STUDENT NUMBER: 65413822
MODULE: MRL3701
DATE 27/10/22.
QN 1.
1.1
The legal machinery that comes into operation on sequestration is designed to ensure
that whatever assets the debtor has, are liquidated and distributed among all his creditors
in accordance with a predetermined (and fair) order of preference. The term “concursus
creditorum” means that upon the granting of a sequestration order (or provisional order)
“coming together of creditors” is established, and the interests of creditors as a group
enjoy preference over the interests of individual interests. The debtor is divested of his
estate and cannot burden it with any further debts. A creditor’s rights to recover his claim
in full by judicial proceedings is replaced by the right, on proving a claim against the
insolvent estate, to share with all other proved creditors in the proceeds of the estate
assets. Apart from what is permitted by the Insolvency Act, nothing may be done which
would have the effect of diminishing the estate assets or prejudicing the rights of creditors.
Walker v Syfret NO 1911 AD 141. This principle entails that those creditors who have
proved a claim have the right to share with other proved creditors in the proceeds of the
estate assets. Thus, the interests of creditors as a group enjoy preference over the
interests of an individual creditor.
This principle is designed to ensure that whatever assets the debtor has, are liquidated
and distributed among all his creditors in accordance with a predetermined (and fair) order
of preference. The debtor is divested of his estate and cannot burden it with any further
debts. This guards against some creditors prejudicing other creditors
1.2
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 Western Cape High Court, Cape Town court will have
jurisdiction to sequestrate the company’s estate (s 149(1)(a)).
1.3
Compulsory Sequestration
Fred’s debt relief may be provided through compulsory sequestration proceedings that
are instituted by any aggrieved creditor of the insolvent debtor in a competent court,
especially, when the debtor commits some acts of insolvency (s 8 of the Insolvency Act;
Sharrock, Van Der Linde & Smith, 2012). However, the applicant must comply with all the
relevant requirements and related formalities before compulsory sequestration can be
utilised for debt relief purposes under the Insolvency Act (ss 9; 10 (c) & 12 (1) (c)).
Accordingly, affected Fred must prove that they have liquidated claims of not less than
R100 each, against the debtor’s insolvent estate before their compulsory sequestration
application is granted for debt relief purposes (s 9 (1) of the Insolvency Act). Moreover,
the affected creditor should prove that the debtor is factually insolvent or has committed
an act of insolvency (s 9 (1) of the Insolvency Act). A debtor’s acts of insolvency include
making or attempting to make a disposition of any property that belong to the insolvent
estate, which has the effect of prejudicing creditors or preferring one creditor over the
other; removing or attempting to remove any such property in order to prejudice creditors
or prefer one creditor over the other (s 8 of the Insolvency Act).
Furthermore, creditors must prove that there is a reason to believe that the compulsory
sequestration will be to the advantage of the general body of creditors in order for them
to successfully rely on such sequestration for debt relief purposes (s 9 (1) ss 8; 10 (c)
and 12 (1) (c) of the Insolvency Act; Naidoo case ). In this regard, the creditors should
positively submit to the court that the compulsory sequestration will be to the advantage
of all creditors (Meskin & Co v Friedman 1948 2 SA 555 (W) (Friedman case)).
Accordingly, the creditors must prove that there is a reasonable prospect which is not too
remote that the compulsory sequestration will bring some pecuniary benefit to all the
affected creditors (Friedman case). Additionally, for the advantage to creditors’
requirement to be satisfied, there must be a substantial majority of creditors that will
receive some dividends from the compulsory sequestration proceedings that are
instituted for debt relief purposes under the Insolvency Act .The affected creditors should
merely prove on a balance of probabilities that there is a prima facie reason to believe
that the compulsory sequestration will bring some advantage to all creditors (ss 10 (c)
and 12 (1) (c) of the Insolvency Act; Fesi v ABSA Bank Ltd 2000 1 SA 499 (C)
The creditors should further comply with some formalities such as proof of sufficient
security for costs for their liquidated claims to the Master (ss 6 (1) and 9 (1) of the
Insolvency Act; also see R v Hohls 1959 2 SA 656 (N). This occurs when creditors provide
sufficient proof of security for costs in respect of their compulsory sequestration
application until a trustee is appointed (s 9 (3) (b)) of the Insolvency Act). Creditors must
comply with the prescribed form and content that must be filed in a notice of motion and
a supporting affidavit of a creditor with full details of debtors or any other affected person,
for them to successfully rely on compulsory sequestration for debt relief purposes in South
Africa (s 9 (3) of the Insolvency Act; Thorne NO v Sinclair 1930 EDL 409). The creditor
must facilitate the search of the Master’s records (In re Hugo 1921 CPD 742), submit
relevant information for the Master’s report (s 9 (4) & (5) of the Insolvency Act) and furnish
the debtor and interested parties with copies of the compulsory sequestration application.
