Hocklys Insolvency Law 9th Edition.pdf

Hocklys Insolvency Law 9th E Page v Preface This ninth edition of Hockly’s Insolvency Law follows the expanded format of the previous three editions, and its basic purpose remains the same: to provide a concise, yet fairly detailed, account of the law of insolvency, winding-up, and business rescue proceedings (which have replaced judicial management). The book aims at a wide readership. For the subject specialist, it offers an update of recent developments in the law relating to insolvency, winding-up and business rescue proceedings; for students, it is a text for both undergraduate and postgraduate study; and for insolvency practitioners, it provides both a clear and practical analysis of the law and material for research and argument. It will also soon be available as an e-book. Insolvency is an area in which there are continually developments in the case law and applicable legislation. We have endeavoured to include all the developments that have taken place in the six years since the last edition of Hockly’s Insolvency Law, including the fundamental changes introduced by the Companies Act 71 of 2008. The book mostly reflects the law of insolvency as at the end of August 2012, with a few additions made during the production process. As before, the appendices contain specimen applications, specimen estate accounts and the Insolvency Act. Further appendices now include excerpts from the Companies Act 61 of 1973, the Companies Act 71 of 2008 and the Close Corporations Act 69 of 1984, as well as the entire Cross-Border Insolvency Act 42 of 2000. Cross-references throughout are to paragraphs, not pages. A sincere vote of thanks must go to Linda van de Vijver for her invaluable assistance and co-operation in publishing this new edition. We would also like to thank Deidre du Preez for managing the project and compiling the table of cases, Adami Geldenhuys for compiling the table of statutes and the subject index, and preparing the statutes that appear in the appendices, Nic Jooste for designing the book covers, and Tommy Bell for the typesetting. RD SHARROCK KE VAN DER LINDE AD SMITH Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21 Chapter 22 Chapter 23 Chapter 24 Chapter 25 Page vii Contents Preface Part 1 Introduction Introduction Part 2 Obtaining a sequestration order Voluntary surrender Compulsory sequestration Part 3 Effects of sequestration The legal position of the insolvent Vesting of the assets of the insolvent Vesting of the assets of the solvent spouse Uncompleted contracts and legal proceedings not yet finalized Part 4 Collection of estate assets Preservation of the estate pending the trustee’s appointment Meetings of creditors and proof of claims The election of the trustee The duties and powers of the trustee Impeachable dispositions Interrogation of the insolvent and other witnesses The duties of the insolvent Part 5 Realization and distribution of the assets Realization of the estate assets Creditors’ claims and their ranking The estate accounts and the distribution of the estate Part 6 Composition and rehabilitation Composition Rehabilitation Part 7 Miscellaneous Partnership and sequestration Insolvent deceased estates Offences Part 8 Winding-up and rescue of companies and close corporations Winding-up of companies Winding-up of close corporations Business rescue and compromise Page viii Part 9 Cross-border insolvency Chapter 26 Cross-border insolvency Appendices Appendix 1 Specimen applications Appendix 2 Estate accounts Appendix 3 Insolvency Act 24 of 1936 Appendix 4 Companies Act 61 of 1973, Chapter XIV Appendix 5 Companies Act 71 of 2008, Chapter 2 Appendix 6 Companies Act 71 of 2008, Chapter 6 Appendix 7 Close Corporations Act 69 of 1984, Part IX Appendix 8 Cross-Border Insolvency Act 42 of 2000 Table of cases Table of statutes Index 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Page 1 Part 1 Introduction Chapter 1: Introduction Meaning of ‘insolvency’ Purpose of a sequestration order What may be sequestrated Jurisdiction of the court The Master Condonation of irregularities Historical overview 1.1 1.2 1.3 1.3.1 1.3.2 1.4 1.4.1 1.4.2 1.4.3 1.4.4 1.5 1.6 1.7 1.7.1 1.7.2 1.7.3 Page 3 Chapter 1 Introduction Synopsis Meaning of ‘insolvency’ Purpose of a sequestration order What may be sequestrated Meaning of ‘estate’ Meaning of ‘debtor’ Jurisdiction of the court Which court has jurisdiction Jurisdiction over a debtor and his estate Jurisdiction in litigation against third parties Competing courts—removal to another court The Master Condonation of irregularities Historical overview Roman law Roman-Dutch law South African law 1.1 Meaning of ‘insolvency’ In common parlance, a person is insolvent when he is unable to pay his debts. But the legal test of insolvency is whether the debtor’s liabilities, fairly estimated, exceed his assets, fairly valued (Venter v Volkskas Ltd 1973 (3) SA 175 (T) 179; Ex parte Harmse 2005 (1) SA 323 (N) 325). Inability to pay debts is, at most, merely evidence of insolvency. 