Insolvency Notes 2021/2022 (University of the Witwatersrand)

lOMoARcPSD|8553092 Insolvency Notes - 2021/2022 Insolvency Law (University of the Witwatersrand, Johannesburg) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 INSOLVENCY LAW UNIT 1: INTRODUCTION MEANING OF INSOLVENCY A person is insolvent when he is unable to pay his debts. - Legal test of insolvency is whether the debtor’s liabilities, fairly estimated exceed his assets, fairly valued – Venter v Volkskas 1973 A person who has insufficient assets to discharge his liabilities although satisfying the test of insolvency is not treated as insolvent for legal purposes, unless his estate has been sequestrated by an order of the court. - Sequestration = a formal declaration that a debtor is insolvent. - Granted either at the instance of the debtor himself or at the instance of one or more of the debtor’s creditors. NOTE: sequestration + sequestration order should be used only in re: to a person’s estate. Thus, a debtor’s estate is sequestrated, not the debtor himself. However, both the debtor’s estate and the debtor himself may be described as insolvent. - When the word insolvent is used it carries two possible meanings – first, that the debtor’s estate has been sequestrated or that his liabilities exceed his assets. PURPOSE OF A SEQUESTRATION ORDER Main objective: secure the orderly and equitable distribution of a debtor’s assets where they are insufficient to meet the claims of all his creditors. - Executing against the property of a debtor who is in insolvent circumstances inevitably results in one/few creditors being paid and the rest receiving little/nothing. - The legal machinery coming into operation on sequestration is designed to ensure that whatever assets the debtor has are liquidated and distributed among all his creditors in accordance with a predetermined and fair order of preference. The law proceeds from the premise that, one an order of sequestration is granted a concursus creditorum (‘coming together of creditors’) is established and the interests of creditors as a group enjoy preference over the interests of individual creditors – Richter v Riverside Estates 1 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 The debtor is divested of his estate and cannot burden it with any 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 of prejudicing the rights of creditors – Ward v Barrett. The law of insolvency exists primarily for the benefit of creditors (Ex Parte Pillay: Mayet v Pillay) & thus a court will not sequestrate a debtor’s estate unless it is shown that the sequestration will be to the advantage of creditors. - Sequestration will not be resorted to if the debtor, although insolvent, only has one creditor and the latter is already in possession of a judgment against the debtor. In this instance, the normal execution procedure offer a less expensive means of exacting from the debtor whatever amount he is able to pay. - Sequestration will not be ordered if the assets in the debtor’s estate will be consumed by placing the estate under sequestration and there will be nothing left over for creditors. Order will only be made if the expected result will be an appreciable dividend for creditors. This process relieves the debtor from legal proceedings by creditors and allows him, through rehabilitation, to free himself from all unpaid pre-sequestration debts – s 129(1) (b). Sequestration orders affect not only the rights of the two litigants, but also of third parties and involves the distribution of the insolvent’s property to various creditors, while restricting those creditors’ ordinary remedies and imposing disabilities on the insolvent – Naidoo v ABSA Bank. It follows that sequestration proceedings instituted pursuant to breach of a credit agreement could not be classified as ‘legal proceedings to enforce the agreement’ as envisaged by s 129(b) of the NCA. WHAT MAY BE SEQUESTRATED Meaning of ‘estate’ An estate is usually conceived of as a collection of assets & liabilities (Ex Parte Foxcroft), but a debtor who has only liabilities may be regarded as having an estate for sequestration purposes. - Look at Miller v Janks The joint estate of spouses marries in COP is an estate for purposes of insolvency, thus they do not have a separate estate which can be sequestrated, even where he is carrying on a business independently of his spouse – Ex Parte Vally. The spouses are both debtors and on sequestration of the joint estate, they both become insolvent debtors – Acar v Pierce; Du Plessis v Pienaar; Berrange v Hassan. 2 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 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 estate: s 17(5) of MPA; Maharaj v Sanlam Life Insurance. A debtor who is married out of COP has a separate estate that can be sequestrated. However, the solvent’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 title to them. A debtor who estate has been sequestrated may, during his insolvency, acquire a new estate under a title valid against his trustee. This new estate may be voluntarily surrendered (Ex parte Foxcraft) or sequestrate at the instance of a creditor (Ex Parte Geeringh). Compulsory sequestration is possible even where the assets in the second estate have been dissipated by the time the application for sequestration is made (Miller v Janks). Meaning of ‘debtor’ ‘A person of 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 (s2). An entity or association of persons is regarded as ‘a debtor in the usual sense of the word’ it is able to possess an estate and incur debts – Magnum Financial Holdings v Summerly & another. The entities that may be placed in liquidation according to s 337 of the Companies Act 1973, are a company, an external company – one registered outside the Republic) and any other body corporate – refers to a juristic person or universitas, i.e: an association of persons that has perpetual succession and is capable of holding property and of suing and of being sued in its corporate name – Magnum Financial Holdings v Summerly. The term debtor therefore embraces the following: - A natural person - A partnership – even one whose members are all juristic persons (SARS v Hawker Air Services) - A deceased person and a person incapable of managing his own affair - An external company that does not fall within the definition of ‘external company’ - An entity of association of persons that is not a juristic person, such as a trust – NOTE: although a trust falls within the definition of a juristic person in the Companies Act, it does not meet the definition of a company in that Act and hence cannot be liquidated under Chapter 14 of the Companies Act. A body corporate established ito the Sectional Titles Act 95 of 1986 is a ‘body corporate’ as referred to in the definition of ‘debtor’ in the Insolvency Act and therefore, is not capable of being sequestrated. It also cannot be wound up for non-payment of debts 3 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 or by reason of its insolvency. The legislature did not intend the law governing the winding up of insolvent companies to apply to body corporates – Reddy v Body Corporate of Croftdene Mall JURISDICTION OF THE COURT Which court has jurisdiction Only a provincial or local division of the HC may adjudicate upon an insolvency matter – s 2. A MC 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 MC. Jurisdiction over a debtor and his estate Ito 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 – (a) - At any time within the 2 months immediately preceding the lodging of the application the debtor ordinarily resided or carried on business within the jurisdiction of the court – (b). Domicile or property within jurisdiction A personal right, such as a right to a performance of some kind, is taken to be situated where the debtor liable to render the performance is domiciled. Residence or business within jurisdiction in preceding 12 months The debtor need not have ordinarily resided or carried on business for the entire 12 months preceding the application: ordinary residence or conduct or business at any time during that period suffices. However, ‘ordinary residence’ means something more prolonged that a temporary stay – Philips v Commissioner or Child Welfare. Jurisdiction in litigation against third parties S 149: it is not relevant where the trustee of an estate litigates against third parties. Competing courts – removal to another court A court having jurisdiction over a debtor may refuse or postpone proceedings if it appears to the court equitable or convenient that the estate should be sequestrated by 4 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 another court. The inquiry is not where the sequestration order may more conveniently be granted, but where the estate may more conveniently be administered. 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 HC and one of his most important functions is the custody of all documents relating to insolvent estates. For the performance of various functions the Master is entitled to charge fees, some being in cash, some by means of revenue stamps. The Master is a “creature of statute” and only has the powers granted to him by legislation. CONDONATION OF IRREGULARITIES In terms of Section 157(1) of the Act, irregularities in procedure can be condoned in the following instances: - where the irregularity has not caused a substantial injustice; or - where the irregularity has caused a substantial injustice, but the prejudice to creditors can be remedied by an order of court. The courts have recognised the following additional grounds whereby an irregularity can be condoned: - where a deviation is so slight as to fall within the maxim de minimis non curat lex (the law is not concerned with trifles) ex parte immerman; - where all interested parties have waived compliance with the provisions of the Act – ex parte nel; - where the provision in question is not peremptory and has substantially been complied with – ex parte bosch; and - where it was impossible to comply with the Act – ex parte henri. If defect does not qualify as ‘formal’ for purposes of s 157(1) and none of the grounds for condonation mentioned above are present, then the procedural step in the question is invalid – Ex parte Foley HISTORICAL OVERVIEW South Africa followed Roman Dutch law regarding insolvencies, but in 1843 a landmark ordinance was passed changing the law and more specifically abolishing the cessio bonorum (voluntary surrender of goods by a debtor to his creditors). The Constitution provides a basis for the further reform of Insolvency Law as it poses a potential threat to 5 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 a number of fundamental rights, but mere conflict does not render a provision constitutionally invalid. Constitutional invalidity involves a twofold inquiry: - Does the provision conflict with a fundamental right? - If so, is the limitation reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom? 6 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 UNIT 2: OBTAINING A SEQUESTRATION ORDER Two ways of sequestration: 1. Debtor/Agent ay apply to court for acceptance of the surrender of his estate – s 3(1). 