Creditors should also comply with the formalities for provisional sequestration, service of
rule nisi, opposition to application, anticipation of return day and intervention by another
creditor. In a nutshell, Fred may only rely on compulsory sequestration for debt relief
purposes if they comply with all the relevant requirements and formalities .
1.4
This was an appeal from an order dismissing an application for compulsory sequestration
and setting aside the provisional order of sequestration. The debt owed by the respondent
represented the taxed costs of the action in the Magistrate Court and the taxed costs of
the same case on appeal. The appellant issued a writ of execution in respect of each
case and in both cases, there was a nulla bona return. It was clear that the respondent
committed an act of insolvency in terms of s 8(b) of the Insolvency Act. When a creditor
applies for the compulsory sequestration of a debtor’s estate, the court needs to be
satisfied that there is reason to believe that sequestration of the debtor’s estate will be to
the advantage of his creditors, before granting a final sequestration order. However, in
the case of a voluntary surrender, s 6 places a heavier burden of proof on the applicant,
being the debtor himself, in that he has to satisfy the court that sequestration of his estate
will be to the advantage of creditors. The court drew attention to and explained this
difference in the burden of proof required and held that even when all the requirements
of the respective sections were complied with, the court retained its discretion to refuse a
sequestration order.
Respondent had a claim against applicant’s son, which was larger than the claim of
applicant against respondent. Sequestration would mean that respondent would no
longer have a claim against the son. In the circumstances, sequestration would not have
been to the advantage of the creditors as a group and the application was dismissed. The
applicant appealed. Legal question Could a court exercise its discretion in the granting of
a sequestration order?
The court exercised its discretion by refusing an application for compulsory sequestration
because the applicant was clearly abusing the process. The applicant's correct remedy
was to take out a warrant for the execution of his judgment against the debtor, and then
have the debtor's claim against the applicant's son attached in payment of the judgment
debt.
The decision/Ratio decidendi was that even if it were assumed that sequestration would
have been to the advantage of the creditors, it was clear that the applicant had brought
the application with the exclusive aim of preventing the debtor from enforcing his claim
against the applicant's son. That amounted to an abuse of the court process, and for that
reason the court should in any event exercise its discretion against the applicant.
1.5
The Constitution of the Republic of South Africa, 1996, is regarded as one of the most
progressive constitutions in the world. As the supreme law in South Africa, it applies to all
law and conduct. All South African laws must be consistent with the Constitution. Where
there is an alleged violation of constitutional provisions, that law or conduct must be
evaluated to establish whether or not it is consistent with the values of an open and
democratic society based on fundamental human rights such as human dignity and the
right to equality.
The Insolvency Act and section 27 in particular which is the focus of this paper must be
consistent with the Constitution. Section 27(1) provides: “No immediate benefit under a
duly registered antenuptial contract given in good faith by a man to his wife or any child
to be born of the marriage shall be set aside as a disposition without value, unless that
man's estate was sequestrated within two years of the registration of that antenuptial
contract."
This section protects benefits arising from an antenuptial contract and given by a man to
his wife or to a child born of their marriage, from being set aside as dispositions without
value during sequestration proceedings. The same protection is not afforded however, to
benefits given by the wife under an antenuptial contract. This also excludes benefits given
by those in a same sex marriage, and limits the benefits available to children born of that
form of marriage.
