BUS LAW INSOLVENCY Exam Questions with Complete Solutions.

BUS LAW: INSOLVENCY Exam Questions with Complete Solutions What is insolvency? - Correct Answers: Insolvency is a legal status of a natural or juristic person when their liabilities exceed their assets and are unable to pay their debts. They have to be legally declared insolvent by a court Aims and objectives of the law of insolvency? - Correct Answers: 1. To allow creditors to be paid in order of preference 2. To maximise assets for distribution among creditors (which is done by minimising legal costs if each creditor had to sue separately and mechanisms for investigation are created which allows the uncover of hide assets/ fraud) 3. Prevent the debtor from further diminishing their estate by taking the control of their assets out of their hands and into their trustee 4. Benefit creditors (not a punishment for the debtor) What is sequestration? - Correct Answers: This is the process whereby the assets of the debtor are taken over by the trustee, sold and divided amongst the creditors. Only natural persons, partnerships and trusts can be sequestrated. It is also known as winding up and is governed by the Insolvency act / Common law What is liquidation? - Correct Answers: This is winding up of juristic persons and the assets are taken out of the hands of the directors and into the liquidator. The company is then dissolved. This is governed by the insolvency act, companies act and the close corporations act Secured creditor - Correct Answers: This is the creditor who will be paid first. E.g. a bank with a mortgage bond Preferment creditor - Correct Answers: SARS have a preferment claim, and so will be paid after the secured creditor Concurrent creditors - Correct Answers: Creditors who will be paid after the secured and preferment creditors. They will be paid Xc in every rand X = (money left to pay creditors) / (total outstanding debt) What is concursus creditorum? - Correct Answers: This means the position of every creditor is frozen at the date of sequestration or liquidation and cannot do anything to move up the order of preference What are the manners of sequestration? - Correct Answers: 1. Voluntary surrender 2. Compulsory sequestration 3. Friendly sequestration only a high court can make a sequestration order What is voluntary surrender? - Correct Answers: This is when the debtor applies to the court to be sequestrated and the debtor is then absolved from any of their debts incurred before the sequestration. (The creditors cannot sue him and need to claim against his estate with the trustee) What is the effect of people married ICOP and partnerships and sequestration? - Correct Answers: There is a single joint estate with ICOP and so both spouses need to apply for sequestration and the joint estate and both are then declared insolvent. With partnerships, all partners must apply for sequestration of the partnership estate AND their individual estate. What are substantive requirements for voluntary sequestration? - Correct Answers: These requirements must be met and it is still up to the court's discretion to grant the sequestration: 1. The debtor is insolvent 2. there are enough assets to cover the costs of sequestration 3. A non-negligible dividend must be paid to creditor so that there will be a benefit for creditors. (nothing under 10c in WC and under 20c in Gauteng). It is not set out what is too small and the court has held 5c to be non-negligible 4. All procedures and formalities are followed If the person is too broke to be sequestrated they may be referred for a debt review. What is compulsory sequestration? - Correct Answers: This is when the creditor/s apply for the sequestration of the debtor's estate (partnerships and marriages ICOP apply). The onus lies on the creditor What are the requirements for a compulsory sequestration? - Correct Answers: 1. The creditor must be entitled to make the application (has a claim of more than R100 or collectively more than R200) 2. The creditor must prove the debtor is insolvent or has committed an act of insolvency 3. There must be reason that the sequestration will be to the advantage of the creditors 4. Procedural requirements must have been met What are acts of insolvency - Correct Answers: 1. If he leaves his home or country to avoid paying the debt 2. If he fails to pay a judgement debt or does not have enough disposable property to settle the debts 3. If he makes a disposal of his property which prejudices his creditors or prefers one creditor over the other 4. If he removes or attempts to remove the property with the intention to prejudice or prefer creditors (intention is NB) 5. If the debtor makes an offer of to be released from some or all of debt (show inability to pay not refusal, request for extension is not an act) 6. If the debtor fails t make the application for voluntary surrender in time (fails to make a court application within a certain amount of time after the notice appears) 7. Written notice of the inability to pay (request for extension or to pay in instalments is an act of insolvency) 8. If the debtor is unable to pay his debts after publishing a notice of sale of business Note: applying for a debt review is not an