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. A sequestration order is a formal declaration that a debtor is insolvent. The order is granted either at the instance of the debtor himself (voluntary surrender: see chapter 2) or at the instance of one or more of the debtor’s creditors (compulsory sequestration: see chapter 3). The terms ‘sequestration’ and ‘sequestration order’ should strictly be used only with reference to a person’s estate. A debtor’s estate is sequestrated, not the debtor himself. However, both a debtor’s estate and the debtor himself may properly be described as ‘insolvent’. When the word ‘insolvent’ is used to describe a debtor, it carries two possible meanings: either that the debtor’s estate has been sequestrated, or that his liabilities exceed his assets (cf s 2 of the Insolvency Act 24 of 1936, definition of ‘insolvent’). The notion of ‘becoming insolvent’, thus, has a wider meaning than that Page 4 of ‘being sequestrated’ (Land- en Landboubank van Suid-Afrika v Joubert NO 1982 (3) SA 643 (C) 648). | 1.2 Purpose of a sequestration order The main objective of a sequestration order is to secure the orderly and equitable distribution of a debtor’s assets where they are insufficient to meet the claims of all his creditors. Executing against the property of a debtor who is in insolvent circumstances inevitably results in one or a few creditors being paid, and the rest receiving little or nothing at all. The legal machinery that comes 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, once an order (or provisional 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 NO v Riverside Estates (Pty) Ltd 1946 OPD 209 223). 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 or prejudicing the rights of creditors (Ward v Barrett NO & another NO 1963 (2) SA 546 (A) 552). In Walker v Syfret NO 1911 AD 141 166, Innes J explained the underlying principle as follows: ‘The object of the [Insolvency Act ] is to ensure a due distribution of assets among creditors in the order of their preference. . . . The sequestration order crystallises the insolvent’s position; the hand of the law is laid upon the estate, and at once the rights of the general body of creditors have to be taken into consideration. No transaction can thereafter be entered into with regard to estate matters by a single creditor to the prejudice of the general body. The claim of each creditor must be dealt with as it existed at the issue of the order.’ The law of insolvency exists primarily for the benefit of creditors (cf Ex parte Pillay; Mayet v Pillay 1955 (2) SA 309 (N) 311) and, accordingly, a court will not sequestrate a debtor’s estate unless it is shown that the sequestration will be to the advantage of creditors. Thus, sequestration will generally not be resorted to if the debtor, although insolvent, has only one creditor and the latter is already in possession of a judgment against the debtor. In such a case, the normal execution procedure offers a less expensive means of exacting from the debtor whatever amount he is able to pay (cf Absa Bank Ltd v De Klerk and related cases 1999 (4) SA 835 (E) 839; Lynn & Main Inc v Mitha NO 2006 (5) SA 380 (N) 383). And 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. The court will make an order of sequestration only if the expected result will be an appreciable dividend for creditors. The requirement of advantage to creditors is discussed further in 2.2.3 and 3.1.3. Although sequestration was not designed to alleviate the position of the debtor, it inevitably has this effect because it relieves him from legal proceedings by creditors Page 5 and allows him, through rehabilitation, to free himself from all unpaid pre-sequestration debts (s 129(1)(b)). Because insolvency law aims to ensure that creditors receive an equitable share of the debtor’s estate, it is sometimes regarded as no more than an elaborate system of execution. In some legal systems, for instance, insolvency law is classified under civil procedure rather than under mercantile law, as in our system. But the notion that insolvency law is merely a system of execution is simplistic. If it were merely this, sequestration would affect only the debtor’s assets, whereas, as will be noted later (chapter 4), sequestration also affects the debtor personally, restricting his capacity and freedom to enter into contracts, to follow a chosen vocation, to litigate, and to hold office. In Naidoo v Absa Bank Ltd 2010 (4) SA 597