2. Creditor(s) may apply to court for the sequestration of the debtor’s estate s 9(1). VOLUNTARY SURRENDER: CH 2 Who may apply - Estate of a natural person: debtor/agent – s 3(1). If agent, he must be expressly authorized to do so – Ex Parte Brown. - Estate of a deceased debtor: the executor – s 3(1) - Estate of a debtor who is incapable of managing his own affairs: the curator bonis who is entrusted with administering the estate s 3(1) – Ex Parte Houston. - Partnership estate: all the members of the partnership who reside in the Republic, or their agent – s 3(2). Ex Parte Bester: an application for surrender of a partnership estate was refused because only one member of a partnership had brought the application. The court held that one member of a partnership is not an agent of all other members for the purposes of s 3(2). - Joint estate of spouses married in COP: both spouses – s 17(4) of the MPA. Requirements Court must be satisfied that:  The debtor’s estate is insolvent;  The debtor owns realizable property of sufficient value to defray all costs of the sequestration which will, ito the Act, be payable out of the free residue of his estate;  Sequestration will be to the advantage of creditors – s 6(1). Debtor’s estate insolvent - Insolvent if the amount of his total liabilities exceeds the value of all of his assets. - Extent of assets + liabilities is generally determined by reference to the statement of affairs which he is required to prepare and file, but the court is not bound by the valuations in the statement (Ex Parte Van den Berg) and may make a finding of insolvency even where the statement indicates that his assets exceed his liabilities. - TEST: whether it is established that the debtor is without funds to pay his debts in full and it is improbable that the assets will realise enough for this purpose – Ex Parte Harmse. 7 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 Free residue sufficient to pay costs of sequestration ‘costs of sequestration’ : the costs of surrender + the general costs of administration (s 97). ‘free residue’ : 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 (s 2). Free residue incl -  The balance for the proceeds of encumbered property after discharge of the encumbrances – Ex Parte Van Heerden  Goods bought by the debtor under an instalment agreement to the extent that their market value exceeds the balance outstanding ito the transaction – Mindel v Shaer Logical result of this requirement is that the debtor must own sufficient property to meet the costs of sequestration is that a debtor who has no assets and only liabilities cannot surrender his estate. In Ex Parte Collins, the court refused to grant an application for surrender because the debtor had only liabilities, in spite of the fact that the costs of sequestration had been guaranteed to the Master. Note – an estate comprising only liabilities may be compulsory sequestrate – Miller v Janks IF the free residue is insufficient, the court must refuse the application – Ex parte Swanepoel. The insufficiency cannot be cured by the furnishing of a guarantee, since the guarantee does not have the effect of creating an asset in the debtor’s estate – Ex Parte Theron. Where it is uncertain whether the free residue is sufficient, the court may grant the application, provided a guarantee for costs, to the satisfaction of the Master, has been furnished. The guarantee in such a case is regarded as removing the uncertainty – Mindel v Shaer. Sequestration to be to advantage of creditors The debtor has to prove that sequestration will be to the advantage of creditors, whereas in an application for compulsory sequestration, the creditor has to show merely that there is reason to believe that it will be.  Onus is voluntary surrender is more onerous.  Reason: a debtor can normally be expected to provide a detailed account of his own financial position, whereas a sequestrating creditor would generally not have access to this info – Hillhouse v Stott; Botha v Botha  Also reduces the ever present risk of the debtor abusing the sequestration procedure and resorting to sequestration when it holds little or no real benefit for creditors and simply gives the debtor a means of escaping his liabilities. Preliminary formalities 8 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 Steps that are to be followed prior to the application for surrender are set out in section 4. Note – formal defects do not necessarily invalidate the application. Notice of intention to surrender The debtor has to publish a notice of surrender in the GG and in a newspaper circulating in the magisterial district in which he resides, or if he is a trader, in the district where he has his principle place of business. The notice must correspond with Form A in the First Schedule. Must state:  Full names, address, occupation of the debtor  The date upon which & the particular division of the HC before which the application for acceptance of the surrender will be made; and  When and where the debtor’s statement of affairs will lie for inspection as required by the Act. Publication must take place not more than 30 days and not less than 14 days before the date state in the notice as the date for the hearing of the application. Purpose: to alert creditors as to the intended application, in case they should wish to oppose it. The notice must be published in a newspaper containing reports on local or foreign happenings of recent occurrence and of a varied character, intended for the information of the general reader – R v Lewin. The newspaper chosen for publication must circulate in the area in which the debtor’s creditors are located, even if the debtor no longer resides or carries on business there. The 14-day time limit is to ensure that creditors have sufficient opportunity to peruse the statement of affairs and decide whether or not to oppose the application. The objective in imposing the 30-day limit was that debtors should not be able to give long notice months beforehand and in that way keep creditors from levying execution and in the meantime dissipate all the assets – failure to adhere strictly to the 30 day time limit has been taken to be fatal to the application, but in Ex Parte Harmse, the court held that the failure is a formal defect or irregularity as envisaged by s 157(1) and therefore does not invalidate the application unless it has cause substantial injustice which cannot be remedied by a court order. Publication of the notice of surrender may be proven by using an affidavit enclosing copies of the relevant gazette & newspaper. Notice to creditors and other parties Within 7 days after publication of the notice of surrender the debtor must furnish copies of the notice to creditors and other parties – compliance with this requirement may be proved through use of an affidavit. 9 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 i.Notice to each creditor DR must deliver/post a copy of the notice to all of his creditors whose address he knows or can ascertain (s 4(2)(a)) – provides protection to creditors who may wish to contest the application or take steps to safeguard their interests. Failure may be regarded as fatal, but in some circ, the court may be prepared to condone non-compliance with the time period – Ex Parte Hetzler ii. Notice to trade union and employees DR must post a copy of the notice to every registered trade union that, to his knowledge represents his employees (s 4(2)(b)(i)). The debtor must also give notie to the employees themselves, either:  By affixing a copy of the notice to any notice board to which the employees have access inside the debtor’s premises;  If they don’t have access to these premises, by affixing a copy of the notice to the front gate of the premises; or  Failing the latter, by affixing a copy of the notice to the front door of the premises from which the debtor conduct any business immediately prior to the surrender. iii. Notice to SARS DR must send a copy to SARS – s 4(2)(b)(iii) Preparation and lodging of statement of affairs Preparation of statement The statement of affairs referred to in the notice of surrender must be framed substantially in accordance with Form B, First Schedule of the Act and contain: Form B Balance Sheet Annexure I List of immovable assets, estimated values, as well as any mortgages Annexure II List of any movable property not incl. in Annexures III or V and their value Annexure III List of debtors with their residential and postal addresses, details of each debt and an estimate extent (good, bad, or doubtful) Annexure IV List of creditors, addresses, particulars of each claim and security held Annexure V List of any movable assets pledges, hypothecated, subject to a lien or under attachment in execution of a judgment Annexure VI List and description of every accounting book used by the debtor at the time of surrender or ceasing to carry on business Annexure VII Detailed statement of the causes of the debtor’s insolvency Annexure VIII Personal information about debtor incl. 10 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 prior insolvency and rehabilitation Affidavit Made by the debtor verifying the statement of affairs is true, complete and estimated amounts fairly and correctly estimated. When a partnership estate and a private estate of a partner are surrendered simultaneously, separate statements of affairs must be prepared and costs are part of sequestration costs. Lodging of statement The statement with supporting documents must be lodged in duplicate at Master’s Office and lie for inspection by creditors at all times during office hours for 14 days. On expiry of inspection period, a certificate is issued to the effect that it’s duly lain for inspection and whether any objections were lodged, which is filed with Registrar before application is heard. Effect of notice of surrender (1) Stay of sales in execution After publication of the notice, it is unlawful to sell any property in the estate which has been attached under a writ of execution or other similar process, unless the person charged with the sale could not have known of the publication. If the sale proceeded, the trustee of the estate cannot claim it if ownership thereof has been transferred unless he proves that the buyer acted in bad faith and with knowledge that the sale was unlawful. The court or the Master may, however, order that such an asset should nevertheless be sold if, in his opinion, the value does not exceed R 5,000.00 and direct how the proceeds of the sale must be applied. The creditor must show that it would be more to the advantage of the general body of creditors to proceed with the sale. Publication of a notice of surrender has no effect on other civil and criminal proceedings and attachments in execution of judgments may be made, although sale in execution is stayed. (2) Curator bonis may be appointed Debtor is still at liberty to deal with his property as he chooses. As a safeguard against the debtor squandering his assets after publication, the Master may appoint a curator bonis to debtor’s estate, who takes estate into his custody and assumes control of any business or undertaking of debtor. Estate remains vested with debtor and curator is only the caretaker. 