As the right to equality in section 9 of the Constitution seeks to provide equal benefits
before the law to persons in the same or similar positions by prohibiting unfair
discrimination, the limitations in section 27 render it vulnerable to constitutional review.
As the Insolvency Act has not been amended as a whole to accommodate the equality
provisions in the Constitution, in its current form, section 27 seems to violate section 9(3)
of the Constitution on the grounds of sexual orientation, marital status and birth.
However, certain proposals have been made in the report by the South African Law
Reform Commission on the Review of the Law of Insolvency to develop section 27 to
comply with the Constitution. Further developments have been proposed by the
Department of Justice and Constitutional Developments in its presentations to the Labour
Market Chamber in 2003 and 2006.
This paper examines section 27 of the Insolvency Act as it currently reads, within the
context of the right to equality in section 9 of the Constitution. Current developments in
respect of section 27 will be considered to illustrate progress made in reforming the
section and whether the reform measures proposed will protect all those affected by the
discrimination arising from section 27.
The discussion opens with a consideration of the current dispensation and the question
whether section 27 violates section 9(3) of the Constitution. Current developments will
then be discussed in the light of the current proposals.
1.6
Trustee may elect to perform in terms of the contract or not and the only power he has is
to exclude the right of the other party to invoke the remedy of specific performance . Once
the trustee has elected to repudiate or continue the contract , he cannot change his mind
. If he fails to reach a decision within a reasonable amount of time , it is assumed he does
not intend to perform in terms of the contract . The trustee is given this power so that he
may act in the interest of the concursus creditorum . Repudiation is a breach of contract
in that the repudiating party indicates by words or conduct that he does not intend to
perform his obligations under the contract . Repudiation the opposite party , in this case
the Bank , to the contract the right to claim the appropriate remedies for breach of contract
. The consequences of repudiating a contract are that if the trustee elects to repudiate the
contract , the opposite party is precluded from obtaining an order of specific performance
, even if he has performed his own obligations in full . However , he may exercise the
other remedies for breach of contract . In this regard , the trustee’s act of repudiation is
visited with the same consequence as an unlawful repudiation by a solvent party . If the
opposite party , in this regard Bank, chooses to disregard the repudiation and keep the
contract alive , he may prove a concurrent claim for damages in lieu of performance . He
then remains liable for and must render , his own counter performance.
QN 2
2.1
The trustee may at any time convene a meeting of creditors called a general meeting for
the purpose of giving him instructions concerning any matter relating to the administration
of the estate (s 41), for instance, where the directions given at the second meeting do not
cover the matter in question. He is obliged to call a general meeting if required to do so
by the Master or by creditors representing one-fourth of the value of all claims proved
against the estate (ibid). A meeting called for the purpose of considering an offer of
composition is a general meeting (Mia v The Master & others 1940 TPD 86; Ilic v Parginos
1985 (1) SA 795 (A) 803). The trustee is obliged to call this meeting when he informs
creditors of the offer of composition (s 119(5)).
A general meeting must be convened in the same way as the second meeting of creditors,
and the notice must state the matters to be dealt with at the meeting (s 41). A general
meeting cannot be convened solely for the purpose of ‘interrogating witnesses’ (Essop v
The Master & another 1983 (1) SA 926 (C)). But if the meeting is properly called by the
trustee ‘for the purpose of giving him directions’, the interrogation of witnesses can take
place at the meeting (ibid; Marques & another v De Villiers & another NNO (supra) 420).
A special meeting may be organised and held for proving claims or for
interrogating an insolvent.
A special meeting for proving claims must be established by the trustee if so is requested
by an interested person, provided that that person cover all the associated costs to be
incurred in connection with that special meeting.
The trustee may arrange a special meeting to question the insolvent if asked to do so by
a creditor who has established a claim against the estate.
