THE LAW OF INSOLVENCY AND

LIQUIDATION

Courtesy of: General Principles of Commercial Law

INTRODUCTION

The free enterprise or market economic systems, economic activity is always attended
by some measure of risk. Persons or enterprises may experience problems due to, for
example, drought, mismanagement or attempts to elevate their standard of living
beyond what is financially realistic.

When a person’s liabilities exceed his or her assets, this is normally evidenced by an
inability to pay his or her debts. Two problems in particular arise when a debtor’s debt
cannot be paid:

a) With regard to the creditors, the claims of those who proceed to act against the
debtor first, may be met in full while the remaining creditors receive very little
or nothing at all.
b) With regard to the debtor, the possibility exists that his or her financial
difficulties may never be overcome since the creditors will always be ready to
attach any assets the debtor may acquire.

With a view to the protection and benefit of all concerned, legal machinery has been
created by which the estate of the debtor can be sequestrated and a fair distribution of
the assets can be made among the creditors. The Insolvency Act 24 of 1936 provides
for the sequestration of the estates of the insolvent debtors. Included under the
definition of the debtor are natural persons, partnerships and certain other entities or
associations. A company and a close corporation are not regarded as debtors within
the Insolvency Act and have to be wound up or liquidated under the Companies Act
61 of 1973 or the Close Corporations Act 69 of 1984. Winding-up will be discussed
below. A sequestration order may be obtained in of two ways, namely voluntary
surrender and compulsory sequestration.

VOLUNTARY SURRENDER
The insolvent himself or herself approaches the court and applies for the acceptance
of the voluntary surrender of his or her estate. All the partners of the partnership have
to apply for the voluntary surrender of its estate. The court can accept the voluntary
surrender if the following requirements are met:

a) The insolvent must comply with the prescribed formalities. These formalities
pertain mainly to notification of the creditors to enable them to object the
application.
b) The insolvent has to prove that he or she is indeed insolvent, that is, that the
estate’s liabilities exceed its assets.
c) The surrender must be to the advantage of the creditors. This advantage must
be a financial benefit- there should be a reasonable prospect that each ordinary
creditor will receive a not negligence dividend. When there is an appreciable
risk that the creditors might eventually costs, sequestration will not be
regarded as beneficial to the creditors.
 d) There must be sufficient assets to cover the costs of sequestration. The costs of
sequestration include among other items, the cost of bringing the application
to court and the fees that have to be paid to the trustee.

It is important to note that the court still has the discretion to refuse the application
even if all the requirements have been complied with.

COMPULSORY SEQUESTRATION

In this case one or more of the creditors approach the court to obtain a sequestration
order. A creditor with a liquidated claim of at least R100, or two or more creditors
who together have liquidated claims of at least R200 against the insolvent, may bring
such an application. A claim is liquidated if its amount has been ascertained either by
way of agreement or through a judgment of the court.

The following must be proved by the creditor:

a) That he or she has the necessary claim against the insolvent.

b) That the insolvent is indeed insolvent, or that he or she has committed one
or more of the acts of insolvency. It is obvious that it would more often
than not be impossible for the creditor to prove that the liabilities of the
debtor exceed his or her assets. After all, the creditor might not have
access to the books of the insolvent. In order to simplify the creditors task,
the Insolvency Act mentions a number of acts of insolvency. When a
person commits one of these acts, it is very often the case that he or she is
indeed insolvent. Instead of proving that the debtor committed one of these
acts.
c) That there is reason to believe that the sequestration will be to the
advantage of the creditors. The concept ‘advantage of creditors’ has been
discussed in the section on voluntary surrender.

The court first grants a provisional sequestration order and remands the case to enable
the debtor and other creditors to oppose the granting of a final order on the return day.