act of insolvency What is a friendly sequestration? - Correct Answers: This is what the court describes an application for sequestration made by a creditor, at the request of the debtor with the debtor's cooperation What is the motive of a friendly sequestration? - Correct Answers: This for the creditor to help the debtor escape their financial problems and the application is based on a written inability to pay. What are the advantages of a friendly sequestration as a oppose to a voluntary sequestration? - Correct Answers: - It avoids the time consuming procedural requirements with a voluntary sequestration - The burden of proof is lighter as they have to prove there is reason to believe it will advantage creditors than it will advantage creditors - It is easier to prove insolvency as it is based on reason to believe than actual insolvency The court may require hard evidence from a friendly creditor than they would a normal creditor (e.g. hard evidence of the loan as oppose to a written notice of inability 8g (request for an extension of time is an act of insolvency under g but not under e) What are the ways an insolvent company can be liquidated? - Correct Answers: 1. winding up by the court 2. a voluntary winding up What is winding up by the court for companies? - Correct Answers: The company is wound up if they are unable to pay their debts by either; 1. statutory demand which has not been met (a creditor who is owed R100 or more has left a letter of demand at the registered office and they company has not paid or secured payment for 3 weeks) 2. Nulla Bona return - Failed to pay an amount after being sued or "no property to sell to satisfy debt" 3. Actual inability to pay debts (A<L/ commercial insolvency) What is voluntary winding up of companies? - Correct Answers: This is called a creditors voluntary winding up and is initiated by shareholders, who pass a special resolution (75% in favour) to liquidate the company. The resolution is registered at the CIPC and a liquidator is appointed who acts for the benefit of the creditors. Effect of insolvency: absolution from debts - Correct Answers: This refers to natural persons only and the debtor is absolved from all debts incurred before sequestration. This means the debtor cannot be sued personally and they must put a claim against the trustee. The trustee sells the assets and distributes them according to concursus creditorum and once the debtor is rehabilitated, the debts are extinguished even if not paid the full amount. Rehabilitation occurs automatically after 10 years or can apply to court after 4. Effect of insolvency: property - Correct Answers: This refers to natural persons and they are divested from their estate and assets. All property belonging to the insolvent acquired before the date of sequestration or during sequestration falls into the insolvent estate. Effect of insolvency: property. What are exceptions which do not fall into the insolvent estate? - Correct Answers: 1. Remuneration (for reasonable maintenance) 2. Money received from litigation for deformation or personal injury 3. means of subsistence (clothing, furniture, bedding etc. and what is reasonable) 4. Pensions and insurance (there is a cap) 5. Property acquired where the source of funds are remuneration, litigation money, subsistence money or pension/insurance Effect of insolvency: solvent spouse (natural persons) - Correct Answers: This only deals with people married OCP or with Accrual as with ICP, they're both insolvent. The property of the solvent spouse is automatically vested in the insolvent estate and the burden is on the solvent spouse to prove their property falls into one of the categories where the property must be released to them: 1. Property wended before the marriage 2. Property acquired in an ANC 3. Property bought with their own money or gifts 4. Certain insurance policies 5. Property acquired with the proceeds of any of the property mentioned above Effect of insolvency: Personal status and contractual capacity (natural persons) - Correct Answers: The insolvent can work in whatever occupation they want, however, they cannot in the following ways without the consent of the trustee: - carry on a business which is a general dealer or manufacturer - be employed in a business which is a general dealer or manufacturer The insolvent cannot be a director of a company without the permission of the court, or work as an attorney or CA. The insolvent has full contractual capacity, but with the two exceptions: - cannot enter a contract to dispose of their assets - cannot enter a contract which will negatively affect their estate The contract will then be voidable at the instance of the trustee Effect of insolvency: uncompleted contracts (natural and juristic persons) - common law - Correct Answers: Agency and partnerships are automatically terminated. The trustee can then decide whether to abide or repudiate. If the trustee repudiates, it is a breach of contract and the other party has the normal remedies (damages and restitution) and this claim becomes a concurrent claim unless they have a security to their claim. If the trustee abides, the other party has a preferent claim for the money due under the contract