However, calling such a special meeting calls for the Master's approval. The Government
Gazette must also receive notice of this meeting from the trustee, and at such
interrogation the provisions of section 65 shall mutatis mutandis apply
2.2
The case Pretorius' Trustee v Van Blommenstein 1949 (1) SA 267 (O) is a good axample
of deposition
The facts are that the Insolvent purchased a lorry from the defendant and sometime later
pledge it to secure payment of the price, because the seller had sued for the price and
was only prepared to agree to an extension, if real security existed. Trustee of insolvent
estate applied for the disposition to be set aside either as a voidable preference in terms
of Section 29 or as an undue preference in terms of Section 30. Defendant raised the
defence of ordinary course of business and no intention to prefer in terms of Section 29.
The Legal question was that Could pledging of the lorry by the insolvent, in an effort to
gain extra time in which to pay his debts and save his estate, be regarded as in the
ordinary course of business?
ii) Had the insolvent intended to prefer a creditor?
The finding was dismissed as:
i) Although it wouldn’t normally fall within ordinary course of business for a debtor to give
a pledge on a debt he had earlier incurred, here the insolvent had no choice and,
therefore, it was found to be in the ordinary course of business.
ii) His position was by no means hopeless and he did not contemplate sequestration.
The decision was as follows:
i) An objective test was used to determine whether the transaction took place in the
ordinary course of business and court held that it was entitled to consider all
circumstances. Court, in considering the transaction in surrounding circumstances, looks
at whether the transaction is one which two solvent business persons would conclude. It
wasn’t necessary to ask what the insolvent’s liabilities and assets were at the time of the
disposition or by which means he raised the funds for the disposition. Legislature had
also deliberately separated the intention to prefer from this element.
ii) Insolvent’s state of mind was held to be the determining factor and is a question of fact.
He expected to stave of insolvency if he could obtain an extension of time in which to
dispose of his main assets, the plot; the only method in which he could obtain the desired
facilities from a pressing creditor was to pledge the lorry.
2.3
Disposition in fraud of creditors (actio Pauliana)
The Act doesn’t deprive the creditors of their right under common law to have a disposition
set side as being in fraudem creditorum. The common law action is known as the actio
Pauliana and the Plaintiff must prove the following to succeed:
-the transaction diminished the debtor’s estate;
-the person who received from the debtor did not receive his own property;
- there was an intention to defraud and
-the fraud took effect.
Creditors may invoke the actio Pauliana to recover not only the assets disposed of, but
also any benefits accruing from the insolvent’s fraud.
2.4
An insolvent is prohibited from holding some offices if there is a possibility of prejudice to
the public interest (for example the National Assembly), if a great amount of trust and
responsibility is required (for example, a trustee of an insolvent estate), or if the possibility
of dishonest business practices exists (for example, running a close corporation).
QN 3
3.1
For one, a sequestration application can be reversed only if notices to the effect have
been published in the Government Gazette and the local papers in which the original
notice of intention to voluntary sequestrate has been published. In addition, the Master of
the High Court must be informed, as well as SARS and the creditors.
The question should rather be: “Can a sequestration be reversed without the risk of it
being an act of insolvency?” The answer is no. Once the intention to apply for
sequestration has been published and the applicant thus receives protection against
further legal action by creditors, the applicant cannot decide not to proceed with the
application, unless the applicant has a valid reason, such as being able to pay the
creditors, as well as the interest, and legal fees up to date.
However, the creditors can still see it as an act of insolvency and thus take the necessary
steps for judgement against the debtor. Indeed, though it is possible for a sequestration
application to be reversed, the creditors still have full right to then proceed with their legal
action against the debtor. It is seen as unethical to have the sequestration reversed before
the hearing date, as many such debtors use the process to stay a sale of execution. In
this instance, one cannot blame the creditors for wanting to take legal action against the
applicant.
But when else can sequestration be reversed? If one refers to the process of rehabilitation
of the insolvent party’s financial estate, it can be seen as a reversal of the sequestration.
Rehabilitation brings an end to the sequestration. This means the insolvent party’s legal
standing and thus capacity to manage their financial affairs will be that of rehabilitated.
