MRL3701 Insolvency Law SUMMARY NOTES WITH QUESTIONS.
MRL3701 Insolvency Law SUMMARY NOTES WITH QUESTIONS. Meaning of “insolvency” Common meaning – a person is insolvent when he is unable to pay his debts, however, The legal test for insolvency is whether the debtor's liabilities, fairly estimated, exceed his assets, fairly valued. The inability to pay debts Is merely evidence of insolvency. A person who has insufficient assets to discharge his liabilities (although he satisfy the test for insolvency) is not treated as insolvent for legal purposes unless his estate is sequestrated by an order of the court. Sequestration order = formal declaration that a debtor is insolvent Sequestration order can be granted: 1. at the instance of the debtor himself (voluntary surrender) or 2. at the instance of one or more of the debtor's creditors (compulsory sequestration) Note: a debtors estate is sequestrated NOT the debtor himself HOWEVER both debtor's estate and debtor himself may be described as insolvent “Insolvent”has 2 meanings: 1. debtor's estate has been sequestrated 2. debtor's liabilities exceed his assets Purpose of a sequestration order – to secure the orderly and equitable distribution of a debtor's assets where they are insufficient to meet the claims of all his creditors – to execute against property of a debtor who is in insolvent circumstances means that a few creditors will be paid and the other will receive little or nothing – therefore the purpose is to liquidate all assets and distribute it among all creditors ito a predetermined (and fair) order of preference – the law proceeds from the premise that once an (provincial)order is granted, a concursus creditorum (coming together of creditors) is established – the interest of creditors as a group has preference over individual creditors – debtor cannot burden his estate further with any debts – creditors right to recover his claim in full is replaced by the right (on proving a claim against the insolvent estate) to share with all other proved creditors in the proceeds – may not diminish estate assets or prejudice any creditors rights – law of insolvency is primarily for the benefit of the creditors therefore the court will not sequestrate the estate of a debtor if it is not to the benefit of the creditors – therefore, will not resort to sequestration if debtor (although insolvent) has only 1 creditor and he has a judgment against the debtor – normal execution proceedings Downloaded by Emma Cain () lOMoARcPSD| will offer a less expensive means of payment – court will not order sequestration is all assets will be consumed just by placing the estate under sequestration – only if there is an appreciable dividend for the creditors – sequestration wasn't designed to alleviate the position of the debtor but this is the effect as he is relieved from legal proceedings by creditors and allows him to rehabilitate and free him from unpaid debt. – Insolvency law ensures that creditors receive an equitable share of the debtor's estate – sequestration not only affect the debtor's estate but also the debtor personally as he is restricted to enter into other agreements and his capacity, to hold office, to litigate, it restricts the creditor's ordinary remedies – Sequestration proceedings instituted pursuant to breach of a credit agreement could not be classified as legal proceedings to enforce the agreement as envisaged by Sec 129(b) of the National Credit Act What may be sequestrated? Act provides for the sequestration of the ESTATE of a debtor 1. Meaning of “Estate” • a collection of assets, but if you only have liabilities then you will have a estate for sequestration purposes • joint estate of spouses married in community of property is also an estate • married in community of property – you do not have a separate estate even if you do business independently from your spouse, spouses are both debtors on sequestration of the estate • on divorce each spouse regains separate estate which needs to be sequestrated separately • Sec 17(5) of Matrimonial Property Act – sequestration does not extinguish the liability of the solvent spouse for debts of the joint estate • HOWEVER if divorce takes place AFTER a creditor has already acquired the right to apply for a sequestration of the joint estate then the creditor is required to sequestrate the separate estates of both spouses • out of community of property – there is a separate estate which can be sequestrated BUT solvent spouse's assets are affected as they vest in the trustee of the insolvent estate until the solvent spouse can establish his/her title to them • debtor whose estate has been sequestrated may during his insolvency acquire a new estate under a title valid against his trustee. This new estate may be voluntary