Effect of insolvency: uncompleted contracts (natural and juristic persons) - stature provisions - Correct Answers: 1. Cash sale of immovable property where the purchaser is insolvent The trustee must make their decision to repudiate or to abide within 6 weeks or the seller can get a court order to cancel the contract, or the property be restored to him (damages) 2. Cash sale of moveable goods where the purchaser is insolvent: If the insolvent purchaser failed to pay the full price on delivery, the seller can reclaim the property given they gave notice of their intention within 10 days of delivery 3. Credit sales of moveable goods where the purchaser is insolvent: (see security notes) 4. Contracts of lease, where the lessee is insolvent If the trustee does not notify the lessor within 3 months of being appointed, the lease is terminated after the 3 month period 5. Contracts of lease where the lessor is insolvent: This is governed by huur gaat voor koop, the successor (trustee in this case) becomes the bound by the lease agreement and they cannot repudiate the lease (if they sell it, they will have to sell it with the tenants) Note: if there was a mortgage bond on the property before the lease began, the trustee must try and sell the lease with the tenants but if cannot get a high enough price to satisfy the mortgage then they can evict the tenants 6. Contracts of employment where the employer is insolvent: All contracts are suspended and the trustee needs to meet with trade unions and employees to try and save the business. If it cannot be saved then the contracts are terminated and the employers have a preferment claim for severance paid and arrear wages, but a concurrent claim for loss suffered Effect of insolvency: legal proceedings (natural and juristic) - Correct Answers: Proceedings are suspended until the trustee is appointed. Where the insolvent is the defendant: The plaintiff must give notice if they want to continue, no notice = end to proceedings. Where the insolvent is the defendant or the plaintiff and the proceedings continue, the trustee takes their place (nomino officii) Exceptions to the rule: The insolvent can represent themselves with maters regarding: 1. status (divorce) 2. matters which do not affect the insolvent estate (a claim for reasonable maintenance) 3. A claim against the insolvent for a delict committed by him after sequestration (the estate is not liable for any loss or damage) 4. a claim for pension which is due to him 5. a claim for compensation for deformation or personal injury 6. a claim for earnings which are due Effect of insolvency: effect on execution (natural and juristic) - Correct Answers: Before execution is after judgement but before execution. All execution proceedings are stopped and fall into the insolvent estate. Process of winding up companies - Correct Answers: After all creditors are paid, if there is any money left over shareholders will get it, and the company will then dissolve and cease to exist What are impeachable transactions (natural and juristic persons)? - Correct Answers: These are transactions before sequestration/liquidation whereby the insolvent tries and puts their assets beyond the reach of the creditors 1.Dispositions without value 2. Dispositions under an ante nuptial contract (natural persons only) 3. Voidable preferences 4. Undue preferences 5. Collusive dealings 6. Actio Pauliana 7. Voidable sale of business What are dispositions without value? - Correct Answers: Section 26 1. There must have been a disposition of property by the debtor and must have been proved by the trustee. 2. Disposition must have been made without value and this needs to be proved by the trustee/ liquidator 3. Liabilities exceed assets if the disposition was made more than 2 years ago, the trustee must prove that after the disposition, L>A to have the disposition set aside If the disposition was made within 2 years of the sequestration, the onus is on the person who benefitted to show that the person was solvent to avoid having the disposition set aside The asset is then brought back into the estate of the insolvent for the benefit of the creditors. Note: inadequate value is value, whereas nominal value is NOT value What are dispositions under ANC? - Correct Answers: Section 27 All dispositions under an ANC are protected, besides the dispositions within 2 years of the sequestration. The following requirements are to protect the assets if they were disposed within 2 years of the sequestration: Requirements for the disposition to be protected: 1. There must be an immediate benefit: the disposition must be within 3 months of marriage 2. Disposition must be have made in good faith (not to defraud creditors) 3. The ANC must have been registered at the Deeds registry at least 2 years before sequestration What are voidable preferences? (disposition of assets) - Correct Answers: Section 29 A court may set aside a disposition made by the insolvent if the trustee can prove the following: 1. There has been a disposition of property 2. The disposition took place within 6 months of sequestration 3. The effect of the disposition was to prefer one creditor over another The test is whether a creditor was paid earlier or more