The party is no longer insolvent or bankrupt, as is the legal term for it. The person can
enter credit agreements without written permission from the trustee or curator. In addition,
the person can take their inheritance money if relevant in ownership.
The same person is once again able to be a director of a company or member of a close
corporation. Certain government positions can once again be filled.
As can be seen from the above information, the effects of sequestration can be reversed,
provided all the requirements have been met. This includes the fact that the creditors
must have received their minimum benefit, the trustee must have submitted the first
liquidation account, and they must give permission for the rehabilitation. To this end, it is
important for the sequestrated party to give full cooperation in terms of scheduled
meetings with the trustee and creditors.
To come back to the issue of whether a sequestration application can be reversed without
it being an act of insolvency, the answer is yes. This is provided the Master of the Court
has given permission for such and the applicant has published a notice to the effect in
the Government Gazette.
The Master of the Court must be satisfied that the application has been done in good faith
and that the applicant has a valid and good reason for withdrawing the application to
surrender their estate.
It is possible for the notice of surrender to lapse. This is the case if the court rejects the
surrendering of the applicant’s estate. It is also when the debtor does not apply for the
surrendering of their estate within 14 days after the publication of the date of the hearing.
The notice of surrender also lapses if the sequestration has not been done according to
legal formalities.
Where a curator bonis has already been appointed to oversee the estate’s assets, then
the debtor must receive control back over the estate. Keep in mind that the costs already
incurred by the curator must be paid by the debtor.
Rather seek legal guidance as opposed to relying on information from the Internet to
make an informed decision on whether or not to have the sequestration reversed. Our
attorneys are experienced insolvency lawyers and are thus able to ensure compliance
with any and all legal requirements and formalities in terms of the reversal.
3.2
Winding-up on the ground that it appears just and equitable is an independent ground
which is not limited by the other grounds, but at the same time it is not an unlimited or
“catch-all” ground. In Rand Air (Pty) Ltd v Ray Bester Investments 1985 (2) SA 345 (W),
an attempt to rely on this ground as an alternative to the ground that the company was
unable to pay its debts proved unsuccessful. There is no closed group of situations in
which it will be just and equitable to wind up a company, and the courts accordingly still
have a discretion to identify new situations. But some categories have already crystallised
in case law, and, as also appears from Rand Air (Pty) Ltd v Ray Bester Investments, the
courts are slow to extend them. In this case, the court set out the following categories:
(a) If the main object for which the company was formed can no longer be attained. In
such a case, it is said that the company’s substratum has disappeared. This happened in
In re Rhenosterkop Copper Co 1908 CTR 931, because the land on which the company
was to conduct mining operations contained no minerals
(b) If the company’s objects are illegal, or if the company was formed to defraud the
persons invited to subscribe for its shares
(c) If there is a justifiable lack of confidence in the way in which the directors are
managing the company’s affairs. This situation arose in Moosa NO v Mavjee Bhawan
(Pty) Ltd and another 1967 (3) SA 131 (T), where a director had misled members about
the advisability of a transaction because he wished to make a profit at the company’s cost
(d) If there is a deadlock in the management of the company: the voting power in the
board of directors and the general meeting is divided, and winding-up is the only solution
(e) If the company is a quasi-partnership and grounds exist on which a partnership could
be dissolved. This situation is encountered where the personal relationship between the
members is based on good faith
(f) If the minority shareholders are oppressed by the controlling shareholders.
Winding-up will be just and equitable only if the oppression cannot be removed by another
suitable remedy.
3.3
In terms of section 345 of the Companies Act, a company is deemed unable to pay its
debts if
(a) a creditor having a claim of at least R100 which is already due leaves a demand at
the company’s registered office and the company for three weeks after that has failed to
pay the claim, to give security for it, or to compromise it to the satisfaction of the creditor,
or
(b) a warrant of execution or other process issued on a judgment against the company
has been returned by the sheriff with an endorsement that he did not find disposable
property sufficient to satisfy the judgment, or that the disposable property which he found
did not, upon sale, satisfy the process, or
(c) it is proved to the satisfaction of the court that the company is unable to pay its debts