THE ACTS OF INSOLVENCY

The Insolvency Act sets out a number of acts of insolvency that can be committed by
a debtor. They are:

a) The debtor leaves the Republic or remains absent from the Republic or departs
from his or her house with the intention to evade or delay payment of his or
her debts. It will seldom be possible for the creditor to produce direct evidence
of the debtor’s intention. Our courts are prepared to infer the debtor’s intention
from the surrounding circumstances, for example, circumstances indicating
 that the debtor had realised that his or her estate might possibly be
sequestrated in the near future.
b) The debtor, upon the demand of the sheriff, fails to satisfy a court judgement
given against him or her, or fails to point out to the sheriff disposal property
sufficient to satisfy it, or if the return made by the sheriff indicates that he or
she did not find sufficient disposal property to satisfy the judgement. The
sheriff must first give the debtor the opportunity to point out sufficient
realisable property. If the sheriff cannot find the debtor or the debtor refuses to
co- operate, the sheriff can look for realisable property.
c) The debtor disposes of any of his or property with the effect of prejudicing the
creditors or of preferring one creditor above another. An attempted
disposition, which would have the same effect, also constitutes an act of
insolvency. The counter value received for the disposition as well as the
financial position of the estate at the time of the disposition (that is whether it
was solvent or insolvent) is important considerations in determining whether
the effect of the disposition was prejudicial.
d) The debtor removes or attempts to remove property with the intent to
prejudice the creditors or to prefer one creditor above another. The effect of
the removal is not important- it is the intention can be inferred from the
surrounding circumstances.
e) The debtor makes or offers to make any arrangement with any of the creditors
for releasing him or her wholly or partially from the debts. If a compromise is
reached or proposed in respect of a disputed debt, it is not an act of
insolvency.
f) The debtor, after having published a notice of intention to surrender the estate
which ahs not lapsed or been withdrawn, fails to submit a substantively correct
and complete statement of affairs with the Master, or fails to apply for the
acceptance of the surrender of the estate on the date indicated by the notice.
Note that the notice of intention to surrender lapses fourteen days after the
intended date of the application. Such a notice can be withdrawn only with the
written consent of the Master.
g) The debtor gives written notice to any one of the creditors that he or she is
unable to pay of the debts. It is important that the notice must convey the
debtor’s inability to pay. If the debtor notifies a creditor that he or she is
unwilling to pay, it will not be an act of insolvency.
h) The debtor, being a trader and having given notice of the intended transfer of
the business, is unable to pay all its debts. The effect of the publication of such
a notice is that all liquidated debts owed by the business become payable
immediately, even if they were originally intended to be payable at a future
date only.

THE CONSEQUENCES OF SEQUESTRATION

As soon as the person’s estate is sequestrated, various consequences follow for the
insolvent. It affects the insolvent’s personal status, property, as well as civil legal
proceedings instituted by or against him or her. It could also have an impact on certain
contracts concluded before the sequestration.
When a partnership estate is sequestrated, the court simultaneously sequestrates the
estates of all the partners, except if there is a legal bar to the sequestration of the
particular partner’s estate. The sequestration of a partnership estate or of the private
estate of any of the partners results in the dissolution of the partnership.

THE PERSONAL CONSEQUENCES OF SEQUESTRATION

Certain offices may not be held by an insolvent person, for example that of director of
a company. An insolvent may not without the written consent of the trustee do
business as a general dealer or manufacturer nor be in the employ of such a business
nor be directly or indirectly involved with it. The insolvent furthermore has certain
obligations relating to the sequestration process, for example the attendance of
meetings and the duty to supply the trustee with an explanation of the insolvency. As
regards the insolvent’s capacity to conclude contracts, the written consent of the
trustee is needed to conclude contracts that might adversely affect the estate or any
contribution the insolvent has to make towards the insolvent estate. The insolvent has
no capacity to dispose of any property of the insolvent estate. Apart from these
limitations, the insolvent’s contractual capacity is not affected.

