Study Unit 1 - Introduction to Insolvency Law

Question 1

What is the meaning / definition of “Insolvency”?

Answer 1

In terms of Section 2 of the Insolvency Act:

• Insolvent is a debtor whose estate is under sequestration & includes “debtor” before sequestration.
• Insolvent estate is an estate under sequestration.

In Everyday Language (common parlance):
* Person unable to pay his debts is only evidence of insolvency.

Question 2

What is the Legal Test of Insolvency?

Answer 2

Debtor’s liability (fairly estimated) exceed his assets (fairly valued).

Question 3

When will a person be treated as an insolvent for legal purposes?

Answer 3

Person will only be treated as an insolvent for legal purposes once his estate has been sequestrated by an order of the court.

Question 4

What is a Sequestration Order?

Answer 4

A Sequestration order is a formal declaration that a debtor is insolvent.

Question 5

How can an estate be sequestrated?

Answer 5

An estate can be sequestrated by:

• Debtor (voluntary sequestration)
• Creditor (compulsory sequestration)

Question 6

When will the consequences of the Act apply?

Answer 6

Consequences of the Act will only apply after sequestration order is granted.

Section 26, 29, 30 & 31 make provision for some dispositions to be set aside. Although disposition takes place before sequestration, the relevant sections may only be invoked after the court sequestrated the debtor’s estate.

Question 7

What is the purposed of a sequestration order?

Answer 7

The purpose of a Sequestration order is to ensure the orderly and fair distribution of a debtor’s assets where his assets are not sufficient to pay all his creditors in full.

Question 8

When is Concursus creditorum established?

Answer 8

Concursus Creditorum (coming together of creditors) is established once an order of sequestration is granted

Question 9

What does Concursus creditorum entail?

Answer 9

Concursus creditorum (coming together of creditors) entails that the:

• Interests of the creditors as a group has preference over the interests of individual creditor;
• Creditors who proved a claim have the right to share with other proved creditors in the proceeds of the estate assets.
• Creditor’s right to recover claims by judicial proceedings are replaced by the above right.

Question 10

When will a court not grant a sequestration order?

Answer 10

The court won’t grant a sequestration order:

• if there is no advantage to the creditors;
• if there is only 1 (one) creditor;
• if the assets are not enough to cover the costs of sequestration

Question 11

What is the consequences of the sequestration order on the debtor?

Answer 11

The debtor is divested of his estate and can’t burden it with more debts.

Question 12

What is the meaning of “Estate”?

Answer 12

An Estate is usually conceived as:

• Estate that includes assets & liabilities;
• Estate that consists of liabilities only;
• Joint estate of spouses married in community of property;
• Separate estates of spouses married out of community of property;
• New estate of a debtor whose estate was sequestrated.

Question 13

What is the meaning of “Debtor”?

Answer 13

A debtor may be:

• natural person;
• partnership;
• deceased person;
• person incapable of managing owner affairs;
• external company that does not fall within the definition of external company (ex: foreign company that has not established a place of business in South Africa;
• entity / association of persons that is not a juristic person (ex: Trust)

In terms of Section 2 of the Act:
* Debtor means a person / partnership / estate of a person / partnership which is a debtor in the usual sense of the word, except a body corporate / company / association of persons which may be placed in liquidation under the law relating to companies.

Thus a Body Corporate established in terms of the Sectional Titles Act is a Body Corporate as defined in the Companies Act and not a debtor for the purposes of the Act.

Question 14

Which court may adjudicate upon Insolvency matters?

Answer 14

Only the Provincial or Local Division of the High Court may adjudicate upon an Insolvency matter but a Magistrate’s court may preside over prosecutions for criminal offences under the Act, setting aside of voidable dispositions and other matters if the jurisdictional limits are not exceeded.

Question 15

Which court has jurisdiction over a debtor and his estate?

Answer 15

In terms of Section 149 of the Act a court has jurisdiction over a debtor and his estate if:

• on the date of lodging, the debtor is domiciled or owns / is entitled to property situated within the jurisdiction of the court;
• at any time of the 12 months immediately preceding lodging, the debtor ordinarily resides or carried on business within the jurisdiction of the court.

Question 16

When is a person domiciled at a particular place?

Answer 16

In terms of Section 1(2) of the Domicile Act a person is domiciled at a particular place if

• he is lawfully present there; and
• has the intention to settle there for an indefinite period.

Question 17

What is the procedure where courts have competing jurisdiction?

Answer 17

Court with jurisdiction over a debtor may refuse / postpone proceedings if it appears to the court equitable / convenient that the estate should be sequestrated by another court.