than they would have gotten under concourses creditorum 4. Immediately after the disposition, L > A for the insolvent Proviso: The court CANNOT set aside the disposition if the one who it favoured can prove: 1. it was in the ordinary course of business 2. it was not intended to prefer one creditor to another. What are undue preferences (disposition of property) - Correct Answers: Section 30 The court may set aside the disposition of the asset if the debtor disposed of the asset at a time where L>A and the intention was to prefer one creditor above the other. The onus is on the trustee Differences between section 29 and 30 - Correct Answers: Sec 29: voidable preferences Sec 30: undue preferences 1. Sec 29: disposition must have occurred not more than 6 months before sequestration There is no time limit with sec 30 2. Sec 29: disposition will be set aside if immediately after L>A Sec 30: will be set aside if during the time L>A 3. Sec 29: effect of disposition must be made by the trustee Sec 30: the intention must be proved by the trustee 4. Sec 29: beneficiary ca avoid having the disposition set aside (proviso) Sec 30: no proviso Both sections - the disposition must have been made to a creditor and if it is set aside, the creditors claim is restored and will rank according to the normal concursus. What are collusive dealings with disposition of assets? - Correct Answers: Section 31 The trustee must prove: 1. The debtor made a disposition of the property before sequestration 2. The disposition was made in collusion with another person 3. The disposition has an EFFECT of preferring one creditor above the others or prejudicing the creditors Effects of collusion: the party who benefited may have to pay damages and will forfeit their claim What is act pauliana with disposition of assets? - Correct Answers: This is under the common law and says that assets which are disposed of in a collusive manner with the INTENTION of preferring one creditor to another can be set aside What is a voidable sale of a business (impeachable transactions) - Correct Answers: Section 34 This applies to companies and CCs as well If the trader trades the business, goods or property belonging to the business (except in the ordinary course of business) or the good will of the business without advertising it, the transfer is void as against the creditors for 6 months after the transfer (can still claim from debtor) It is also void against the trustee if the estate is sequestrated within 6 months of the transfer (can set aside the asset) (trustee can set aside business) (person who buys the business can have a concurrent claim against the estate) This applies to solvent traders Who is prevented from being a trustee/ liquidator? - Correct Answers: 1. Minors or anyone with a legal disability 2. insolvents 3. live outside the country 4. juristic person 5. convicted person 6. anyone who colluded with the debtor 7. anyone who induced them to vote for him 8. an auditor or bookkeeper of the creditor in the last 6 months 9. anyone related to the insolvent (natural persons) 10. any previous directors of the insolvent (juristic person) Meetings of creditors in realisation and distribution of assets - Correct Answers: there are usually 2 meetings. 1st is the appointment of the trustee 2nd is for creditors to prove their claims and for the trustee to give an update on the state of the estate the trustee may call more meetings Proof of claims in realisation and distribution of assets - Correct Answers: The creditors need to prove a claim (employees do not have a claim to salaries owed) Claims are in sworn statements which set out the particulars of the claim and any securities The trustee has a right to dispute any of the claims What are the different estate accounts? - Correct Answers: Liquidation account: What the assets were sold for and what cash is on hand. It also sets out how much has been spent (in terms of admin and fees etc) Distribution account: plan of distribution If the proceeds are not enough to cover the costs of sequestration, the creditors will have to contribute (usually concurrent creditors) Preferred creditors: secured creditors - Correct Answers: Secured creditors: they have a security for their claim (e.g. a bank with a mortgage) and their securities are paid first, after maintenance and admin fees are paid. Preferred creditors: preferent creditors - Correct Answers: Free residue = remaining estate after secured creditors have been paid and preferment creditors are paid from this order of preferent creditors: 1. Funeral cover (max R300) 2. costs of sequestration (other than the costs from selling secured assets) a. sheriffs fee b. master's fee c. cost of application (lawyers fee), trustees fee, accountants fee, costs of continuing with incomplete contracts If there is not enough money the concurrent creditors will have to pay these 3. cost of execution (max R50) - when judgement was prior to sequestration and execution hadn't happened yet 4. salaries and wages of former employees (arrears, max R12000) 5. custimes and excise 6. SARS for income tax 7. Claim under a general notarial bond Concurrent creditors - Correct Answers: They are creditors who do not have a security