THE EFFECT OF SEQUESTRATION ON THE PROPERTY OF THE INSOLVENT

The sequestration of a person’s estate results in the loss of ownership in the estate and
causes the insolvent estate to vest tin the Master and then in the trustee as soon as one
is appointed. However, the following property of the insolvent is excluded from the
insolvent estate:
a) Clothes and bedding and such portion of the household furniture, tools and
other essential means of subsistence as is determined by the creditor’s or, if no
creditors have proved claims, by the Master.
b) Remuneration for the work done by the insolvent done after the sequestration.
The trustee can, however, lay claim to that part of the remuneration that is not
needed for the support of the insolvent and his or her dependants. The trustee
has to approach the Master to determine the amount of the remuneration to
which the insolvent estate is entitled.
c) Any pension to which the insolvent is entitled for services rendered as well as
pension moneys protected by other statutes.
d) Compensation for loss suffered in the insolvent’s personal capacity. Loss
suffered in the insolvent’s personal capacity, means loss as a result of bodily
injury or infringement of his or her personality, for example for pain and
suffering or medical costs. It does not include damages awarded for loss or
damage to the insolvent’s property.
e) The proceeds of the above exempt items or any property the insolvent has
acquired with such proceeds.
f) Benefits under certain long-term policies such as life or disability policies. The
policy must have been in force for at least three years and the insolvent or his
spouse must be the life assured under the policy. The first R50 000 would not
form part of the insolvent estate. Assets acquired with policy benefits are
protected for five years from the date on which the policy benefits were
provided. If the policy was ceded as security for a debt, the policy benefits
required to meet the bill will, however, form part of the insolvent estate.
THE EFFECT OF SEQUESTRATION ON CIVIL LEGAL PROCEEDINGS

All civil proceedings by or against the insolvent and that relate to the estate, are
stayed until a trustee has been appointed. A sequestration order does not effect
pending criminal proceedings.

THE EFFECT OF SEQUESTRATION ON UNCOMPLETED CONTRACTS

The sequestration of a person’s estate does not, as a general rule, terminate contracts
concluded prior to sequestration. A notable exception to this rule is a contract of
employment. The sequestration of the employer’s estate has the effect of terminating
the contract.

An uncompleted contract is a contract in terms of which one or both of the parties

must still perform. If the insolvent has already performed in terms of the contract, but
the other party has not yet performed, the trustee can claim performance from the
other party.

If neither the insolvent nor the other party has performed, the trustee can claim
performance from the other party, but then the trustee has to tender full performance
of the obligations of the insolvent estate. If the trustee does not wish to proceed with
the execution of the contract, but the other party has not performed, the trustee can
claim performance from the other party.

If neither the insolvent nor the other party has performed, the trustee can claim
performance from the other party, but then the trustee has to tender full performance
of the obligations of the insolvent estate. If the trustee does not wish to proceed with
the execution of the contract, it may be repudiated. The other party will then have
only a concurrent claim for damages against the estate. Specific performance will not
be granted against an insolvent estate contrary to the wishes of the meeting of
creditors, since it may lead to one creditor being preferred above others.

If the other party has already performed, but the insolvent has not, the trustee (acting
according to the wishes of the creditors) may either uphold the contract and perform,
or repudiate the contract. The other party will then have a concurrent claim for the
return of his or her performance as well as for damages. For some contracts specific
rules apply which differ from the principles set out above.

CONTRACTS OF EMPLOYMENT

The sequestration of the employer’s estate automatically causes the termination of the
contract. The employee will have a claim for arrear wages and for damages. The
claim in respect of arrear wages, for a period not exceeding three months and to the
maximum amount fixed from time to time, will rank as a preferent claim. The
employee will have a concurrent claim for any balance of arrear wages as well as for
loss resulting from the termination of the contract.
Sequestration of the estate of the employee does not in itself terminate the contract. In
certain instances the employee’s insolvency might be a ground for dismissal, but this
topic falls out the scope of this chapter.

INSTALLMENT SALE TRANSACTIONS

An instalment sale transaction is a contract of sale in the terms of which moveable

property is sold and the purchase price is payable in instalments. The ownership in the
property is reserved and passes to the purchaser only once the final instalment is paid.
The Credit Agreements Acts 75 of 1980 regulates the transactions. The Insolvency
Act regulates the position where the purchaser becomes insolvent. Although in terms
of the contract, ownership has not yet passed to the purchaser, sequestration of the
purchaser’s estate nevertheless causes ownership in the moveable property to pass to
the insolvent estate immediately. The seller who loses his or her ownership is,
however, protected because he or she becomes a secured creditor of the estate. The
seller will acquire a hypothec (a form of real security) over the property sold.