11 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 (3) Potential compulsory sequestration If after having published the notice of surrender: the debtor fails to lodge a statement of his affairs; or lodges a statement which is incorrect or incomplete in a material respect; or fails to make application to court on the appointed day, and the notice is not properly withdrawn, the debtor commits an act of insolvency which entitles a creditor to apply for the compulsory sequestration of his estate. Compulsory sequestration cannot be applied for if the notice of intention to surrender has lapsed. (4) No withdrawal of notice without consent A notice of surrender cannot be withdrawn without the written consent of the Master. (5) Lapse of notice of surrender The notice of surrender lapses if: the court does not accept the surrender; or if the notice is properly withdrawn; or if the debtor fails to make the application for surrender within 14 days after the date advertised as the date of the hearing of the application. Application for surrender Form and contents of application Application for surrender is brought by way of a notice of motion4. It is supported by a founding affidavit: Why: To persuade the court that the 4 requirements for voluntary surrender has been satisfied Contain: Full name, status, occupation and address of applicant to show jurisdiction and locus standi An allegation of insolvency and facts to establish this Explanation as to how the insolvency came about An averment that applicant owns realisable property of sufficient value to defray all the costs of sequestration which will be payable out of the free residue of the estate An allegation that it will be to the advantage of the creditors if the debtor’s estate is sequestrated, amplified by facts supporting the allegation Details of any salary or income that the debtor is receiving 12 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 Any other information that may influence the courting granting or refusing the surrender A description of the procedural steps followed by applicant prior to bringing the application supported by documents proving that each step has been taken Confirm: It must be sworn in and signed before a commissioner of oaths independent of the office in which it was drawn. Filing of application at court The application must be filed with the Registrar of the HC prior to the date advertised in the notice of surrender. Copy of application to consulting party If the debtor is an employer, he must provide a “consulting party” as contemplated in Section 189 of the Labour Relations Act, 66 of 1995, with a copy of the application. Section 189 deals with the dismissal of employees for reasons based on the employer’s operational requirements and require the employer to consult one of the following:  the person whom he is required to consult in terms of a collective agreement;  if no collective agreement, the workplace forum and registered trade union of the employees likely to be affected by the proposed dismissals;  if no workplace forum, the registered trade union whose members are likely to be affected by the proposed dismissals;  if no trade union, the employees likely to be affected by the proposed dismissals or their representatives. Master’s report In the Cape, a Master’s report must be obtained and filed prior to the set-down of the application. Opposition to application A creditor may oppose the application even if his claim is less than the amount required to entitle him to apply for compulsory sequestration and even if his claim is disputed by the debtor. Adjudication on the application When adjudicated upon, the following documents must be before the court:  The notice of motion and supporting affidavit(s);  The debtor’s statement of affairs, incorporating the verifying affidavit;  Any sworn valuation necessary in the circumstances;  Proof of publication of the notice of surrender;  Proof by affidavit that the applicant has delivered/posted copies of the notice as required; 13 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092  A certificate from the Master that the statement of affairs has lain for inspection;  Any report by the Master;  Any opposing affidavits by creditors; and  The debtor’s replying affidavit. Court’s discretion Even if the court is satisfied that the requirements + preliminary formalities have been observed, they still have a discretion to reject the surrender – s 6(1). Factors that may influence the court towards refusing the application: - DR displayed gross extravagance and ran up debts on a pretentious scale, even after judgment had been granted against him – Ex parte logan - DRs creditors are not pressing him for payment & are willing to give him time or to accept payment in monthly instalments – Ex parte Kruger - DR had an ulterior motive in applying for surrender – i.e: to avoid paying or to defeat the rights of a particular creditor: Ex parte Striling; Ex parte Van den Berg; or to prevent the sale in execution and transfer of his immovable property: Naidoo v Matlala - DR failed to give a full and frank account of his financial position - DRs papers were deficient in a number of respects - DRs financial problems could be dealt with more appropriately under the NCA – look at Ex Parte Ford Costs of surrender Costs incurred in surrendering are included in the costs of sequestration and are payable out of the estate. Costs occasioned by unsuccessful opposition to the application must be borne by the creditor concerned, but court may order these costs (or part thereof) to be paid out of the estate. Setting aside sequestration order No appeal lies against the order refusing to accept the surrender, but anyone aggrieved by an order accepting it may appeal against such an order. Noting of an appeal does not suspend the operation or execution of the relevant order. One of the consequences of a rehabilitation order in terms of Section 129(1)(b) of the Act is that the debtor is discharged from all debts, the cause of which arose before sequestration (except ones out of fraud on his part). Even if all debts have not been paid in full from the proceeds of the estate, the order enables the debtor to start building up a new estate without recourse by creditors who have not been paid in full. If the 14 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 debtor is not rehabilitated, but the sequestration order is simply set aside, this consequence does not follow and the debtor then remains fully liable for all debts which existed before the granting of the sequestration order. COMPULSORY SEQUESTRATION: CH 3 Requirements The court may grant an application for the sequestration of a debtor’s estate if it is satisfied that: (1) Applicant entitled to apply in terms of Section 9(1) Section 9(1) allows proceedings to be instituted by: a creditor (or his agent) with a liquidated claim for more than R 100.00; or two or more creditors (or their agents) with liquidated claims of not less than R 200.00 in aggregate. The fact that a creditor holds security for his claim doesn’t exclude him from applying even if the value of the security exceeds the amount of the claim. A liquidated claim is a monetary claim where the amount of the claim has been fixed or determined such as: price of goods sold and delivered; a claim based on a provisional sentence judgment; a claim for return of price paid under a sale cancelled due to the seller’s repudiation; a delictual claim for the theft of a fixed and determinable sum of money An unliquidated claim does not give locus standi to apply for example: a claim for transfer of property; a claim for damages for failure to carry out obligations in terms of a consent paper; a claim for payment of an untaxed attorney and client bill of costs. Liquidated does not mean an amount is already due and payable. Section 9(2) provides that a liquidated claim “which has accrued but isn’t yet due” by the time application is heard must be regarded as liquidated for these purposes. After debtor’s estate has been provisionally sequestrated, debtor himself cannot make a payment to sequestrating creditor to extinguish his claim or to reduce it below R 100.00. A third person, such as a surety, may make such payment on debtor’s behalf after which provisional order must be discharged. Creditor can’t refuse payment in full, but may reject part payment. Where creditor’s locus standi is eliminated, another creditor may intervene and apply for a further provisional order to be granted. (2) Debtor has committed an act of insolvency or is insolvent Acts of insolvency 15 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 A debtor’s estate may be sequestrated even though he is technically solvent in terms of Section 9(1) by any creditor if he commits one of the following acts of insolvency: i) Absence from the Republic or dwelling Section 8(a): If he leaves the Republic or, being out of the Republic, remains absent from it, or departs from his dwelling or otherwise absents himself, with the intention to evade or delay payment of his debts. The creditor must establish the debtor’s intention and such may be inferred from for eg an appointment made by the debtor to make a payment and then departing without keeping it. ii) Failure to satisfy judgment Section 8(b): 2 acts of insolvency are created where a court has given judgement against a debtor, namely:  if he fails, upon the demand of the officer whose duty it is to execute the judgment, to satisfy it or to indicate disposable property sufficient to satisfy it; or  if it appears from the return made by the officer, without presenting the writ to the debtor, that he has not found sufficient disposable property to satisfy the judgment. “Disposable property” is any property which may be attached and sold in execution. If the debtor point out insufficient disposable property to satisfy the writ, the sheriff may refuse to attach it and make a nulla bona return, in which event the creditors may apply for sequestration. iii) Disposition prejudicing creditors or preferring one creditor Section 8(c): If he makes, or attempts to make, any disposition of any of his property which has the effect of prejudicing his creditors or preferring one creditor above another. Only the effect of the disposition need be considered and it does not matter if the debtor acted on purpose or recklessly as his intention is irrelevant. A debtor commits this act, for example, if he:  refuses to meet one debt while paying another in full;  sells an asset deliberately below its market value whilst failing to meet debts;  passes a mortgage over immovable property to secure his debt to 1 creditor, while his business ventures are in financial difficulties and he’s not paying creditors. iv) Removal of property with intent to prejudice or prefer Section 8(d): If a debtor removes, or attempts to remove, any of his property with the intent to prejudice his creditors or to prefer one above another. Differs from Section 8(c) insofar as a disposition of property is not required, mere removal is sufficient, and the intent of the debtor, not the effect, is important – Eg sending money or goods to a foreign country so that they aren’t available for the settlement of the creditor’s claims. 