against their payment and are paid pro rata Offer of composition - Correct Answers: This is an offer granted to the trustee any time after the first meeting and is an offer whereby the creditors are in full or part paid over a period of time. If the offer is accepted the creditor can apply for rehabilitation. How can a natural person be rehabilitated? - Correct Answers: 1. automatic rehabilitation after 10 years 2. application to the court before 10 years rehabilitation ends the effects of sequestration Requirements to apply for rehabilitation to the court - Correct Answers: 1. Composition of not less than 50c in the rand for every concurrent creditor, the creditors have been paid or security has been given (certified by the master) 2. Lapse of prescribed time after confirmation of first account The insolvent can apply for rehab after 12 months have passed from confirmation of the first liquidation and distribution account, but subject to the following: a. if the insolvent has been sequestrated before, he must wait 3 years AFTER THE CONFIRMATION OF THE L&D ACCOUNT b. if the insolvent has been convicted of fraud in relation to the current sequestration or previous one then he must wait 5 years from the date of CONVICTION c. the insolvent may not apply for rehab less than 4 years after the sequestration unless he has a recommendation from the master 3. No claims proved after 6 months, only if: a. no claims against estate b. not been convicted c. not been sequestrated before 4. Full payment has been made and the master has approved (can apply for rehabilitation any time) Effects of rehabilitation - Correct Answers: Puts an end to sequestration, all debt before sequestration and the debtor has full contractual capacity again. Property stays in the hands of the trustee besides the following two cases: a composition agreement provides the property to be revest in the insolvent 2. where the basis of rehab was no claims were proved after 6 months What is business rescue? - Correct Answers: helps a firm who is financially struggling to not be liquidated. There is the temporary supervision of the company and management of its affairs by a business rescue practitioner, supervision of claims against the company, development of a plan which will maximise its likelihood of continuing or maximising benefit for creditors on immediate liquidation What is financially distressed? - Correct Answers: It is reasonably unlikely the business won't be able to pay their debt for the next 6 months or will become insolvent in the next 6 months Voluntary initiation of business rescue - Correct Answers: This cannot be done if liquidation has already begun. The resolution must be filed with the companies and intellectual properties commission (CIPC) in pretoria. The company is appointed a BR practitioner and all stakeholders must be notified. They can apply to the court to set aside the BR: 1. the business is not financially distressed 2. the business cannot be recovered 3. it is just and equitable to do so 4. procedural requirements wasn't met They can also apply to the court for the practitioner to be set aside: 1. does not meet requirements (member of accounting or legal profession with a good standing professional body) 2. not independent of the company 3. lacks skills needed for the business Court order business rescue - Correct Answers: any affected person may apply to the court for this order The copy of the application must be delivered to the CICP, the business and affected parties The court will grant the application if: 1. the company is distressed or 2. the company has failed to pay employment or 3. it is just and equitable for financial reasons AND there is reason to believe the business can be rescued the court can grant the order and/or place the company in liquidation. The BR can be granted even if the business is in liquidation By the court mero motu: the court itself during liquidation can make an order for BR instead of liquidation Commencement of BR - Correct Answers: The practitioner must investigate and see if the business can be rescued. if not it must inform the court and apply for liquidation. If the business can be rescued: 1. the practitioner must meet with employees and creditors who have claims 2. the practitioner must consult with management and form a BR plan. This must set out A, L and E. it must set out a proposal and a 3 year forecasted balance sheet and income statement based on this proposal. 3. must meet with shareholders creditors and employees to approve plan (75% approval from creditors) 4. if the plan is adopted it binds the company Effects of BR - Correct Answers: - all legal proceedings are suspended and may not be continued without the consent of the practitioner or court - a creditor may not enforce debt unless allowed by the plan - incomplete contracts can be repudiated or abided by (damages can be claimed) - employment continues but retrenchment may occur (in terms with the labour law) - directors remain under supervision, but may be removed Termination of BR - Correct Answers: 1. if liquidation starts 2. if the BR plan was rejected substantial implantation filed by the practitioner 4. if the business is no longer in financial distress