The Insolvency Act 24 of 1936 (“the Act“) provides a legal mechanism for the sequestration of a debtor’s estate where the debtor is unable to satisfy their financial obligations. Sequestration may be effected voluntarily by the debtor or compulsorily at the instance of a creditor. This article focuses specifically on the legal requirements that a creditor must satisfy in order to obtain a compulsory sequestration order against a debtor’s estate through an application to the High Court.
What is Sequestration?
Sequestration is a formal legal process whereby an individual is declared insolvent and their estate is placed under administration for the benefit of its creditors. Once a sequestration order is granted, the Master of the High Court will appoint a trustee to assume control over the insolvent estate, realise the debtor’s assets, and distribute the proceeds among its creditors in accordance with the Act.
Who May Be Sequestrated?
In terms of section 2 of the Act, a “debtor” for purposes of sequestration includes:
- A natural person;
- A partnership; or
- The estate of a person or partnership.
Juristic persons, such as companies and close corporations, fall outside the scope of the Insolvency Act and are instead subject to liquidation under the Companies Act.
What Must A Creditor Prove?
Sections 9, 10, and 12 of the Act outline the procedural and substantive requirements that a creditor must satisfy to obtain a provisional and final sequestration order. These can be summarised into three core elements:
- The Creditor Must Have a Liquidated Claim
In terms of section 9(1) of the Act, the petitioning creditor must demonstrate that they hold a liquidated claim of at least R100.00 against the debtor. Where the application is brought by two or more creditors jointly, their combined claims must amount to at least R200.00.
A liquidated claim refers to a fixed and ascertainable amount that is due and payable at the time of the application.
- The Debtor Must Have Committed an Act of Insolvency or Be Factually Insolvent
The creditor must prima facie prove that the debtor has either committed an act of insolvency as contemplated in section 8 of the Act, or that the debtor is factually insolvent.
Acts of Insolvency:
Section 8 of the Act sets of the 8 acts of insolvency as follows:
- The debtor leaves South Africa, or departs from their home or remains absent, with the intention of evading or delaying payment of their debts;
- The debtor fails to satisfy a judgment debt and has no sufficient attachable assets;
- The debtor disposes of, or attempts to dispose of, property in a way that prejudices creditors or prefers one creditor over another;
- The debtor removes or attempts to remove assets to favour one creditor over another;
- The debtor makes or offers to make an arrangement with creditors to release them wholly or partially from their debts;
- After publishing a notice of intention to surrender their estate, the debtor either fails to comply with statutory requirements, submits a materially incorrect or incomplete statement of affairs, or fails to apply for surrender on the date indicated;
- The debtor gives written notice to any creditor stating that they are unable to pay their debts;
- If the debtor is a trader who has published notice of a business transfer in the Government Gazette (as required under section 34(1)) and is thereafter unable to pay all debts.
Factual Insolvency:
In the absence of an act of insolvency, a creditor may rely on the factual insolvency of the debtor.
In Venter v Volkskas Ltd, the court confirmed that a person is factually insolvent if their liabilities, fairly estimated, exceed their assets, fairly valued. In practice, creditors frequently support this ground by providing a schedule of the debtor’s assets and liabilities to illustrate the excess of debt.
- Sequestration Must Be to the Advantage of Creditors
The creditor must further demonstrate that there is reason to believe that sequestration will be to the advantage of the general body of creditors.
Although the Act does not define this concept in detail, the courts have provided the following insight:
- In Lotzof v Raubenheimer, the court stated that ‘to the advantage of creditors’ must refer to an advantage to all creditors or at least the general body of creditors (concurses creditorum);
- In Meskin & Co v Friedman, the court held that there need only be a reasonable prospect, not a likelihood, that some pecuniary benefit may result from the sequestration and that even if assets are not known, the possibility of discovering or recovering assets during the insolvency enquiry is sufficient; and
- In London Estates (Pty) Ltd v Nair, the court emphasised that sequestration is only to the advantage of creditors when it results in payment in respect of the claims of the creditors as a body and that there will be no advantage for creditors if no dividend or only a negligible dividend is available after the costs of sequestration have been met.
In summary, compulsory sequestration is a significant legal remedy available to creditors seeking to recover debts from insolvent individuals or partnerships. However, the requirements imposed by the Insolvency Act are strict and must be satisfied in full. The creditor must establish a liquidated claim of the prescribed minimum amount, prove an act of insolvency or factual insolvency, and demonstrate that sequestration will likely benefit the general body of creditors.
If you are a creditor considering sequestration proceedings, or a debtor facing such proceedings, our firm is available to guide you through the process.
For further assistance, kindly contact us at MichaelO@caf.co.za or call on 021 674 2083.
Written by Jenna van der Berg
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).