtor is domiciled in a foreign estate and it appear to the court equitable or convenient that the debtor's estate be sequestrated outside the REPUBLIC. 2583853 LAWS2009A – Theme 4 Sequestration and its consequences 1 Obtaining a Sequestration Order 1. Voluntary Requirements (a) The debtor is insolvent (b) The value of the debtor’s property is sufficient to meet the costs of the sequestration. FV (Fair Value) of Liabilities > FV (Fair Value) of Assets. (c) Sequestration will be to the advantage of the creditors. Preliminary formalities (a) Publication of the notice of surrender: - Voluntary surrender is initiated by the publication of a notice of surrender in the prescribed form in the GOVERMENT GAZETTE and in the newspaper circulating in the district where the debtor resides or has his place of business. - The notice must not appear more then 30 days and not less then 14 before the date of application for surrender. (b) Notice to creditors and other parties: Within 7 days of publication the debtor must furnish copies of the notice to the creditors and other parties– must deliver a post notice. - Creditors: The debtor must deliver or post a copy of the notice to every one of his creditors whose address he knows or can get. The objective of this is to provide protection to creditors, who may wish to contest the application. Failure can be regarded fatal to application. - Other parties e.g.: SARS and trade unions. Must be given notice by a copy on the notice board or a front gate note. (c) Lodgement of the statement of affairs: Debtor must lodge with the MASTER and MAGISTRATE of the district in which he carries on business. Unless required by MASTER OR COURT, debtor is not obliged to have property mentioned in his statement. Filing of the application at the court Prior to the hearing a debtor must lodge with the Registrar of the High Court a notice of motion and affidavit making out a case for voluntary surrender. Copy of the application to ‘consulting party’ If the debtor is an employer, he must at the time of application provide a consulting party. Adjudication on the application Appear before court to examine. Therefore, despite meeting statutory requirements the court can refuse by: - The applicants' creditors are willing to give the applicant time to overcome his financial difficulties. - Application was brought for an ulterior purpose. 2583853 LAWS2009A – Theme 4 Sequestration and its consequences 2  - The applicant failed to make full disclosure regarding his financial position. - The applicants' financial difficulties could be addressed by using the machinery of the NATIONAL CREDIT ACT. 2. Compulsory sequestration Requirements (a) Applicant must be entitled to apply: - A creditor who has a liquidated claim against the debtor for not less than R100 OR - 2 or more creditors who have a liquidated claim against the debtor, in aggregate, to not less than R200. A liquiated claim is a monetary claim, the amount of which is fixed by an agreement, judgement or otherwise. Claim for damages is NOT Liquidation. (b) Debtor is insolvent or committed act of insolvency (discussed below) (c) Reason to believe that sequestration is to the advantage of creditors: For this requirement to be satisfied, there must be a reasonable prospect that will achieve the following objectives - A dividend for Creditors that is not negligible. - A more advantageous outcome for creditors. Acts of insolvency - Departure/absence from South Africa/dwelling - Failure to satisfy a judgement - Disposition of property - Removal of property - Arrangement for release from debts - Failure to act in terms of a notice of surrender - Written notice of inability to pay - Inability to pay debts after notice of sale of business Friendly sequestration - A ‘friendly sequestration’ is to have his estate sequestrated by an amicable creditor, such as a friend or relative to whom he owes a debt. - The court must scrutinize every such application because there is; - A concern is that it can cause collusion and malpractice. - Collusion: agreement between parties to surpass facts or manufacture evidence to make it appear to the court that a party has done something to never end. - Types of collusion and malpractices: - The friend or relative is not really a creditor and has no interest in the debtors’ assets. - The creditor overvalues the debtor’s property or lists assets which are no saleable. - Obtains a provisional SEQ order but has no intention of having a final order. 2583853 LAWS2009A – Theme 4 Sequestration and its consequences 3  Steps by the creditor/applicant prior to adjudication on application (a) Security for costs: Cost of sequestration proceedings and the costs of administrating the estate (b) File the application and certificate at the court: - Creditor must File with the Registrar a notice of motion and affidavit making out a case of compulsory registration. - The words "Date of application" refer to the date of signature of the application (c) Master’s report and creditor’s reply (d) Serve copy of the papers to debtor and other parties - Who are the other parties? Trade union, employees and SARS - Affix copy of the application to notice board or front gate/door of the premises (e) File an affidavit setting out compliance with above steps. First adjudication- provisional sequestration - Provisional order- prima facie requirements must be met. - What is a prima facie case - “Are the facts in dispute?” - No – if the creditor’s allegations true, meet the requirements for sequestration order? - Yes – whether, after considering the affidavits of both creditor and debtor, meet the requirements for sequestration on a balance of probabilities? - Rule nisi calling on debtor to show (prove) why estate not