CHAPTER 1 – INTRODUCTION
Meaning of Insolvency
Legal test of insolvency is whether the debtor’s liabilities, fairly estimated, exceed his assets, fairly
valued (Venter v Volkskas 1973).
Inability to pay debts is not insolvency but is rather evidence of insolvency. Such a person is not treated
as an insolvent unless his estate has been sequestrated by an order of the court.
A sequestration order is a formal declaration that a debtor is insolvent. It can be granted in two ways:
1) At the instance of the debtor himself (voluntary surrender).
2) At the instance of one or more of the debtors creditors (compulsory sequestration).
NB a debtors estate is sequestrated and NOT the debtor himself, use it with reference to the estate only.
You can use the word insolvent to describe the debtor. This could mean two things:
1) The debtors estate has been sequestrated OR
2) The debtors liabilities exceed his assets under the definition of insolvency.
Purpose of a sequestration order
Main objective – secure orderly and equitable distribution of a debtors estate where there are
insufficient assets to meet the claims of all creditors.
Sequestration makes use of a pre-defined legal machinery to liquidate the assets of a debtor and
distribute them amongst creditors in an order of preference.
Once an order of sequestration is granted, a concursus creditorum is established. The interests of
creditors as a group enjoy preference over individual creditors (Richter NO v Riverside Estates 1946).
A debtor is divested of his estate on sequestration and cannot burden it with further debt. 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 (Walker v Syfrt 1911 AD).
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.
Nothing can be done outside of the Act which could diminish the value of the estate or prejudice
creditors rights (Ward v Barrett NO).
,Insolvency exists to the benefit of creditors and thus a court will not sequestrate an estate unless it can
be shown to be to the creditors advantage (example: You have one debtor and there is already a
judgement against the debtor).
Sometimes regarded as no more than an elaborate system of execution because it aims to ensure that
creditors receive an equitable share of the debtors estate.
Sequestration is clearly more than this though as it affects more than a debtors assets, it affects the
debtors legal personality – affecting his capacity to enter contracts, litigate, hold office or follow a
vocation of choice.
Naidoo v ABSA Bank 2010 SCA – The SCA said that a sequestration order is not an ordinary judgement
entitling a creditor to execute on the estate. It affects ‘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.
‘[An] order for the sequestration of a debtor’s estate is not an order for the enforcement of the
sequestrating creditor’s claim, and sequestration is thus not a legal proceeding to enforce an
agreement’ (From Naidoo v ABSA).
WHAT MAY BE SEQUESTRATED
The estate of a debtor in accordance with the definition in the Act.
Meaning of ‘Estate’
Ex Parte Foxcraft – ‘a collection of assets and liabilities’.
A debtor who has only liabilities may be regarded as having an estate for purposes of sequestration
(Miller v Janks TPD). [A]n estate . . . is [no] less an estate because at one time it has only assets, at
another time only liabilities, and at yet another time both assets and liabilities.’
Joint estates are estates for insolvency purposes as the debtor married in community of property does
not have a separate estate. Both spouses are debtors for purposes of the Insolvency Act even if the
activity on which the insolvency is bases is unrelated to the one (Ex PArte Valley 1930; De Wet NO 1970
A).
Divorce would result in separate estates.
In terms of s17(5) of the matrimonial property Act, divorce will not extinguish the liability of the solvent
spouse for debts of the joint estate. A creditor who has acquired the right to sequestrate the joint estate
may upon divorce, and is required to, sequestrate both estates separately (BP South Africa v Viljoen
2002).
,Meaning of ‘debtor’
Under the IA, a debtor is a person or 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.
An entity or association of persons is regarded as a debtor if it can incur debts and possess an estate
(Magnum Financial Holdings).
Chapter 14 of the Companies Act 61 of1973 governs the liquidation of insolvent companies. New CA
expressly keeps this process in operation.
The Act tells us that a company, external company and any other body corporate (juristic person).
Debtor thus means:
- A natural person
- A partnership – even when the members are juristic persons (Hawker Air Service 2006 SCA).
- A deceased person and a person incapable of managing their own affairs
- An external company that doesn’t meet the definition in the CA 1973
- An entity or association of persons that is not a juristic person, such as a trust.
The law governing insolvency does not apply to body corporates. A body corporate established under
the Sectional Titles Act cannot be sequestrated. (Reddy v Body Corporate of Croftdene mall 2002 D.
Jurisdiction of the Court
Which Court has jurisdiction?
only a Provincial or Local Division of the High Court may adjudicate upon an insolvency matter (see
definition of Court in IA).