surrendered or sequestrated . Compulsory sequestration is possible even where the assets in the 2 nd estate have been dissipated by the time the application for sequestration is made 2. Meaning of “debtor” • = a person/partnership or the estate of a person/partnership, which is a debtor in the usual sense except a body corporate or a company or other association of persons which may be placed in liquidation under the law relating to companies (Sec 2) Downloaded by Emma Cain () lOMoARcPSD| • Magnum Financial Holding v Summerly & Another – an entity/association of persons is regarded as a debtor in the usual sense of the word • Sec 337 – 426 of Companies Act 61 of 1973 – governs liquidation of insolvent companies = this was left in operation in Companies Act 71 of 2008 to apply to winding up and liquidation of companies • Entities that may be placed in liquidation: ◦ company ◦ external company (company registered outside the RSA) ◦ any other body corporate • Body Corporate = a juristic person/universitas, I.e an association of persons that has perpetual succession and is capable of holding property & suing/being sued in its corporate name • DEBTOR embraces the following ◦ a natural personally ◦ a partnership (even one whose members are all juristic persons) ◦ a deceased person & a person incapable of managing his own affairs ◦ an external company that doesn't fall within the definition of external company (I.e a foreign company that has not established a place of business in the RSA) ◦ an entity/association of persons that is not a juristic person, such as trust • A Body Corporate established ito the Sectional Titles Act 95 of 1986 is a body corporate referred to in the definition of “debtor” in the Insolvency Act and is not capable of being sequestrated, cannot be wound up Jurisdiction of the Court Which court has jurisdiction? • Rule – only a Provincial/Local division of the High Court • Magistrates Court may preside over prosecutions for criminal offences under the Insolvency Act, proceedings to set aside voidable dispositions, provided the ordinary jurisdictional limits as to offence, person, amount imposed by Magistrates Court Act are not exceeded Jurisdiction over a debtor and his estate Sec 149(1) – 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/compulsory sequestration of the debtor's estate is lodged with the Registrar of the court, the debtor is domiciled/owns property/is entitled to property situated within the jurisdiction of the court (sec 149(1)(a)) (domicile/property within jurisdiction) OR • at any time within the 12 months immediately preceding the lodging of the application, the debtor ordinarily resided/carried on business within the jurisdiction of the court (Sec 149(1)(b)) (residence/business within jurisdiction in preceding 12 months) Domicile/property within jurisdiction Downloaded by Emma Cain () lOMoARcPSD| • a personal right (a right to a performance of some kind)is taken to be situated where the debtor, liable to render the performance, is domiciled • Nahrungsmittel GmbH v Otto – N applied to sequestrate the estate of O (German citizen and imprisoned in Germany). N said court has jurisdiction as O had been awarded costs in an earlier court case decided in SA. Because of this O owned/was entitled to property situated with the court's jurisdiction. Court: the location of the right to costs, being intangible property without any physical address followed the domicile of the debtor liable to pay the costs. Debtor was Germany company situated in Germany therefore not in SA jurisdiction. Residence/business within jurisdiction in preceding 12 months • debtor need not ordinarily have resided/carried on business for entire 12 months preceding application – important – AT ANY TIME during that period. • Ordinary residence means more than a temporary stay Jurisdiction in litigation against third parties • Sec 149 – deals with when a court has jurisdiction over a debtor & his estate, NOT relevant where the trustee of an estate litigates against a 3rd party • in proceedings to set aside a voidable disposition made to a 3rd party prior to sequestration, ordinary rules of jurisdiction apply and the trustee cannot rely on Sec 149 Competing courts – removal to another court • Court having jurisdiction may refuse/postpone the surrender/sequestration if it appears that the estate should be sequestrated by another court in RSA • Court may order transfer of the case – transferee court need not have original jurisdictional • court should take into account when transferring ◦ convenience of the parties ◦ convenience of the court ◦ general disposal of litigation • essential enquiry is where the estate may more conveniently be administered (therefore what would happen AFTER the order is granted) .