The Insolvency Act does not provide for the situation where the estate of the seller is
sequestrated, so the general rules apply. The trustee might elect to continue with the
contract and receive the remaining instalments. However, the trustee may also
repudiate the contract and recover the property from the purchaser, because the
ownership still vests in the seller’s estate. The purchaser will then have to be content
with a concurrent claim for the return of the instalments already paid, as well as
damages.

SALE OF MOVEABLE PROPERTY FOR CASH

The Insolvency Act protects the person who sells movables for cash (as opposed to
credit) to a person whose estate is later sequestrated. If the goods were delivered but
the purchase price was not paid, the seller can claim back the goods within ten days of
delivery by notifying the insolvent, the trustee of the Master in writing. If the trustee
disputes the sellers right to claim back the goods, the seller will lose the right unless
he or she institutes legal proceedings to recover the property within fourteen days of
being notified of the dispute.

If the estate of the seller is sequestrated, the general rules will apply. The trustee can
either repudiate the contract or claim repayment of the purchase price from the other
party. Ownership in the property vests in the insolvent estate until the price is paid.

SALE OF IMMOVABLE PROPERTY

Where the estate of the purchaser is sequestrated before the immovable property is
transferred, the trustee has the usual choice of upholding or repudiating the contract.
If the trustee decides to claim transfer, the purchase price must be paid. However, the
Insolvency Act provides that the seller can request the trustee in writing to exercise
the choice. If the trustee does not exercise a choice within six weeks of receiving the
written notice, the seller may apply to court for the cancellation of the contract and the
return of the property.

Where the estate of the seller is sequestrated before the property is transferred to the
purchaser, the general principals set out above will usually apply. If the trustee
repudiates, the purchaser has a concurrent claim for the return of the purchase price
already paid, as well as for damages. However, if moveable property intended for
residential purposes is sold and the price is payable in three or more instalments over
a period exceeding one year, the provisions of the Alienation of Land Act 68 of 1981
protect the purchaser. The purchaser, and not the trustee of the seller’s estate, can
determine the outcome of the contract. The purchaser may choose to claim transfer of
the property, against payment of the transfer costs and either the outstanding balance
of the purchase price, or, if the amount payable in respect of administration and
sequestration costs, outstanding levies and release amounts on bonds exceed the
outstanding balance, such higher amount. If the purchaser decides not to claim
transfer, he or she will, provided the contract plus interest and the cost of certain
expenses in connection with the property.

Another provision of this Act can also possibly protect the purchaser to a certain
extent, but only if it is invoked before the sequestration. The Alienation of Land Act
allows the purchaser of registrable land to claim transfer of the property once fifty per
cent of the purchase price has been paid. It will always be a good precautionary
measure for a purchaser to claim such transfer as soon as the fifty per cent
requirement is met.

CONTRACTS OF LEASE

The Insolvency Act has a special arrangement if the estate of the lessee is
sequestrated. The lessor may not terminate the contract, but if the contract provides
for such a right of cancellation in the event of the lessee’s insolvency. The trustee has
the usual choice of upholding or repudiating the contract, but if the contract is upheld,
the lessor must be notified within three months of the trustee’s is being appointed. If
the trustee does not exercise this choice, the contract will automatically lapse three
months after the date of appointment of the trustee. The rent for the period after
sequestration forms part of the cost of sequestration. This means that the lessor has a
very good chance of receiving full payment, because of the cost of sequestration is
one of the first claims paid from the insolvent estate. If the lessor has suffered any
loss, he or she will have a concurrent claim for damages.