finally sequestrated: - On provincial grant of sequestration order, the court must simultaneously grant a rule NISI, calling upon a debtor to show case why his estate should not be sequestration. - The rule of nisi is served on: ▪ Debtor ▪ Registered trade union representing debtor’s employees ▪ The employees themselves ▪ The South African Revenue Service - The sheriff must establish whether the employees are represented by a registered trade union and whether there is a notice board inside the employers premises to which the employees have access. Opposition to the application - Who: A debtor or creditor may oppose the application - How: They must file affidavits with court Registrar and serve these affidavits on the sequestrating creditor. - When: In sufficient to enable the sequestrating creditor to reply before the return day in the rule nisi. Second adjudication- final sequestration - Court satisfied that sequestrating creditor has proved the requirements for compulsory sequestration on a balance of probabilities, may confirm the provisional order. 2583853 LAWS2009A – Theme 4 Sequestration and its consequences 4  - Court not satisfied, either discharge the provisional order or require further evidence from the creditor. - Oral evidence is allowed to deal with factual disputes. - NB – court has an overriding discretion on whether the confirm the provisional order: - Must ensure that the factual disputed will not disturb the balance of probabilities. - Even if the court is happy with all the requirements, it is not obliged to confirm the provincial order and retains an overriding discretion. 2583853 LAWS2009A – Theme 4 Sequestration and its consequences 5 The Consequences of a Sequestration Order Legal status of the insolvent - Ability to enter into contracts: You now need written consent of a trustee. - Affect of a prohibited contract: It becomes voidable at the option of a trustee. - Affect of a contract which is not prohibited: If the trustee consent is not needed, the contract is valid and binding on the parties. - Protection to bona fide third parties: Protects 3rd parties who contract with the insolvent. - Impact on earning a livelihood: May not, without written consent of his trustee, carry on, be employed in any capacity or have any direct or indirect interest in the business of a trader who is in a general dealer or manufacture. Insolvent may carry on a VOCATION. - Instituting and defending legal proceedings: The insolvent may sue or be sued in his own name and with our ref to the trustee. - Holding office: An insolvent is disqualified from holding certain positions such as - He can't be a TRUSTEE - Can't be apart of the national assembly, national counsel of provinces. - Can't be director of a company or management in a cc of which he is a member. The estate of the insolvent - The master of the insolvent estate is the trustee. - The insolvent must give up their property to the trustee. - All the property that belongs to the insolvent on the date of sequestration, and all property acquired by him or accrued to him during the sequestration, including any inheritance, despite the will Same with a joined insolvent estate), will fall into the insolvent estate. - Wearing apparel and bedding, any household furniture, tools and other essential means will be excluded from the insolvent estate. - An Insolvent cannot dispose of assets forming part of his insolvent estate, if he purports to do so, the trustee may claim return of the asset. The solvent spouse’s estate - The estate of the spouse of the insolvent has the same effect as the insolvent, because, the transfer of ownership is not permanent as the solvent spouse may secure the release of assets. - A “spouse” includes a partner in a marriage or civil partnership. - If the relationship has been terminated between the spouses, then this section [21(1)] does not apply. - A court exclude a spouse’s property from vesting in the trustee if the solvent spouse is carrying on the business of a trader apart from the insolvent spouse, as the sequestration may cause serious prejudice, if the spouse is able to prove: - She owned it before she was married to the insolvent. - She acquired it under a marriage settlement. - She acquired it under the marriage by a title valid as against creditors of the insolvent. - She acquired it with property falling into one of the above categories. 2583853 LAWS2009A – Theme 4 Sequestration and its consequences 6 Unperformed Contracts and Unfinished legal proceedings - Contract completed by the insolvent but not by the other party: The right of performance is an ASSET to the insolvent estate, the trustee may either sell the right or enforce the debt owed to the estate. - Where the insolvent has purchased immovable property prior to insolvency, the trustee must uphold or repudiate with 6 weeks. If the trustee fails to make the election and notify the other party. The latter may appeal to court for cancellation of the contract and the return of possession of property. - For lease agreements entered into by the insolvent prior to insolvency, trustee must uphold or repudiate, if failure within the 3 months to notify lessor, it is deemed repudiated. - The other party to a contract, cannot obtain an order of specific performance, but may exercise other remedies for breach of contract e.g. damages and cancellations do if the trustee repudiates a contract entered into by the insolvent prior to insolvency. - An employment and mandate contract of the insolvent are terminated on sequestration - Any other awaiting legal proceedings for the insolvent that came up before insolvency, may go ahead and are not affected by sequestration. 2583853 LAWS2009A – Theme 4 Sequestration and its consequences 7