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BER 220 Insolvency Summary
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Business Law 220 (BER 220) summary of insolvency law (chapter 34, 35 and 36)
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INSOLVENCY LAW• totality of rules regulating the situation where debtor cannot pay debts, or where total liabilities
exceed total assets
• creditors can then jointly apply for sequestration for debtor’s estate
Introduction
• debtor is unable to pay his/her debt (debtors options):
o (section 74 of the Magistrates’ Courts Act 32 of 1994), provided that debts ≠exceed R50000:
▪ can apply for an administration order (debtor make payments to administrator)
▪ list of creditors will be drawn by administrator, and they will be repaid with amounts
received from debtor
o debtor is insolvent, can voluntarily surrender estate if necessary requirements are met
o may enter into release/ novation with creditors
▪ means he commits act of insolvency ∴ creditors may apply for sequestration of debtor
o debt for credit agreement i.t.o. National Credit Act 34 of 2005
▪ debtor obtain assistance form debt counsellor to re-arrange his debts
• Creditors options:
o Individually claim performance – demand payment from debtor, not respond = creditor issue
summons/obtain civil judgement, may attach property and sell (proceeds satisfy debt)
o Collective collection -Jointly apply for sequestration of estate (if assets x sufficient to satisfy all
claims against estate)
▪ Purpose = pay dividend to concurrent creditors, instead of satisfying only few creditors
▪ provide for orderly distribution of debtor’s assets where assets are insufficient to satisfy
all creditors’ claims
Insolvency
• Insolvency Act 24 of 1936 – based on 2 principals
o right which creditors have to satisfy their claims through the process of execution
o concurrency of creditors who do not have a preferent or secured claim
• Debtor loses control of estate when sequestration order is given by High Court:
o Control of estate vest in Master of High Court, then in trustee
o Trustee sells assets and pay creditors in manner provided by act
o Concursus creditorum – interest of creditors as group ranks priority over interests over individual
creditors
▪ Creditors≠ attach assest obtain by insolvent after sequestration
▪ Debtor ≠ alienate/burden property (contractual capacity = limited until rehabilitation)
Estates that can be Sequestrated
,• Act defines debtor = person/partnership/deceased estate/estate of person incapable for handling
own affairs/trust
• Companies Act 61 of 1973 – regulates liquidation of insolvent estates
• Companies Act 71 of 2008 – regulates liquidation of solvent companies
Jurisdiction
• Only High Court = make sequestration and rehabilitation orders
• Specific local/provincial division has jurisdiction to sequestrate debtor if he on date of application:
o is domiciled within area of jurisdiction of court
o own or is entitled to property situated within area of the court’s jurisdiction
o at any time during 12 months immediately preceding date of application, resided or carried out
business within area of court’s jurisdiction
• application for the rehabilitation must, in principle be brought in the same division where the debtor
was sequestrated
Voluntary Surrender
The Applicant
• Who can apply:
o Debtor, Agent or representative with special authority, Curator bonis (person appointed to
handle the estate of a person incapable of handling his own estate), Executor of a deceased
estate If the debtor is married: (In community of property –both spouses must apply jointly; Out
community of property- only the debtor will apply), Ordinary Partners: Apply jointly for
surrender of partnership at the same time –apply for surrendering of own estate
Preliminary formalities
• Step 1 – Debtor must publish a notice of intention to surrender his estate in the GG + newspaper
where debtor is staying/trading/principal business is located: 14-30 days before application
o Notice must correspond with Form A of First Schedule of Act + signed by debtor/his attorney
o Notice may be revoked with Master’s consent by publishing notice to that effect in GG & local
newspaper
o Notice may expire if courts reject application/debtor x continue with voluntary surrender
o Effects of the notice:
▪ Assets cannot be attached
▪ Sheriff may not pay creditors after sales
▪ Money and assets must be transferred to trustee
▪ Exceptional circumstances: -Master can authorise sale in execution
▪ Temporary curator bonisto control estate
• Step 2 – Notice of surrender to must be sent to all known addresses of creditors SARS, Employees +
trade unions: within 7 days of publication of the notice
• Step 3 – Prepare statement of affairs to lie for inspection by creditors at the Master's office:
, o List all assets and liabilities
o 2 Copies to the masters office where the debtor resides (No local master –sent to provincial
Master and one copy to Master of the district)
o Must be open for 14 days for inspection from date of surrender
• Purpose of preliminary formalities:
o To inform creditors of the application
o Enable them to object to such an application
The application
• Application is brought by way of notice of motion supported by affidavit (court decision = based on
merit according to strength of documentary evidence
• Applicant and creditors state facts in affidavits (lodged 2 days before date of application)
• Creditors may object to incorrect statement of affairs = Master/magistrate must certify that
objections were lodged against statement + notify court. Applicant may address court regarding
application
Applicants burden of proof
• Applicant must prove the following:
o Formalities were complied with (documentary proof)
o Applicant is in fact insolvent
o Sufficient residue to cover sequestration costs (Master’s fees, cost of application, trustee’s
compensation etc.)
o Sequestration to advantage of creditors
• Court has a discretion to grant or refuse the sequestration order - Can postpone or refuse if brought
with an improper motive
Compulsory Sequestration
• Creditor apply for sequestration of the debtor
• Court will initially place estate under provisional sequestration
Formalities
• Applicant must give security to Master for sequestration costs until trustee is appointed
o Must get a certificate to proof
o Not more than 10 days before application (certificate must be filed with application)
o Copies of the application must be sent to Debtor, SARS, Employees + trade unions (if applicable)
The application
• Applicant must include affidavit stating that he is creditor of insolvent, amount and nature of his claim
and the basis for, amount and nature of security (if any).
• Must state that debtor is insolvent (and give reasons) / debtor has committed act of insolvency
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