A magistrates court may have jurisdiction over other matters like criminal proceedings arising from the
Act provided the ordinary bounds of jurisdiction are not exceeded.
Jurisdiction over a debtor and his estate
S149(1) of the IA tells us that a court will have juris over a debtor and a debtors estate where:
- On the date that the application for compulsory or voluntary surrender is made with the
registrar the debtor owns property , is entitled to property or is domicile in the courts
jurisdiction OR
- Within 12 months prior to the application, the debtor ordinarily resided or conducted business
within the courts jurisdiction.
, A right to performance of some kind is taken to be in the jurisdiction where the debtor is domiciled (If
I’m owed money arising from a dispute in Joburg but I live in Germany, the right is located in Germany
and is beyond the courts jurisdiction (Otto Case 1993 A)
Debtor doesn’t have to carry out business for the entire 12 month period but ordinary residence means
something more than a temporary stay (Phillips case 1956 C).
The Master
Has an essential role in insolvency matters.
The master exercises custody of all documents relating to insolvent estates (s154(1)).
The master is a creature of statute and only has powers which have been granted to it by legislation
expressly or by implication (De Lange v Smuts NO 1998 CC).
S151 says we can bring the decisions of the Master under review by a court (read section).
A person is ‘aggrieved’ for these purposes if his legal rights have been infringed or if he has a legal
grievance(Francis George Case).
The type of review envisaged by the section is one in which the court has powers of both appeal and
review with the additional power, if required, of receiving new evidence and entering into and deciding
the whole matter afresh.
An order of sequestration by the high court places the insolvent’s estate under the control of the master
who will appoint a trustee to realise the estates assets with an objective of settling creditors claims in
order of preference.
The master appoints the trustee who is responsible for the winding up of the insolvent debtors estate.
Condonation of Irregularity
Often procedures are not correctly followed, late or contain some other kind of breach.
S157(1) provides that ‘nothing done under the Act will be invalid by reason of a formal defect or
irregularity, unless a substantial injustice has been thereby done, which in the opinion of the court
cannot be remedied by any order of the court’.
What do we learn from this:
1) Where a defect does not cause substantial injustice it can be condoned by the court.
2) If it causes substantial injustice but in the opinion of the court the defect can be remedied by an
order then the defect is not fatal.
3) If the prejudice cannot be cured then the procedural step will be invalid.
Meaning of Insolvency
Legal test of insolvency is whether the debtor’s liabilities, fairly estimated, exceed his assets, fairly
valued (Venter v Volkskas 1973).
Inability to pay debts is not insolvency but is rather evidence of insolvency. Such a person is not treated
as an insolvent unless his estate has been sequestrated by an order of the court.
A sequestration order is a formal declaration that a debtor is insolvent. It can be granted in two ways:
1) At the instance of the debtor himself (voluntary surrender).
2) At the instance of one or more of the debtors creditors (compulsory sequestration).
NB a debtors estate is sequestrated and NOT the debtor himself, use it with reference to the estate only.
You can use the word insolvent to describe the debtor. This could mean two things:
1) The debtors estate has been sequestrated OR
2) The debtors liabilities exceed his assets under the definition of insolvency.
Purpose of a sequestration order
Main objective – secure orderly and equitable distribution of a debtors estate where there are
insufficient assets to meet the claims of all creditors.
Sequestration makes use of a pre-defined legal machinery to liquidate the assets of a debtor and
distribute them amongst creditors in an order of preference.
Once an order of sequestration is granted, a concursus creditorum is established. The interests of
creditors as a group enjoy preference over individual creditors (Richter NO v Riverside Estates 1946).
A debtor is divested of his estate on sequestration and cannot burden it with further debt. 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 (Walker v Syfrt 1911 AD).
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.
Nothing can be done outside of the Act which could diminish the value of the estate or prejudice
creditors rights (Ward v Barrett NO).
,Insolvency exists to the benefit of creditors and thus a court will not sequestrate an estate unless it can
be shown to be to the creditors advantage (example: You have one debtor and there is already a
judgement against the debtor).
Sometimes regarded as no more than an elaborate system of execution because it aims to ensure that
creditors receive an equitable share of the debtors estate.
Sequestration is clearly more than this though as it affects more than a debtors assets, it affects the
debtors legal personality – affecting his capacity to enter contracts, litigate, hold office or follow a
vocation of choice.
Naidoo v ABSA Bank 2010 SCA – The SCA said that a sequestration order is not an ordinary judgement
entitling a creditor to execute on the estate. It affects ‘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.