16 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 v) Offer of arrangement Section 8(e): If he makes, or offers to make, any arrangement with any of his creditors for releasing him wholly or part of his debts, it qualifies as an act of insolvency if it is indicative of the debtor’s inability to pay his debts. vi) Failure to apply for surrender Section 8(f): 3 acts of insolvency are created where a debtor has published a notice of surrender of his estate which hasn’t lapsed or been withdrawn and 1 of following done:  he fails to comply with the requirements of Section 4(3) - lodging a statement of affairs with the Master; or  he lodges a statement which is incorrect or incomplete in any material respect; or  he fails to apply for acceptance of the surrender on the specified date. vii) Notice of inability to pay Section 8(g): If he gives notice in writing to any one of his creditors that he is unable to pay any of his debts. One looks at the content of the notice to determine whether it is an act of insolvency and not the debtor’s intention. Usually, the notice must be reasonable interpreted to have intended to give notice of inability to pay any single debt. Mere unwillingness to pay is not an act of insolvency. viii) Inability to pay debts after notice of transfer of business Section 8(h): If, being a trader, he gives notice in the Gazette in terms of Section 34(1) of his intention to transfer his business and is thereafter unable to pay all his debts. Section 2 of Act – Definitions 'trader' means 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, or in which building operations of whatever nature are performed, or an object whereof is public entertainment, or who carries on the business of an hotel keeper or boarding-house keeper, or who acts as a broker or agent of any person in the sale or purchase of any property or in the letting or hiring of immovable property; and any person shall be deemed to be a trader for the purpose of this Act (except for the purposes of subsection (10) of section twenty-one) unless it is proved that he is not a trader as hereinbefore defined: Provided that if any person carries on the trade, business, industry or undertaking of selling property which he produced (either personally or through any servant) by means of farming operations, the provisions of this Act relating to traders only shall not apply to him in connection with his said trade, business, industry or undertaking; ≠Farmer As soon as the notice is published, every liquidated liability of the trader in connection with his business which would have become due at some future date, falls due if the 17 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 creditor demands payment. It follows that the act of insolvency is still committed if the trader cannot pay a debt which bears no relation to his business. Debtor in fact insolvent Instead of relying on an act of insolvency by the debtor, the sequestration creditor can rely on the fact that the debtor’s estate is insolvent and that his liabilities exceed his assets. If the creditor relies on an act of insolvency and can’t establish that it’s been committed, but it’s clear that the debtor is insolvent, court may grant a final sequestration order on latter ground. Factual insolvency may be established: Directly - by evidence of the debtor’s liabilities and the market value of assets; or Indirectly - by evidence of facts and circumstances from which the conclusion of insolvency is fairly and properly derivable. (3) Reasons to believe sequestration will be to the advantage of 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 the creditors. Creditors means all or the general body of creditors. Question: Will a substantial portion of creditors get an advantage from the sequestration? If, after the costs of sequestration have been met, there is no payment to creditors, or only a minimal payment, there is no advantage. The court must compare the position of the creditor if there is no sequestration with the position if there is sequestration and it will only be to the advantage of the creditors if it will result in a greater dividend than would otherwise be the case. The onus of establishing an advantage remains on the sequestrating creditor even if the debtor committed an act of insolvency. The onus of satisfying the court of these 3 matters rests on the sequestrating creditors, no onus on debtor to disprove any element. Friendly sequestration A debtor can arrange with a friend to whom he owes a debt and whom he is unable to pay, that he will commit an act of insolvency by, for example, write saying he cannot meet the debt so that his friend can apply for compulsory sequestration. An application for compulsory sequestration brought by a creditor who is not at arms length is referred to as ‘friendly’ sequestration and the legal position is as follows: - Creditor’s co-operation/motivation to assist debtor doesn’t preclude granting of sequestration. - Court must be mindful of proceedings not at arm’s length – potential collusion and malpractice. 18 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 - Example of abuse: Mthimkhulu v Rampersad – Debtor seeks attorney, writes a letter to his “creditor” who brings application and debtor disappears just before service of court order, which result in return date being extended numerously until genuine creditors have lost interest. - May be brought with sole purpose of getting a stay of civil proceedings / of a sale in execution. Debtor can use it to free himself from his debts: Where granted and free residue doesn’t cover costs of sequestration any creditor who has proved a claim is obliged to contribute. They’re made to believe that there is a risk that they will be called to contribute should they prove their claim, thus they refrain. Where no claims proved within 6 months after the sequestration, the debtor can apply for rehabilitation and be released from his debts. - Courts must scrutinize friendly sequestrations to ensure the requirements of the Act aren’t undermined and the interests of the creditors aren’t prejudiced. Court should require the following from the sequestrating creditor: o Full details of claim; o Documentary evidence establishing that he has actually performed as alleged; o Full details of debtor’s realisable assets, including convincing evidence of likely realisation; o If another creditor has already attached debtor’s property in execution, proof that prior notice of the application has been given to that creditor; and o If he requires an extension of the return date of the rule nisi, an affidavit setting out proper reasons for the extension. Application for sequestration (1) Form and content of application Application is brought by way of a notice of motion. It is supported by a founding affidavit: Why: To set out sufficient facts to establish the requirements for a sequestration order Contain: Full name, status, occupation and address of sequestrating creditor. His locus standi should reflect and in case of an agent, his authorisation Full names, date of birth, identity number and marital status of the debtor and, if married in community of property, that of his/her spouse – Section 17(4)(b) of the Matrimonial Property Act: application to sequestrate joint estate must be made against both spouses Amount, cause and nature of claim - if secured, the nature and value of the security 19 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 The act(s) of insolvency committed by debtor and/or his de facto insolvency An averment that sequestration will be to the advantage of creditors explaining why Any other relevant facts which might influence Court’s discretion Statement that security will be furnished to Master and his certificate obtained as required by Section 9(3) Statement that copy of papers will be lodged with Master to obtain report i.t.o. Section 9(4) A statement confirming that copies of the application will be furnished to interested parties Confirm: It must be sworn in and signed before a commissioner of oaths independent of the office in which it was drawn. (2) Steps prior to adjudication on application i) Security for costs Applicant bound to prosecute at own costs until a trustee or a provisional trustee has been appointed and is required to deposit security for payment of all fees with Master. ii) Search of Master’s records In Western Cape HC (formerly CPD), applicant’s attorney must file an affidavit stating that he searched Master's records and it doesn’t appear that debtor’s estate already under sequestration. iii) Filling of application6 at court with the Registrar iv) Master’s report Master makes a written report to the court of any facts which would justify the court in postponing the hearing or dismissing the application. v) Copy of papers to debtor and other interested parties Applicant also required furnishing copy to:  Every registered trade union that represents any of debtor’s employees;  Debtor’s employees themselves; and  SARS. (3) Provisional sequestration Creditor must approach the court twice: 20 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 i) To obtain a provisional order of sequestration At this stage there must be prima facie (at first sight) satisfaction of the requirements and the following must be before court:  Notice of motion o Master’s certificate that security has been given  Affidavit of search through records by applicant’s attorney  Master’s report o Applicant’s affidavit responding to Master’s report (if any)  Affidavit setting out manner in which others were informed After considering these, the court may make an order:  Sequestrating provisionally – simultaneous rule nisi (order calling upon debtor to show cause, on day mentioned, why his estate should not be finally sequestrated)  Dismissing application  Postponing hearing ii) To have the provisional order confirmed and made final At this stage the requirements are proved on a balance of probabilities. (4) Service of rule nisi Rule nisi must be served on debtor, with application papers if not already served therewith. If debtor is absent for 21 days from usual place of