S`tudy unit 1INTRODUCTION TO INSOLVENCY LAW
Identify the problem faced by the court in Magnum Financial Holdings.
The only problem before the court was whether a trust could, at law, be sequestrated.
Summarise the authority which the court relied on to solve the problem which it faced.
No South...
Identify the problem faced by the court in Magnum Financial Holdings.
The only problem before the court was whether a trust could, at law, be sequestrated.
Summarise the authority which the court relied on to solve the problem which it faced.
No South African case seemed to have dealt with whether a trust could be
sequestrated in terms of section 9(1) read with the definition of “debtor” in section 2 of
16 the Insolvency Act. Therefore the court relied on Ex parte Milton NO 1959 (3) SA 347
(SR). In that case, the Southern Rhodesian court, interpreting a similarly worded
section of the Rhodesian statute, approved the voluntary surrender of the estate of an
administrative trust created by contract. The trust fell within the definition of a “debtor”
and could be described as a debtor in the usual sense of the word. Through its
trustee, the trust could borrow money and, as a property owner, be liable for rates
and taxes. Creditors would be paid only from the trust’s property. The trustee was not
personally liable for debts which he incurred on the trust’s behalf. A concursus
creditorum could not be established by sequestrating the estates of the donor of the
trust property, the trust beneficiaries, or the trustee. By way of comparison, the
Rhodesian court also relied on South African decisions concerning a club which
owned property apart from its members, who were not liable for its debts beyond the
amount of their subscriptions. Such a club was a debtor within the meaning of the
Insolvency Act, and its estate could therefore be sequestrated.
Explain the common-law meaning of the phrase “any body corporate”.
The court gave the common-law meaning of “any body corporate” as an association
of individuals capable of holding property and of suing and being sued in its corporate
name, or a universitas having the capacity to acquire certain rights apart from the
rights of the individuals which form it, and having perpetual succession (ie,
continuous existence).
(1) Explain the main purpose of a sequestration order in respect of Tenza’s estate. (2)
The main purpose of a sequestration order is to ensure the orderly and fair
distribution of a debtor’s (Tenza’s) assets if his assets are not sufficient to pay all his
creditors in full.
(2) Give reasons why a sequestration order may not be granted if a debtor has only one
creditor or if there are not enough assets to cover the costs of sequestration. (3)
If a debtor has only one creditor, there are no conflicting interests between creditors
which must be equitably resolved. If the debtor’s assets are not sufficient to cover the
costs of sequestration, creditors will derive no advantage from the process of
sequestration. Consequently, in such a case sequestration would merely amount to a
waste of time and money.
(3) Explain whether a debtor whose estate is under sequestration may obtain a new
estate which does not form part of the sequestrated estate. (2)
Because some assets which a debtor has or acquires do not form part of his
insolvent estate, it is indeed possible to build up a new estate which does not form
part of the estate under sequestration.
(4) Suppose that Bonzo Ltd is a British company which owns property which is lying in awarehouse
in Cape Town harbour. Bonzo Ltd does not, however, have a place ofbusiness in South Africa.
(a) Briefly explain whether the Western Cape High Court, Cape Town hasjurisdiction to liquidate
Bonzo Ltd. (2)
Because Bonzo Ltd does not have a place of business in South Africa, a South African court will not
have jurisdiction to wind up the company.
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(b) Will the Western Cape High Court, Cape Town have jurisdiction to sequestrate
Bonzo Ltd’s estate? (5)
Because the company may not be wound up in terms of the Companies Act, it is a “debtor” for the
purposes of the Insolvency Act. The estate of the company may therefore be sequestrated by a South
African court. Because the company owns property which is situated within the area of jurisdiction of
the Western Cape High Court, Cape Town, that court will have jurisdiction to
sequestrate the company’s estate.
(c) Will the Cape Town Magistrate’s Court have jurisdiction to sequestrate BonzoLtd’s estate? (1)
A magistrate’s court has no jurisdiction to grant an order of sequestration.
(5) When will a formal defect in an application for the sequestration of an estate be fatal? (2)
A formal defect in an application will be fatal if the defect causes a substantial injustice to creditors
and that prejudice cannot be put right by a court order.
(6) Indicate whether the following statement is true or false.
In common parlance, a person may be said to be insolvent when his liabilities, fairly
estimated, exceed his assets, fairly valued.(2)
This statement is false. In common parlance, a person may be said to be insolvent when he is unable
to pay his debts. The legal test of insolvency, however, is whether the debtor’s liabilities, fairly
estimated, exceed his assets, fairly valued
The ___________________ of insolvency is whether the debtor's liabilities, fairly
estimated, exceed his assets, fairly valued. (2)
Legal test
Exam 2002
What is the definition of a “debtor” in terms of the Insolvency Act 24 of 1936? (4)
A debtor means a person or a partnership or the estate of a person or a 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.
(a) Why was the court in Magnum Financial Holdings (Pty) Ltd (in liquidation) v Summerly
and another 1984 (1) SA 160 (W) satisfied that the applicants had made out a case for
the relief sought (the urgent grant of a provisional sequestration order)? (6)
There had been sufficient service of the papers on the trustee of the trust.
The one provisional liquidator of the applicant company had locus standi to apply for
the provisional sequestration of the trust estate.
The applicant company had a claim against the trust for about R1,6 million which was
due and payable.
