Insolvency in South African law refers to a status of diminished legal capacity (capitis diminutio) imposed by the courts on persons who are unable to pay their debts, or (which amounts to the same thing) whose liabilities exceed their assets.
The legal machinery which 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 object of the Act,” held the court in Walker v Syfret NO, “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.
[3] The entities that may be placed in liquidation under the Companies Act are “Body corporate” in this context refers to a juristic person or universitas.
The starting point is section 157(1), which 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.” The effect of this is the following: There are two ways in which a debtor's estate may be sequestrated: The procedure and requirements for each method differ in material respects (although the consequences of the sequestration order are same in both instances).
“It is necessary,” the court held in Ex parte Van Heerden, “to consider whether the surplus of the proceeds of the immovable property, after satisfying the mortgage bonds which have a preferential claim thereon, can be considered as ‘free residue’ within the meaning of that expression as used in the Act.”[8] The definition of “free residue” must be taken to refer to that portion of an estate under sequestration when liquidated, which is not subject to any right of preference.
One reason for this is that 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 information.
The purpose of the fourteen-day time limit is to ensure that creditors have sufficient opportunity to peruse the statement of affairs and to decide whether or not to oppose the application.
The legislature's objective in imposing the thirty-day limit was to ensure that debtors would not be able to give long notice, months beforehand, and in that way to keep creditors from levying execution and in the meantime dissipate all their assets.
The object of this requirement is to provide further protection to creditors who may wish to contest the application or take steps to safeguard their interests.
In the absence of any direction by the Master or the court, the debtor is not legally obliged to obtain an independent valuation in support of the values given in his statement (if he does so unnecessarily, the cost of the appraisement will not be allowed as part of the costs of the sequestration: Ex parte Kruger 1947 (2) SA 130 (SWA)), but he may effectively be compelled to do this if he relies on the anticipated proceeds of a single asset to show that sequestration will be to the advantage of creditors.
The statement of affairs must lie for inspection by creditors at all times during office hours for a period of 14 days stated in the notice of surrender (s 4(6)).
In the court's view, in the absence of any provision in the Act or other authority providing a legal impediment to the same material facts being used more than once, there was no reason why the debtor could not reuse his previous statement of affairs.
Specifically, even if all the requirements are met, the court still has a discretion to refuse the application, as in the case, for example, of abuse of process, or when it will not be to the advantage of creditors, because there are not enough assets to cover the liabilities.
If, after having published a 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 of surrender is not properly withdrawn, the debtor commits an act of insolvency which entitles a creditor to apply for the compulsory sequestration of his estate.
The court considered that Strauss's frequent absences from his dwelling might be attributed as much to the demands of his occupation as to an intention to avoid payment.
In Bishop v Baker, the creditor averred that the debtor had left South Africa with the intention of evading or delaying payment of her debts.
Prior to his departure, however, he appointed another person as co-director to run the company business, disposed of his office equipment, and terminated the lease of the premises where he had been residing.
[23] The court looks to whether a reasonable person in the position of the receiver, having the same knowledge of the relevant circumstances, would have interpreted the document in question to mean that the debtor cannot pay his debts.
A debtor commits an act of insolvency, in terms of this provision, “if (being a trader) he gives notice in the Gazette in terms of s 34(1) of his intention to transfer his business and is thereafter unable to pay all his debts.” Section 34(2) provides that, as soon as a notice is published every liquidated liability of the trader in connection with his business which would become due at some future date, falls due forthwith, if the creditor concerned demands payment.
The court does not have to be satisfied that sequestration will benefit creditors financially, merely that there is reason to believe that it will: “The facts put before the court must satisfy it that there is a reasonable prospect—not necessarily a likelihood, but a prospect which is not too remote—that some pecuniary benefit will result to the creditors.” It is not necessary to prove that the debtor has any assets, provided it is shown either that the debtor is in receipt of an income of which substantial portions are likely to become available to creditors in terms of section 23(5), or that there is a reasonable prospect that the trustee, by invoking the machinery of the Act, will unearth or recover assets which will yield a pecuniary benefit for creditors.
The debtor resorts to a friendly compulsory sequestration rather than voluntary surrender to achieve the stay because the former procedure is better suited to his purpose.
The result of the application is, initially, only a provisional order which must be served on the debtor and may be postponed and subsequently discharged at the instance of the sequestrating creditor.
The courts have accepted that they must, as a matter of policy, scrutinise every friendly sequestration with particular care to ensure that the requirements of the Act are not subverted, and that the interests of creditors are not prejudiced.
It is no longer permissible for a court to grant a provisional order ex parte merely because the applicant has clear documentary evidence, such as a nulla bona return.
Sequestration of a debtor's estate imposes on him a form of reduction in status, which curtails his capacity to contract, to earn a living, to litigate and to hold office.
On the other hand, the insolvent may enforce payment for work done after sequestration because section 23(9) expressly gives him the right to recover this remuneration for his own benefit.
The insolvent may follow any profession or occupation, and enter into any employment—except that he may not, without the written consent of the trustee, carry on, or be employed in, the business of a trader who is a general dealer or manufacturer.
The insolvent may sue or be sued in his own name in any matter relating to status or to any right not affecting his estate, and may claim damages for defamation or personal injury.