Study unit 1: Introduction to Insolvency Law
Case Law:
NB: Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly and another NNO 1984 (1) SA 160 (W)
Meaning of “insolvency”
Common meaning – a person is insolvent when he is unable to pay his debts, however,
The legal tes...
Case Law:
NB: Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly and another
NNO 1984 (1) SA 160 (W)
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,
, lOMoARcPSD|6444641
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
, lOMoARcPSD|6444641
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 2nd 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
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or a company or other association of persons which may be
placed in liquidation under the law relating to companies
(Sec 2)
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