residence and business, court may direct it to be attached to the door of the courthouse and published in the Gazette. Also copies to:  Any registered trade union that represents the debtor’s employees;  The employees themselves; and  SARS (5) Opposition of application After granting of the rule nisi, debtor and other interested parties may oppose application by filing affidavits with Registrar setting out grounds of opposition and serving applicant in sufficient time to enable him to reply before the return day. (6) Anticipation of return date On application of debtor, court may anticipate return day of rule nisi for purpose of discharging provisional order, provided 24 hours’ notice of application has been given to 21 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 applicant. Court must be satisfied that all creditors received notice and none has valid objection. (7) Intervention by another creditor Fullard v Fullard: Creditor entitled to intervene to have provisional order set aside or to obtain a fresh sequestration order. If latter, first order must be set aside and a new order must be issued. Intervening creditor must imply case for sequestration, furnish security as if original applicant without restating facts appearing from records in existing proceedings. (8) Final sequestration On return day, court must have in addition to provisional stage:  Sheriff’s return of service of rule nisi;  Any opposing affidavits of the debtor and/or other interested parties;  Replying affidavit of applicant; and  Any affidavit by the provisional trustee Court may confirm provisional order if it’s satisfied applicant has established requirements on a balance of probabilities. If not satisfied, it must either dismiss application and set aside the provisional order or require creditor to produce further proof of allegations in his application and postpone the hearing for a reasonable period. Court’s discretion Even if the court is satisfied that the requirements have all been established on a balance of probabilities, it’s not bound to grant the final order of sequestration. Costs of proceedings Trustee must, from first available funds from estate, reimburse sequestrating creditor for his taxed costs in sequestrating the estate. Costs of opposition not part of sequestration costs. Unwarranted or vexatious proceedings As safeguard court may, when satisfied that application is abuse of court’s procedures or is malicious or vexatious, allow debtor to prove damage suffered and award compensation it deemed fit. 22 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 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. The aggrieved person must first obtain leave to appeal from the appropriate court. No appeal lies against the granting of a provisional sequestrating order or the refusal of such an order. 23 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 UNIT 3: EFFECTS OF SEQUESTRATION THE LEGAL POSITION OF THE INSOLVENT ch 4, p 63-69 Sequestration of a debtor’s estate imposes on him a form of reduction in status, which limits his capacity to contract, earn a living, litigate and hold office. Contracting The debtor retains a general competency to make binding agreements, but certain restrictions are imposed to protect creditors. (1) Prohibited contracts The debtor may not make a contract which:  purports to dispose of any property of his insolvent estate; or  adversely affects (or is likely to) his estate or any contribution (moneys earned by the insolvent due to trustee only once the Master indicated that it is not necessary for the support of the insolvent or his dependents) which he is obliged to make towards his estate, without written consent of the trustee. Mervis Brothers v Hannekom: M sued H, an insolvent, for the amount of a debt incurred before sequestration based on an undertaking given by H after sequestration without the trustee’s consent. MC held that undertaking likely to affect any contribution which H would be obliged to make, if called upon to do so, and therefore not binding. On appeal the court found that at time of contracting, H was not obliged to make a contribution as Master hadn’t assessed a contribution so consent was not necessary and the undertaking binding. (2) Effect of contract which is not prohibited Where trustees’ consent is not necessary or has been given, the contract is valid and binding between the parties. However, according to De Polo v Dreyer, insolvent may not enforce performance in his favour unless the Act specifically gives him the right to do so. If the Act is silent, the trustee is the proper person to enforce the claim. (3) Effect of prohibited contract Contract is voidable at option of the trustee or remains binding on the parties. Same rules apply regarding performance for a contract which is not prohibited. Section 24(1) provides protection to third parties who contract with debtor, ignorant of his insolvency. If an insolvent purports to alienate, for valuable consideration and without consent, property he acquired after sequestration, to a person who proves he was not aware, and had no reason to suspect that his estate was under sequestration, the alienation is nevertheless valid. This Section: applies only to new assets which came into insolvent’s possession after sequestration. Wessels v De Klerk: Insolvent sold immovable property that formed part of insolvent 24 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 estate and received two promissory notes in part payment. He endorsed these to a bona fide purchaser. Court held sale was not validated and therefore voidable; places the onus on third party to prove his unawareness. Earning a livelihood Insolvent is allowed to follow any profession or occupation or enter into any employment and he may make whatever contracts which are reasonably necessary for this purpose. But insolvent may not, without written consent of the trustee, carry on, be employed in any capacity or have any direct or indirect interest in, the business of a trader who is a general dealer or a manufacturer – farmer not a trader for purposes of Act. S v Van der Merwe: General dealer is someone who trades at a fixed and recognised place in all sorts of wares, not just in 1 kind or a few particular kinds – eg milk depot (Ex parte Du Plessis) or a restaurant (R v Papangelis). If trustee gives or refuses to consent, any of the creditors or insolvent may appeal to Master. Instituting and defending legal proceedings Proceedings which may be brought/defended personally by insolvent An insolvent may sue or be sued in the matters relating to:  status, eg divorce;  a right which does not affect the insolvent estate, eg to receive maintanence from the insolvent;  recovery of remuneration or reward for work done;  a pension to which he is entitled for services rendered;  compensation in respect of loss or damage suffered by reason of defamation or personal injury;  a delict committed by him after sequestration of his estate. When there is an irregularity or the bona fides of the trustee or the creditors is under suspicion, the insolvent may interfere with the administration of his insolvent estate. Security for costs An insolvent who enters into legal proceedings may be obliged to give security for costs of action. MC HC Factors in HC Case flows from Pl compelled if def Cannot claim May claim if action the Act claims security security will probably not succeed Case doesn’t flow Pl complete if def Pl not compelled to May claim security from the Act requires security lodge security if action is reckless 25 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 or vexatious Entitlement for costs When insolvent obtains an award of costs in his favour in a matter in which he is entitled to litigate, the judgment for costs belongs to him personally and may dispose of it as he likes - Schoeman v Thompson. Damages for maladministration on the part of trustee accrue to insolvent estate, but an award of costs against trustee is for the benefit of the insolvent - Ecker v Dean. Holding office An unrehabilitated insolvent is disqualified from being a trustee of an insolvent estate and, if he’s one when his estate is sequestrated, he must vacate office. He is not capable of being a member of the National Assembly, National Council of Provinces or the Provincial Legislature. The insolvent can’t, except with permission of court, be a director of a company or take part in the management of a close corporation. VESTING OF THE ASSETS OF THE INSOLVENT Vesting of estate in trustee The function of trustee is to collect assets in estate, realise them and distribute proceeds amongst creditors in the order of prefrence laid down by the Act. Estate will remain vested in trustee until:  the discharge of the sequestration order by the court;  the acceptance by creditors of an offer of composition (an offer to creditors of an amount in final payment of insolvent’s debts which will discharge the sequestration) made by insolvent which provides that insolvent’s property will be restored to him; or  an order for the insolvent’s rehabilitation is granted in terms of Section 124(3) on the following grounds: - no claims have been proved against the estate; - insolvent has not been convicted of any offence with regard to his insolvency; and - insolvent’s estate has not been sequestrated before. If a trustee vacates his office, is removed from office or dies, the estate revests in the Master until a new trustee is appointed or in the co-trustee, if there is one. Property which falls into estate The insolvent estate comprises of:  all property of insolvent at date of sequestration, inculding property (or proceeds) in the hands of a sheriff under a writ of attachment; 26 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092  all property which insolvent acquires or which accrues to him during sequestration, including any property he recovers for the benefit of estate where trustee fails to take necessary action. Property may be movable or immovable property wherever situated in South Africa and includes contingent interests in property, excluding contingent interests of a fideicommissary (a person who receives a gift of property, usually by will, to be held on behalf of another who cannot receive the gift directly) heir or legatee. Whenever insolvent has acquired property which is claimed by the trustee, it’s deemed to belong to the insolvent estate until the contrary is proved. However, if a person who became a creditor of the insolvent after sequestration alleges that an asset does not belong to the estate and claims a right to the asset it is deemed to not belong to the estate until the contrary is proved. Du Plessis v Pienaar: Sequestration of a joint estate makes both spouses ‘insolvent’ for purposes of the Act resulting in the property of both of them vesting in trustee and being available to meet claims of creditors. Property inherited by a spouse to a marriage in community of