Where the estate of the lessor is sequestrated, the trustee will have the option of either
continuing with the contract or of repudiating it. The lessee will have a concurrent
claim for damages. The trustee will eventually have to sell the leased property and
terminate the contract. However, if immovable property is involved, the “huur gaat
voor koop” doctrine might protect the lessee.
THE EFFECT OF SEQUESTRATION ON THE PROPERTY OF THE
SOLVENT SPOUSE

The sequestration of a person’s estate also affects the property of his or her spouse.
“Spouse” is given an extended meaning in the Insolvency Act and includes spouses
married according to any legal system or custom and a man and a woman who live as
husband and wife without being married. The term ‘solvent spouse’ indicates that the
consequences to be discussed do not apply to parties to a marriage in community of
property, because in such a case both spouses are regarded as being insolvent and
there is only one joint insolvent estate.

When the insolvent spouse’s estate is sequestrated, all the property of the solvent
spouse also vests in the Master and then in the trustee of the insolvent spouse’s estate.
The solvent spouse then has to apply to the trustee or the court for the release of his or
her property. The following categories of property have to be released:

a) Property, which belonged to the solvent spouse immediately prior to the

conclusion of the marriage.
b) Property acquired by the solvent spouse in terms of an ante nuptial contract.
c) Property acquired by the solvent spouse during the course of the marriage,
with a title valid against the creditors of the insolvent spouse. The solvent
spouse will have a valid title if, for example, he or she acquired the property
with an own salary or if it was received as a donation. If, for example, the
property was registered in the name of the solvent spouse in an attempt to put
it beyond reach of the insolvent’s creditors, but the spouses have the mutual
understanding that the property still belongs to the insolvent, the solvent
spouse will not have a valid title against the insolvent’s creditors.
d) The proceeds of property which would otherwise have had to be released or
property acquired with such proceeds.

The fact that the trustee might have to release property does not preclude the trustee
from recovering that property for the benefit of the insolvent estate at a later stage if
the spouse acquired it through an impeachable disposition.

If the trustee or the court does not release the property, it is applied to satisfy the
claims of the solvent spouses creditors. Should any balance remain, it is applied for
the benefit of the creditors of the insolvent spouse.

There is a special provision allowing a solvent spouse who carries on a separate

business as a trader, or would probably be seriously disadvantaged by the immediate
transfer of his or her assets to the Master or to the trustee, or to obtain an urgent court
order postponing the vesting of all or some of the assets in the Master or the trustee.
The solvent spouse will have to provide security to the insolvent estate. This provision
is just a temporary measure, the solvent spouse will still have to prove that he or she is
entitled to the release of the property, otherwise it will vest in the Master or the trustee
once the period for which the order was granted has expired.
IMPEACHABLE DISPOSITIONS

One of the biggest advantages of the sequestration order is the creation of a body of
creditors and the equal treatment of creditors. Sometimes, however, an insolvent has
disposed of some of the assets prior to sequestration, thereby prejudicing the rights of
the creditors. Subject to certain requirements, the court on the application of the
trustee can set such dispositions aside or, should he or she fail to do so, on the
application of the creditors.

The property or its value will then have to be restored by the recipient. However, if
the recipient acted in good faith and gave up any property, security or right in return
for receiving the disposition, he or she cannot be obliged to return the property or
benefit, unless the trustee indemnifies the recipient for the loss of property or benefit,
unless the trustee indemnifies the recipient for the loss of property, security or right.
The provisions regarding impeachable dispositions will not affect a person, who, in
good faith and for value, acquired any property from a person other than the insolvent.

DISPOSITIONS NOT MADE FOR VALUE

In this case the disposition is made without value, for example a donation, or without
adequate value, for example, where an asset is sold far less than its worth. A
disposition without value can be set-aside to the extent that, immediately after the
disposition was made, the insolvent’s liabilities exceeded the assets. So, if the amount
by which the liabilities exceeded the assets is less than the value of the disposition, the
disposition will be set aside partially.

The Insolvency Act provides a defence against the trustee’s claim for setting aside a
disposition without value. The defence only operates for the benefit of the insolvent’s
wife or the children born of the insolvent’s marriage.