An act of insolvency in terms of section 8(g) of the Insolvency Act had been committed,
and the trust estate was also insolvent.
It was to the advantage of the trust’s creditors that its estate should be urgently sequestrated.
The necessary security bond had been lodged.
A trust falls within the definition of a ‘debtor.’
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(b) Max Limited is an Canadian company and the owner of property which is in storage in
Cape Town Harbour. Max Limited does not, however, have a place of business in
South Africa. Will the Cape Provincial Division of the High Court have jurisdiction to
sequestrate the estate of Max Limited? Give reasons for your answer. Do not discuss
whether the name of the Provincial Division of the High Court is the correct one.
Further, you must not discuss whether any other court may have jurisdiction to
sequestrate the estate of Max Limited. (5)
As this company cannot be wound up under the Companies Act because it has no
place of business in South Africa, it is therefore a “debtor”for the purposes of the
Insolvency Act (s 2 "debtor") and its estate may therefore be sequestrated by a High
Court in South Africa. Max Ltd owns property situated in the jurisdiction of the Cape
Provincial Division of the High Court, and so the Cape court will have jurisdiction to
sequestrate the company’s estate (s 149(1)(a)).
2009
A person may be insolvent in the sense that his.................................... exceed his
..............................., even though his estate has not yet been sequestrated. In fact,
sequestration will usually be applied for only when the .................................. already exceed the
.....................................
Liabilities: Assets: Liabilities:Assets
(b) The sequestration procedure is aimed mainly at achieving a .......................................... of the
available assets among .....................................of the debtor. (2)
Fair distribution: Competing creditors
(c) An external company may be .................................................. in South Africa (in terms of the
Companies Act 61 of 1973) if it has a place of business in South Africa. If it does not have a
place of business in South Africa, its estate may be
in South Africa under the Insolvency Act, if a South African court has jurisdiction in terms of
section 149 of the Insolvency Act. (2)
Liquidated: Sequestrated
(e) A formal defect in an application for sequestration will be fatal if the defect causes a
substantial injustice to ................................................... and that prejudice cannot be put
right by a .........................................................
Creditors: Court order
(a) An estate is usually conceived of as a collection of.................................................................
and......................................................................................... (2)
(a) Assets (1): Liabilities (1)
Insolvency law provides a procedure for dealing fairly with the claims that the unpaid
__________________ of the insolvent person have against the insolvent estate.
Insolvency law also protects the debtor from being harassed by his or her creditors.(2)
(a) creditors
There are ________ acts of insolvency. (2)
8
Only a ______________________ has jurisdiction to wind up a company. (2)
High Court
Study unit 2-3VOLUNTARY SURRENDER
Fill in the blanks in the following incomplete statements about debtors and the people who
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may apply for the voluntary surrender of the debtor’s estate.
(1) Tenza is the insolvent debtor and voluntary surrender may therefore be sought by
Tenza himself. State which other person may apply for the voluntary surrender on
behalf of Tenza.
(1) Tenza’s expressly authorised agent may apply on his behalf.
(2) If Tenza is insane, explain who must apply for the voluntary surrender of his estate.
(2) Voluntary surrender may be sought by the person entrusted with administering
Tenza’s estate (Tenza’s curator bonis).
(3) Tenza’s uncle and aunt, Mr and Mrs Zondi, were married in community of property in
1991 and are now insolvent; explain, giving reasons for your answer, who may now
apply for the voluntary surrender of their estate.
(3) Mr and Mrs Zondi were married in community of property in 1991, and are now
insolvent; voluntary surrender may be sought by Mr and Mrs Zondi.
(4) If Tenza were to die, who would apply for the voluntary surrender of his estate?
(4) Voluntary surrender of his estate may be sought by the executor of Tenza’s
deceased estate.
(5) Tenza’s cousins, Mr Abel, Mrs Brown and Mr Charles, run a greengrocer’s shop in
partnership as ordinary partners, but the partnership liabilities heavily exceed the
partnership assets. Explain who must apply for the voluntary surrender of the
partnership estate.
(5) Voluntary surrender of the partnership estate may be sought by Mr Abel, Mrs Brown
and Mr Charles all together. Alternatively, the application may be brought by
their expressly authorised agent.
In Ex parte Henning,
(1) The respondent (Rand Bank) opposed the application for voluntary surrender. One of
the respondent’s grounds of opposition was that the application did not comply with
the requirements of section 6(1) because the applicant’s assets did not cover the
costs of sequestration payable from the free residue. Explain how the court resolved
this issue.
(1) The court decided that even if the sequestration costs had to be available at the time
of the application, the applicant’s assets would probably fetch R1 030 and would
therefore cover the sequestration costs which the parties had agreed would run to
about R1 000. (See p 847 of the law report.)
(2) As regards the requirement of advantage to creditors, the respondent argued that it
would be much better off if the application for voluntary surrender were refused and
the applicant were compelled to continue paying the respondent for nine years.
Describe which test the court laid down as the proper one to be applied in these
circumstances.
(2) The court held that the test was not to compare the respondent’s position at the time
of immediate voluntary surrender of the applicant’s estate with the respondent’s
position if the monthly debt payments were continued for nine years. The question
was merely whether the court papers showed whether voluntary surrender would be
to the advantage of all the creditors.
(3) The respondent argued that the applicant was approaching the court to avoid paying
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