property forms part of insolvent estate, even if the will contains a provision excluding property from any community of property – Badenhorst v Bekker. Property inherited by an insolvent during his insolvency falls into his insolvent estate, notwithstanding a contrary provision in the will - Vorster v Steyn. The reasoning and decision in Badenhorst v Bekker was approved by the Supreme Court of Appeal (“SCA”) in Du Plessis v Pienaar and it was held that a debtor, not the estate of the debtor, incurs the debt. So where spouses are married in community of property their creditors may recover debts from both of them: not only from each spouse's undivided interest in the joint estate, but also from his or her separate estate outside the joint estate. Once the joint estate is sequestrated both spouses are insolvent and property owned by each of them (including separate property) becomes available to the creditors. The effect of these decisions must now be considered in the light of the decision in Wessels NO v De Jager: Insolvent has a competence or power to accept the bequest or nomination and he acquires no right to property or benefit until he has accepted. Repudiating the right to property or benefit will result in it not vesting in his estate and will ensure that it passes to someone other than the trustee and the creditors of his insolvent estate. Property which doesn’t fall into estate  Wearing apparel, bedding, household furniture, tools and other means of subsistance as the creditors may determine;  Remuneration for work done less the portion the Master is of the opinion is not necessary for the support of the insolvent and his dependants due to the trustee; 27 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092  Any pension to which he may be entitled for services rendered by him;  Compensation for any loss or damage by reason of defamation or personal injury;  Compensation for occupational injuries or diseases (loss/damage due to personal injury);  Benefits payable to a minor;  Unemployment insurance benefits (UIF);  Insurance policies o Policies covering liability to third parties - If insolvent insured against liability to third persons prior to sequestration and incur liability covered by the policy, his rights against the insurer pass, upon sequestration, directly to the third party and not the insolvent estate. In terms of Section 156 of the Act, the third party can claim directly against the liability insurer and does not have to rely on a concurrent claim against the insolvent estate. The third party is also exposed to all the same defences which, in the absence of Section 156, the insurer could have raised against the contracting party (the insolvent). It may be illustrated with the decision in Canadian Superior Oil v Concord Insurance where insolvent incurred liability towards the Plaintiff, who wished to claim the damages directly from the insurer in terms of Section 156. The insurance contract between insolvent and the insurer stated that the insurer would be liable to compensate the insured only for moneys already paid by the insured (the insolvent) and, because the insolvent (as a result of the intervening insolvency) had not made any payments towards his liability, the insurer was therefore also not obliged to make any payments to the insolvent. The same defence could therefore be raised against the third party (the Plaintiff). o Life policies - Section 63(1) of the Long Term Insurance Act, 52 of 1998, excludes certain insurance benefits from the insolvent estate, namely: policy benefits provided (or to be) to insolvent under an assistance, life, disability or health policy, which has been in force for at least 3 years and in which insolvent or spouse is the life insured; and any assets which insolvent acquired exclusively with such policy benefits within a period of 5 years from the date on which they were provided. The policy benefits or assets are excluded to an aggregate of R 50,000.00, eg if insolvent is named the beneficiary of policies totaling R 80,000.00, he is entitled to R 50,000.00 and remaining R 30,000.00 vests in his insolvent estate. Section 63(1) has no application if the policy benefits in question are payable to a third party and not the insolvent as the rights to the benefit vests in the third party and will not become part of the insolvent estate – Pieterse v Shrosbree. A life policy taken out by insolvent in favour of a third person is an asset in insolvent estate to the extent that the trustee is 28 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 vested with any right that insolvent had to surrender the policy prior to his death and obtain payment of the surrender value.  Share in accrual;  Trust property or funds: Assets in a trust will not usually form part of the personal estate of the trust trustee if that trustee’s personal estate is sequestrated. Assets in a trust are therefore protected assets.  Right of labour tenant to land or right in land;  Property acquired with money from above sources Disposal of estate property by insolvent An insolvent cannot dispose of any property and if he unlawfully disposes of immovable property, the trustee may recover compensation from:  the insolvent personally;  the person who acquired the property knowing that its part of the insolvent estate; or  a person who did not know, but who acquired it without giving sufficient value in return. Exceptions to the rule that insolvent may not deal with property falling within the insolvent estate:  Section 25(3): If insolvent brings about any act of registration (mortgage or transfer) in respect of immovable property in his estate after expiry of every caveat (entered on the deeds of the immovable property of the insolvent estate to prevent an insolvent from transferring the property or registering any right over it) entered against that property by the Registrar of Deeds, the act of registration is valid.  Section 24(1): If an insolvent purports to alienate, for valuable consideration and without consent, property he acquired after sequestration, to a person who proves he was not aware, and had no reason to suspect that his estate was under sequestration, the alienation is nevertheless valid. Acquisition of new estate during insolvency The insolvent may, during the course of his insolvency, acquire a new estate and hold it with a title adverse to the trustee, due to the fact that various property does not vest in the trustee. This property can in turn be sequestrated. VESTING OF ASSETS OF THE SOLVENT SPOUSE -> Out of community of property 29 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 Marriage in community of property: As there is only 1 joint estate, if one of the spouses is declared insolvent, the other automatically becomes insolvent and both spouses are under sequestration -> Section 21 doesn’t apply Marriage out of community of property: Each spouse continues to have a separate estate consisting of assets and liabilities and there is no joint estate of the spouses -> Section 21 applies. Vesting of assets in trustee Section 21(1): Additional effect of a sequestration order (including provisional order) is to vest the separate property of the spouse of the insolvent in the Master and subsequently the trustee, as if it were property of the insolvent estate, and to empower the Master or trustee to deal with the property accordingly. Transfer is not intended to be permanent since the solvent spouse may secure the release of assets falling within categories set out in Section 21(1), but until the release the solvent spouse has none of the ordinary powers of ownership. Section 21 was introduced to prevent, or at least hamper, collusion between spouses to the detriment of creditors of the insolvent estate by making it difficult for insolvent and spouse to deprive the estate of assets to which it is entitled by pretending that they are the separate property of the solvent spouse. In Harksen v Lane it was contended that Section 21 is invalid for violating the solvent spouse’s constitutional rights. The majority of the Constitutional Court (“CC”) rejected this argument as:  It doesn’t expropriate solvent spouse’s property since it doesn’t contemplate permanent transfer to the Master and trustee;  It differentiates between the solvent spouse and other persons, but this differentiation does not infringe the right to equality and is legitimate as it has a rational connection; and  It does not amount to unfair discrimination. Meaning of ‘solvent spouse’ Section 21(13) of the Act defines "spouse" as not only a wife or husband in the legal sense, but also a wife or husband by virtue of a marriage according to any law or custom, and also a woman living with a man as his wife or a man living with a woman as her husband, although they are not married to one another. Since the commencement of the Civil Union Act (“CUA”), the definition of the term "spouse" in the Act has by implication been amended to include persons of the same sex or of the opposite sex who have entered into a civil union. The CUA was introduced in order to accord same-sex couples the same family law rights and obligations, and the same status, benefits and responsibilities accorded to opposite-sex couples and Section 1 thereof defines "civil union" as the voluntary union of two persons who are both 18 or 30 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 older, which is solemnised and registered by way of either a marriage or a civil partnership, according to the procedures described in the CUA, to the exclusion, while it lasts, of all others. Furthermore, a "civil union partner" means a spouse in a marriage or a partner in a civil partnership, as the case may be, concluded in terms of the CUA and the CUA applies to civil union partners joined in a civil union. A consequence of a civil union is that the legal consequences of a marriage in terms of the Marriage Act, 25 of 1961, apply, with relevant contextual changes, to a civil union. Furthermore, a reference to marriage in any other law, including common law, includes a civil union. In addition, a husband, wife or spouse in any law includes a civil union partner Accordingly, for the purposes of Section 21(13) of the Act, this alteration to the law would mean that a civil union partner falls within the definition of the word "spouse" and that Section 21 of the Act will now apply with equal force to such partners in a civil union. Duty of solvent spouse to lodge statement of affairs Sheriff must serve a copy of the order on solvent spouse if she has a separate estate that has not been sequestrated and she must, within 7 days of service, lodge with the Master a statement of her affairs in the correct form and verified by an affidavit. Postponement of vesting Section 21(10): If the solvent spouse is carrying on the business of 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 exclude her property or part of it from the operation of the order. The sort of contingencies against which the insolvent state must be protected are alienation or fraudulent abandonment of the assets by the solvent spouse, malicious or accidental damage to the property by the solvent spouse or a third person, and theft of assets by a third person. Release of solvent spouse’s property by trustee The trustee is obliged to release property of the solvent spouse which is proved to fall in any of the following categories:  Property owned before the marriage to the insolvent  Property acquired under a marriage settlement  Property acquired by valid title during the marriage - This would include property bought by the solvent spouse from her own earnings or the proceeds of her personal property and donations received by her from friends and family. 