The inquiry is not where the sequestration order may be more conveniently granted by where the estate may more conveniently be administered.

Question 18

What is the Master’s role in the Administration of an estate?

Answer 18

A Master is appointed in terms of the Administration of Estates Act, 66 of 1965, to each of the areas of the Provincial Divisions of the High Court.

His functions are:
* the custody of all documents relating to insolvent estates.

The Master is entitled to charge fees (cash / revenue stamps)

The Master is a “creature of statute” and only has the powers granted to him by legislation.

Question 19

Distinguish between the different types of irregularity.

Answer 19

A party making an application / taking steps n terms of the act will:

• omit prescribed details;
• fail to act within the stipulated time;
• commit procedural breach.

Question 20

Which law did South Africa follow with regards to Insolvency?

Answer 20

South Africa followed Roman Dutch Law

Question 21

Why is Ordinance 6 of 1843 regarded as a landmark in the South African law of Insolvency?

Answer 21

Ordinance 6 of 1843:

• consilidated and changed the law;
• abolished the cessio bonorum (voluntary surrender of goods to creditors).

Question 22

How does the Constitution provide a basis for reform of Insolvency Law?

Answer 22

Insolvency law poses a potential threat to fundamental rights, but mere conflict does not render the provision unconstitutional invalid.

There is a two-fold inquiry with regards to Constitution invalidity:

• Does the provision conflict with fundamental right?
• If so, Is the limitation reasonable & justifiable in an open and democratic society based on human dignity, equality & freedom?

Question 23

Could a trust be regarded as a debtor in the usual sense of the word for purposes of Section 2 of the Insolvency Act and, therefore, be sequestrated?

Answer 23

In Magnum Financial Holdings v Summerly the court held that a trust is not a juristic person, and so it may not be liquidated in terms of the Companies Act. A trust is a debtor in the ordinary sense of the word, however, and therefore a trust estate may indeed be sequestrated.

Question 24

Why was the court in Magnum Financial Holdings satisfied that the applicants had made out a case for the relief sought (the urgent grant of a provisional sequestration order)?

Answer 24

The court in Magnum Financial Holdings was satisfied that the applicants had made out a case for the relief sought because:

• there was sufficient service of the papers on the trustee of the trust;
• the 1 (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 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 be sequestrate urgently;
• the necessary security bond had been duly lodged and also annexed to the court papers.

Question 25

What problem was the court in Magnum Financial Holdings faced with?

Answer 25

The only problem before the court was whether a trust could, at law, be sequestrated.

Question 26

Which authority did the court rely on to solve the problem they faced?

Answer 26

No South African case was dealt with wether a trust could be sequestrated in terms of section 9(1) read with the definition of “debtor” in section 2 of the Insolvency Act.

The court relied on Ex parte Milton where 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 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 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

Question 27

What is the common-law meaning of the phrase “any body corporate” in Magnum Financial Holdings?

Answer 27

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 part of it, and
• having perpetual successions (continues existence).

Question 28

Why will a sequestration order not be granted if a debtor has only 1 (one) creditor?

Answer 28

If a debtor has only 1 (one) creditor, there are no conflicting interests between creditors which must be equitably resolved.

Thus sequestration will be a waste of time and money.

Question 29

Why will a sequestration order not be granted if there are not enough assets to cover the costs of sequestration?

Answer 29

If the debtor’s assets are not sufficient to cover the costs of sequestration, creditors will derive no advantage from the process of sequestration.

Thus sequestration will be a waste of time and money.

Question 30

May a debtor whose estate is under sequestration obtain a new estate which does not form part of the sequestrate estate?

Answer 30

Because some assets which a debtor has / acquired don’t form part of his insolvent estate, it is possible to build up a new estate which does not form part of the estate under sequestration.

Question 31

When will irregularities be condoned?

Answer 31

In terms of Section 157(1) of the Act irregularities will be condoned where the irregularity:

• did not cause a substantial injustice;
• has caused a substantial injustice but the prejudice to the creditors can be remedied by a court order.

Further grounds on which irregularities can be condoned:

• where deviation is so slight that it falls within the maxim de minimis non curat lex (the law is not concerned with trifles)
• where all interested parties waived compliance with the provisions of the Act;
• where the provision in question is not peremptory and has substantially been complied with;
• where it was impossible to comply with the Act.

Question 32

When will a formal defect in an application for the sequestration of an estate be fatal?

Answer 32

A formal defect in an application will be fatal if the defect causes a substantial injustice to creditors and that prejudice can’t be put right by a court order.