‘[An] order for the sequestration of a debtor’s estate is not an order for the enforcement of the
sequestrating creditor’s claim, and sequestration is thus not a legal proceeding to enforce an
agreement’ (From Naidoo v ABSA).
WHAT MAY BE SEQUESTRATED
The estate of a debtor in accordance with the definition in the Act.
Meaning of ‘Estate’
Ex Parte Foxcraft – ‘a collection of assets and liabilities’.
A debtor who has only liabilities may be regarded as having an estate for purposes of sequestration
(Miller v Janks TPD). [A]n estate . . . is [no] less an estate because at one time it has only assets, at
another time only liabilities, and at yet another time both assets and liabilities.’
Joint estates are estates for insolvency purposes as the debtor married in community of property does
not have a separate estate. Both spouses are debtors for purposes of the Insolvency Act even if the
activity on which the insolvency is bases is unrelated to the one (Ex PArte Valley 1930; De Wet NO 1970
A).
Divorce would result in separate estates.
In terms of s17(5) of the matrimonial property Act, divorce will not extinguish the liability of the solvent
spouse for debts of the joint estate. A creditor who has acquired the right to sequestrate the joint estate
may upon divorce, and is required to, sequestrate both estates separately (BP South Africa v Viljoen
2002).
,Meaning of ‘debtor’
Under the IA, a debtor is a person or 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.
An entity or association of persons is regarded as a debtor if it can incur debts and possess an estate
(Magnum Financial Holdings).
Chapter 14 of the Companies Act 61 of1973 governs the liquidation of insolvent companies. New CA
expressly keeps this process in operation.
The Act tells us that a company, external company and any other body corporate (juristic person).
Debtor thus means:
- A natural person
- A partnership – even when the members are juristic persons (Hawker Air Service 2006 SCA).
- A deceased person and a person incapable of managing their own affairs
- An external company that doesn’t meet the definition in the CA 1973
- An entity or association of persons that is not a juristic person, such as a trust.
The law governing insolvency does not apply to body corporates. A body corporate established under
the Sectional Titles Act cannot be sequestrated. (Reddy v Body Corporate of Croftdene mall 2002 D.
Jurisdiction of the Court
Which Court has jurisdiction?
only a Provincial or Local Division of the High Court may adjudicate upon an insolvency matter (see
definition of Court in IA).
A magistrates court may have jurisdiction over other matters like criminal proceedings arising from the
Act provided the ordinary bounds of jurisdiction are not exceeded.
Jurisdiction over a debtor and his estate
S149(1) of the IA tells us that a court will have juris over a debtor and a debtors estate where:
- On the date that the application for compulsory or voluntary surrender is made with the
registrar the debtor owns property , is entitled to property or is domicile in the courts
jurisdiction OR
- Within 12 months prior to the application, the debtor ordinarily resided or conducted business
within the courts jurisdiction.
, A right to performance of some kind is taken to be in the jurisdiction where the debtor is domiciled (If
I’m owed money arising from a dispute in Joburg but I live in Germany, the right is located in Germany
and is beyond the courts jurisdiction (Otto Case 1993 A)
Debtor doesn’t have to carry out business for the entire 12 month period but ordinary residence means
something more than a temporary stay (Phillips case 1956 C).
The Master
Has an essential role in insolvency matters.
The master exercises custody of all documents relating to insolvent estates (s154(1)).
The master is a creature of statute and only has powers which have been granted to it by legislation
expressly or by implication (De Lange v Smuts NO 1998 CC).
S151 says we can bring the decisions of the Master under review by a court (read section).
A person is ‘aggrieved’ for these purposes if his legal rights have been infringed or if he has a legal
grievance(Francis George Case).
The type of review envisaged by the section is one in which the court has powers of both appeal and
review with the additional power, if required, of receiving new evidence and entering into and deciding
the whole matter afresh.
An order of sequestration by the high court places the insolvent’s estate under the control of the master
who will appoint a trustee to realise the estates assets with an objective of settling creditors claims in
order of preference.
The master appoints the trustee who is responsible for the winding up of the insolvent debtors estate.
Condonation of Irregularity
Often procedures are not correctly followed, late or contain some other kind of breach.
S157(1) provides that ‘nothing done under the Act will be invalid by reason of a formal defect or
irregularity, unless a substantial injustice has been thereby done, which in the opinion of the court
cannot be remedied by any order of the court’.
What do we learn from this:
1) Where a defect does not cause substantial injustice it can be condoned by the court.
2) If it causes substantial injustice but in the opinion of the court the defect can be remedied by an
order then the defect is not fatal.
3) If the prejudice cannot be cured then the procedural step will be invalid.