31 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092  Property protected under certain other provisions - Section 21(2)(d) provides for the release of property protected by various other provisions, but this section has become obsolete.  Property acquired with proceeds of the above Clear distinction between the release of property in terms of Section 21(2) of the Act and the setting aside of an impeachable disposition: Property acquired in terms of a marriage settlement must be released in terms of Section 21(2)(b). Dispositions in terms of an antenuptial contract will usually be dispositions without value under Section 26 of the Act. Although trustee must initially release the property to the solvent spouse under Section 21(2) of the Act, the trustee will still be able to set aside such a disposition as a disposition without value if the requirements of Section 26 are proved and the solvent spouse cannot prove the requirements of Section 27 of the Act. Section 21 of the Act used to be especially important in the case of donations made by the insolvent spouse to the solvent spouse. At common law, donations between spouses (except donations in terms of an antenuptial contract) were void. The solvent spouse could therefore not obtain the release of such a donation, because the donated asset had not been acquired by a valid title as against the creditors of the insolvent spouse. Now, however, donations between spouses are valid. The release of the donated item may therefore be obtained, subject to the possibility of the trustee's challenging the donation and having it set aside as a disposition without value in terms of Section 26 of the Act. UNCOMPLETED CONTRACTS AND LEGAL PROCEEDINGS NOT YET FINALISED ch 7 p 86-101 Contract completed by insolvent but not by other party If insolvent has carried out his side and only the other party’s performance is outstanding, that right to performance is an asset in the insolvent estate and vests in the trustee. The trustee may either sell it or enforce performance and then sell the subject- matter of the performance. Contract not completed by insolvent Continuance of contract General rule - Sequestration does not suspend or put an end to the contract. The trustee’s election Trustee may elect to perform in terms of the contract or not and the only power he has is to exclude the right of the other party to invoke the remedy of specific performance7. Once trustee has elected to repudiate or continue the contract, he cannot change his 32 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 mind. If he fails to reach a decision within a reasonable time, it is assumed that he does not intend to perform in terms of the contract. Repudiation is a breach of contract in that the repudiating party indicates by words or conduct that he does not intend to perform his obligations under the contract. Repudiation gives the other party to the contract (aggrieved party) the right to claim the appropriate remedies for breach of contract Statutory controls on the exercise of the trustee’s election Regarding certain contracts, the Act lays down when and how trustee should exercise his election: (1) Contract to acquire immovable property (Section 35: immovable) Section 35: Where insolvent contracted to acquire immovable property and property has’t been transferred8 to him, trustee must make his election within 6 weeks after receiving written notice from the other party calling upon him to do so. If he fails, the other party may apply to court for cancellation9 of contract thus providing for a procedure that the seller must follow in order to prevent the immovable property from falling into the insolvent estate. The other party may also prove a concurrent claim for loss suffered due to non-fulfilment10. If immovable property has, however, been transferred to the estate of the insolvent by being registered in the name of the acquirer in the Deeds Office and the acquirer is then declared insolvent before making his performance under the contract, the situation is not dealt with under this section and the seller is in an weak position at common law. He no longer owns the immovable property and merely has a personal right under the law of contract to claim the insolvent debtor's performance. As the remedy of specific performance won’t be granted in favour of this creditor against trustee of the insolvent estate, his claim against the insolvent estate will be an ordinary, concurrent claim for damages for breach of contract and he will, therefore, rank for a dividend. (2) Hire of property Trustee may only repudiate the lease by giving written notice to the lessor. If he doesn’t notify the lessor of his desire to continue the lease on behalf of the lessee’s estate within 3 months of his appointment, he is deemed to have repudiated it. Repudiation deprives the insolvent estate of any right to compensation for improvements, other than those made in terms of any agreement with the lessor. The lessor has:  a preferent claim for rent payable from date of sequestration to date of determination of lease (included in cost of administration);  if the property is immovable, a secured claim by reason of his tacit hypothec, for rent owed at time of sequestration; and  a concurrent claim in respect of any other loss sustained because of the nonperformance of the lease. 33 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 Consequences of repudiating contract If trustee elects to repudiate the contract, the opposite party is precluded from obtaining an order for specific performance even if he has performed his obligation in full. If he decides to accept the repudiation and cancel the contract, he may use other remedies for breach of contract:  he may recover any property handed over in performance and still owned by him;  he is obliged to make restitution in accordance with normal principles of law of contract unless there is a forfeiture clause in the contract; and  he has a concurrent claim in respect of property which he has transferred, and payments which he has made, to the debtor, and for loss which he suffered because of the breach. Consequences of abiding by contract (Section 36 – Movable) If trustee elects to complete the contract, he ‘steps into the shoes’ of insolvent. He may insist on receiving performance owed by other party and he is bound to carry out the counter-performance owed by insolvent. Bryant & Flanagan: When trustee upholds the contract, he must uphold the contract in full. He can’t uphold in part and repudiate in part. He and the other party must then perform the contract in full. Exception is if the contract is divisible, where the contract may be upheld and repudiated in part. Section 36 regulates the position in a cash sale of movable property where the buyer’s estate is sequestrated before he has paid the full purchase price, but after the property has been delivered to the buyer. This section recognises that the seller of movable property under a cash sale remains the owner thereof until the purchase price is paid. It, nevertheless, places some limitations on that principle by limiting the right of the other party to exercise an accrued right of cancellation where the sale is a cash sale of movable property. Seller of movable property for cash, who has delivered property, but who has not been paid, cannot reclaim it from trustee of buyer’s insolvent estate unless:  he has given notice in writing to the buyer or his trustee within 10 days after delivery (not sequestration) that he reclaims the property; and  if the trustee disputes his right to reclaim the property, he institutes legal proceedings within 14 days after receiving notice of the trustee’s objection. Contracts which are suspended or terminated on sequestration (1) Employment contract (section 38: Contract of service) The sequestration of an employer’s estate suspends the employment contract between him and his employee with immediate effect. During the period of the suspension: 34 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092  the employee isn’t obliged to render services and isn’t entitled to his salary or wage;  no employment benefits accrues to the employee, although he may receive unemployment benefits from the date of suspension. Subsequently, the contract of employment may be terminated by:  the decision of the trustee provided he has engaged in consultation aimed at reaching consensus on appropriate measures to rescue the whole or part of the insolvent employer’s business; or  the expiry of the period of 45 days after the appointment of the trustee if no measures have been adopted which result in the continuation or end of the contract. On termination of contract, the ex-employee is entitled to recover any resultant loss he has suffered plus severance benefits in accordance with Basic Conditions of Employment Act, 75 of 1997. He will have a preferent claim against the insolvent estate, but if he is entitled to an amount of arrear remuneration which exceeds the limits of preference, he must prove an ordinary concurrent claim for that remuneration. A concurrent claim may be proved for loss which he has sustained because of the premature termination of his employment contract. Sequestration of an employee’s estate doesn’t terminate his contract of employment unless he is precluded from holding his position or office while insolvent by statutory provision. (2) Mandate In Goodricke & Son v Auto Protection Insurance it was held that a contract of mandate ipso iure (by operation of law) comes to an end on the insolvency of the mandatory, thus not being suspended but terminated, and the Roman-Dutch authority found in Voet confirms this proposition. However, this proposition probably needs to be qualified:  A mandate to perform a juristic act (eg conclude a contract) shouldn’t terminate since any juristic act performed by a mandatary is deemed to have been concluded between mandatory and other person, and mandatary isn’t party to resultant legal relationship.  