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1. INTRODUCTION:

1.1 Terminology

- Insolvency: The word ‘insolvency’ is derived from Latin and means literally an
inability to pay.

Today, however, when we say that a person is insolvent we do not necessarily mean
that he is unable to pay his debts, but rather that his liabilities exceed his assets – and
that is actually the legal test for insolvency: whether debtor’s liabilities, fairly estimated,
exceed his assets, fairly valued. Thus an inability to pay is only evidence of insolvency
at best .

If a person (the debtor) passes the test of insolvency his estate may be formally
sequestrated by an order of the court.

If a debtor is insolvent, other remedies may be available to his creditors before

sequestration proceedings are resorted to:

1. A creditor may apply to the court for a warrant of execution. If granted the sheriff
of the court will attach property of value to be sold at a sale in execution. The
proceeds of the sale will be paid to the creditor in execution of the debt.

2. A garnishee order may be obtained where a certain percent of the debtor’s salary
is attached every month in execution of the debt until it is paid off.

3. The debtor and creditor(s) may agree to arrange a structured payment plan
where the debtor pays the creditor(s) a certain amount every month / or every
second month etc with interest until the debt has been paid off.

If none of these alternative remedies work sequestration may then be the only solution.

- Sequestration: A sequestration order is a formal declaration by the court that the

debtor is insolvent (see s2 of the Act).

As will be seen later on, the sequestration order may be granted at the request of the
debtor himself called “voluntary surrender” or by one or more creditors called
“compulsory sequestration”.

The sequestration of a debtor’s estate results in a concursus creditorum which means a

“coming together of creditors” – that is all interested creditors to whom the debtor owes
money will come together during the sequestration process, they will prove their claims
against the insolvent estate, vote in a trustee and make certain other administrative
decisions. Such administrative decisions are taken at “meetings of creditors” ie first
meeting, second meeting, special meeting etc.

The Insolvency Act then provides that the insolvent debtor is divested of his estate and
the estate is subsequently vested in the trustee. Concursus creditorum ensures that
whatever decisions the trustee makes will be one that benefits the creditors as a
GROUP and not as individuals. The trustee(s) [sometimes more than one is appointed]
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is the person who will administer the insolvent estate and deals with the claims that the
creditors have against the insolvent estate (s2).

The main task / objective of the trustee is the sale of the property of the insolvent estate
and distributing the proceeds amongst the creditors in the order of preference set out in
the Act [some creditors are preferred over others and get paid out first – but we will get
back to this]. The trustee’s principal duty is thus to liquidate and distribute the assets of
the insolvent estate.

Strictly speaking the term ‘sequestration’ should only be used with reference to a
debtor’s estate and NOT with reference to the debtor himself – thus it is more correct to
speak of a debtors estate being sequestrated and not of the debtor himself being
sequestrated – although if one does speak of the sequestration of the debtor its not
wrong.

However, the word ‘insolvent’ can rightly be used to describe the debtor himself and the
insolvent estate.

Q: What is the purpose of a sequestration order?

A: Sequestration has three main objects:

1. The primary object is to benefit creditors – not one creditor, or some creditors, but
the general body of creditors. Accordingly, a court will not make an order of
sequestration unless it will be to the advantage of the creditors. The insolvent estate
should be wound up as economically as possible and a court will not make an order for
sequestration if the assets of the insolvent estate will be consumed by the costs of
sequestration so that there will be nothing or only a small dividend left to be distributed
to the creditors (all administrative procedures cost money ie placing advert newspaper,
applying to court for certain things, paying trustee, paying master etc).

2. The second object is to enable the debtor to free himself from his pre-sequestration
debts. Although the procedure of voluntary surrender was primarily designed for the
benefit of creditors and not for the relief of harassed debtors, it must nevertheless be
admitted that insolvency proceedings protect the debtor from being unduly harassed or
threatened by his creditors (death threats if you don’t pay by a certain date). By freeing
the debtor from all his debts he can avoid becoming a victim of a never-ending series of
sales in execution of newly acquired assets. Once insolvency proceedings have run
their course, he can become rehabilitated and resume a normal existence.