If mandate doesn’t call for any special skill or expertise and could be satisfactorily executed by the trustee, there seems to be no cogent reason to denying the trustee the option of enforcing the contract – Natal Law Society v Stokes. Contracts which trustee cannot repudiate (1) Lease of immovable property Due to the principle of “huur gaat voor koop”13, trustee cannot repudiate a lease of immovable property concluded by the insolvent as a lessor. However, trustee may be compelled to repudiate lease if property is subject to a real right (eg mortgage bond) 35 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 which was registered prior to lease. Trustee is then required to put property up for sale subject to lease. If highest bid isn’t sufficient to cover amount due to holder of the real right, trustee must, at the request of the holder, sell the property free of the lease. The lessee then has a concurrent claim for damages in respect of loss suffered because of the breach of contract. (2) Sale of land on instalments The trustee’s right to repudiate may be excluded where the insolvent has:  sold land on instalments; or  alienated land which has subsequently been sold on instalments; and  the land has not been transferred pursuant to the transaction(s) in question. This is a sale of land on instalments in which the purchase price is payable in 2 or more instalments over a period exceeding 1 year. To provide for the case where land is disposed of under successive transactions without being transferred, Chapter II of Alienation of Land Act, 68 of 1981 (“ALA”), uses the concepts of an ‘intermediary’ and a ‘remote purchaser’. The main effect of Chapter II is:  Where insolvent sold land, buyer may compel trustee to pass transfer in his favour, provided he arranges to pay all transfer costs plus whichever is the larger of: o the total amount outstanding under the deed of alienation; or o the sum: administration costs; any endowment, betterment or enhancement levy; and the amount required to discharge the mortgage bond.  Where insolvent has alienated land to an intermediary, the intermediary is in the same position as the buyer under contract and can compel transfer in his favour.  Where insolvent alienated land and it was subsequently alienated to an intermediary or remote purchaser, the latter are entitled to transfer if: o they fulfil or undertake to fulfil the obligations in terms of their own deed of alienation; and o the obligations of every intermediary between owner and themselves are fulfilled.  If transfer is not claimed by any persons entitled to it and trustee abandons agreement made by the insolvent and realises the land for creditors, the purchaser of the land under a contract which has been recorded against the title deed of the land has a preferent claim in respect of the proceeds of the realisation. The ALA aims at making sure that every party who has right to transfer is aware of his right and can exercise it. A remote purchaser is required to notify owner of the land immediately of the conclusion of the contract, of his address and of contract itself. Owner must pass these details on to trustee. Trustee is under a duty to notify every person who he has reason to believe purchased the land in terms of a contract, or is an 36 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 intermediary, of his right to take transfer thereof. If land is sold on instalments, but does not fall within ALA, common law is applicable. Trustee becomes owner of property and must decide whether to perform or not, having regard to the best interests of creditors. (3) Sale of goods in terms of instalment agreement Where seller of goods under an instalment agreement is declared insolvent before full price has been paid and ownership has passed to buyer, trustee isn’t entitled to repudiate and vindicate the goods, provided that buyer continues to fulfill his obligations in terms of the contract. There is no clear case authority for this view. (4) Resale of immovable property not yet acquired The trustee’s right to repudiate is excluded where he obtains transfer of immovable property which the insolvent bought and resold (without receiving transfer) prior to the sequestration. On receiving transfer, he is bound to pass transfer of the property to the purchaser against payment of the price, if not already paid. Thus he is not entitled to, having upheld the first contract, to repudiate the second. Purchase of goods in terms of instalment agreement Special rules apply where insolvent has purchased goods in terms of an agreement failing within paragraphs (a), (b) and (c)(i) set our below: Section 1 of the NCA 34 of 2005 – Definitions ‘Installments agreement’ means a sale of movable property ito which – a) All or part of the price is deferred and is to be paid by periodic payments; b) Possession and use of the property is transferred to the consumer; c) Ownership of the property either – i. Passes to the consumer only when the agreement is fully complied with; or ii. Passes to the consumer immediately subject to a right of the credit provider to repossess the property if the consumer fails to satisfy all of the consumer’s financial obligation under the agreement; and d) Interest, fees or other charges are payable to the credit provider iro the agreement, or the amount that has been deferred. The effect of sequestration of buyer’s estate is that the seller loses his right of ownership in the property and simultaneously becomes a creditor with a hypothec over the property. Trustee must, if required by seller, deliver the res vendita to the seller who holds it as security for his claim and has the right to realise his security as prescribed by the Act. The type of agreement envisaged is a sale of movable property in terms of which:  all or part of the price is deferred and is to be paid by periodic payments;  possession and use of property is transferred to the buyer; 37 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092  ownership of property passes to buyer only when the agreement is fully complied with. A transaction meeting these requirements will be governed by Section 84(1), even if it falls outside the ambit of the NCA. Section 84(1) presupposes that an agreement is still in force and that the seller is the owner of the res vendita. It will, however, not apply in cases of physical impossibility and the possessor’s ability to assert a right which defeats the trustee’s right – Venter NO v Avfin. In terms of Section 82(2), if debtor returns property to seller within 1 month before sequestration, the trustee may demand that seller to deliver to him the property or its value at the date of return, subject to payment to creditor by trustee or to deduction by creditor from value of property of difference between total amount payable and total amount actually paid. The legislature clearly intended to enable trustee to reclaim the property for the benefit of concurrent creditors. Difference:  Section 84(1): Hypothec created by statute arises automatically by operation of law, no choice.  Section 84(2): Trustee may elect to demand return of the property Transaction on exchange In terms of Section 35A, these special rules apply in regard to a transaction to which the rules of an ‘exchange’ apply and in which the insolvent was a ‘market participant’:  The exchange or any other market participant may, in respect of the obligations owed to it, terminate transaction in accordance with the rules of the exchange, and trustee is bound by it;  Any resultant claim is limited to amount due upon termination under the rules of the exchange;  Trustee is bound by the rules and practices of the exchange if the transaction is to be settled on a date after sequestration or settlement is overdue on that date. Agreement on informal market Section 35B makes special provision where insolvent was party to a ‘master agreement’. All unperformed obligations arising out of agreement terminate automatically on sequestration. The market values of obligations as at date of sequestration must be netted and this amount is payable. 38 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 UNIT 4: COLLECTION OF ESTATE ASSETS THE PRESERVATION OF THE ESTATE PENDING THE TRUSTEE’S APPOINTMENT Until the trustee has been appointed and can take charge of the estate assets, it is necessary that the assets be preserved for the benefit of the creditors. Notice of sequestration and entry of caveats Once a sequestration order is granted, the Registrar is obliged to transmit one original of the order to the Master (s 17(1)(a)). The Master then gives notice of the order in the GG (s 17(4)). The Registrar must also send one original of every provisional sequestration order or final sequestration order not preceded by a provisional order to the following parties:  The sheriff of every district wherein the insolvent resides or owns property  Every registrar of deeds;  Every officer having charge of an official register of ships; and  Every sheriff who is holding any of the debtor’s property under attachment (s 17(1)(b). The officers concerned must register the order in accordance with s 17(2) and where appropriate, must enter caveats against any transfer of ownership by the insolvent or his spouse and against the cancellation or cession of any mortgage registered in the name of the insolvent or his spouse (s 17(3)(a) and (3)(bis). A caveat iro immovable property expires 10 years after the date of the relevant order – s 17(3)(b). The statutory duties are imposed with the object of informing interested parties that the estate has been sequestrated and preventing any improper dealings with the insolvent’s property. Thereafter, the extent of the assets must be determined to bring the whole estate under proper control. Service of order and attachment of property The registrar granting a final order of sequestration must, without delay, cause a copy of the order to be served on the insolvent and on the spouse of the insolvent (if the spouse has a separate estate which has not been sequestrated) and file with the Master a copy of the sheriff’s return of service – s 16(1).  On being served with the order the insolvent is obliged forthwith to hand over to the sheriff all records relating to his affairs and to lodge with the Master a statement of his affairs.  The solvent spouse who is served with the sequestration order must also lodge a statement of her affairs with the Master. The sheriff is also required to attach and make an inventory of the movable property of the estate which is in the district, capable of manual delivery and not in the possession 39 Downloaded by athelia Mosa ([email protected]) lOMoARcPSD|8553092 of a person who claims to be entitled to retain it under a right of pledge or a right of retention or under attachment by a sheriff of a MC – s 19(1).  The sheriff must act with reasonable care in carrying out this duty – Judelowitz’s Trustee v The Sheriff  Anyone who has an interest in the insolvent estate or the property atta

Insolvency Notes 2021/2022 (University of the Witwatersrand)

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