3. The third object of a sequestration order is to protect creditors against the possible
greed and dishonesty of other creditors. If sales in execution, as explain above, were
the only option it would result in some creditors getting paid – those that made their
warrant of execution application the quickest – and the others would receive little or
nothing. Thus the Act ensures that the procedure takes place in an orderly fashion and
that the assets of the debtor are distributed in an equitable manner in accordance to a
predetermined order of preference (we will get back to the ranking of creditors).
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- Estate: The word ‘estate’ means a collection of assets and liabilities, but a debtor
who only has liabilities also has an estate for sequestration purposes:

“An estates is no less an estate because at one time it has only assets, at another time
only liabilities, and yet at another time both assets and liabilities”. (Miller v Janks).

Further the joint estate of spouses married in community of property is an estate for the
purpose of insolvency – thus both the spouses are insolvent debtors and both get
sequestrated – or rather their joint estate gets sequestrated. As will be seen later,
spouses married out of community of property are not in such a better position as
although the solvent’s spouse’s has a separate estate, the solvent spouse’s property
vests in the trustee of the insolvent estate until the solvent spouse can prove his / her
title to it.

- Debtor s2: In terms of the Act a ‘debtor’ must be a natural person or a partnership
where the members are natural persons, or a trust which is not held by juristic persons.
Excluded are juristic persons like companies which are wound up under the Companies
Act, body corporates, a partnership of juristic entities. Only exception is external
companies – they are not wound up under the Companies Act and although consist of
juristic persons, are considered as ‘debtors’ under the Insolvency Act.

1.2 Historical development

Self-study and this can be found in Hockly’s pp 10-12 and Mars 6-14.

1.3 Jurisdiction of the court

As a general rule only a local or provincial division of the HIGH court has jurisdiction to
adjudicate upon insolvency matters. A magistrate’s court may adjudicate upon certain
issues subject to certain limitations regarding, for example, the offence, the amount of
money involved etc.

The ‘master’ is a person who is appointed to each of the provincial areas of the high
court, eg master of Cape High Court, master of Natal High Court etc. As will be seen
later, the master plays quite an important role in the sequestration proceedings, with
one of his most important functions being to take custody of all documents relating to
the insolvent estate. For performing his numerous tasks for the insolvent estates, he
charges fees in the form of cash or revenue stamps. The master is NOT a judicial
officer; he cannot issue court orders or judgements and only has the powers granted to
him by statute which can be express or by necessary implication.

An application may be made to the court to review any decision made by the master
should any person, including the trustee, feel aggrieved by such a decision of the
master – ‘aggrieved’ in the sense that one’s rights or interests have been infringed.
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1.4 Condonation of irregularities/defects

The sequestration procedure and the administration of an insolvent estate involves a

number of procedural steps from start to finish. In fact, because there is so much
procedure involved, some legal systems classify the law of insolvency as a kind of
addendum (addition) under the law of civil procedure and not as its own entity under
mercantile as we do in SA.

Thus because there are so many procedural steps it often happens that some steps will
be left out or not completed within the specified time limit as laid down in the Act or
some or other procedure breach may be committed.

The question that therefore arises is whether invalidity results by reason of the
procedural irregularity(ies)?

The answer is to be found in s157(1) which states that:

“nothing done under the Act will be invalid by reason of a formal defect or irregularity, unless a
substantial injustice has been thereby done, which in the opinion of the court cannot be remedied
by any order of the court”.

Thus the effect of s157(1) is that:

a) If the formal irregularity has not caused a substantial injustice, then the procedural step /
lack thereof is valid.

b) If the formal irregularity has caused a substantial injustice, but the court is of the opinion
that the prejudice to creditors can be remedied by an appropriate court order, then the
procedural step or lack thereof is not invalid, provided the corrective order handed down
by the court is complied with.

c) If the formal irregularity has resulted in a substantial injustice which cannot be remedied
by a court order, then the procedural step or lack thereof will be invalid.

NOTE: A formal irregularity/defect is an irregularity/defect made with regard to procedure

and NOT with regard to substance – thus if a defect is a substance one and not a formal or
procedural one, then s157 does NOT find application.

*Note: Some parts of these notes are an adaptation of:

R Sharrock ‘Insolvency’ in LAWSA 2ed vol 11 (2008) Durban, LexisNexis Butterworths.