Chapter 2 – Voluntary Surrender
A debtor’s estate may be sequestrated in two ways: The debtor himself
(or his agent) may apply to court for the acceptance of the surrender of
his estate (s 3(1)). This is known as voluntary surrender. A creditor or
creditors (or his or their agent) may apply to court for the sequestration of
the debtor’s estate (s 9(1)). This is called compulsory sequestration. The
procedure and requirements for each method differ in material respects.
2.1 Who may apply
These persons may apply to surrender the estates mentioned:
Estate of a natural person: the debtor himself or his agent (s 3(1)). If
an agent applies, he must be expressly authorized to do so.
Estate of a deceased debtor: the executor (s 3(1)).
Estate of a debtor who is incapable of managing his own affairs: the
party entrusted with administering the estate, i.e., the curator bonis
(s 3(1)).
Partnership estate: all the members of the partnership (other than
partners en commandite (silent partners whose identity is hidden
and who do not take part in managing the partnership) or certain
special partners) who reside in the Republic, or their agent (s 3(2)).
an application for surrender of a partnership estate was refused
because only one member of the partnership had brought the
application. The court held that one member of a partnership is not
an agent of all the other members for s 3(2) purposes.
Joint estate of spouses married in community of property: both
spouses (s 17(4) of the Matrimonial Property Act 88 of 1984).
2.2 Requirements
The court may accept the surrender of a debtor’s estate only if it is
satisfied that:
the debtor’s estate is, in fact, insolvent.
the debtor owns realizable property of sufficient value to defray all
costs of the sequestration which will, in terms of the Act, be payable
out of the free residue of his estate.
and sequestration will be to the advantage of creditors (s 6(1)).
In addition, the court must be satisfied that certain preliminary
formalities have been observed (ibid).
2.2.1 Debtor’s Estate Insolvency
Definition of Insolvency: A debtor is insolvent if their total liabilities
exceed the value of their assets. This is assessed through a statement of
affairs that the debtor must prepare and file.
Statement of Affairs: This document lists the debtor’s assets and
liabilities but is not definitive. The court may disregard the valuations
provided in the statement if evidence suggests otherwise.
Court’s Test of Insolvency: The key test for insolvency is whether the
debtor is unable to pay their debts in full. Even if the debtor’s assets
appear to exceed liabilities, the court will assess if the assets can
realistically be converted into sufficient funds to settle all debts.
Case Law Examples:
Ex parte Greef (1940): The debtor’s statement showed a surplus of
assets, but a sworn appraisal revealed a deficiency. The court ruled
that the debtor was insolvent based on this evidence.
Ex parte Deemter (1962): The debtor's statement showed assets
exceeded liabilities, but the debtor was facing lawsuits from
creditors, hadn’t sold key assets, and had no income source. The
court accepted insolvency and granted surrender.
Ex parte Harmse (2005): The debtor's statement showed an excess
of assets, but only letters from estate agents and valuers were
provided as evidence. The court ruled the debtor didn’t provide
sufficient evidence to prove insolvency, as the applicant's own
estimates did not sufficiently establish insolvency.
Legal Principle: The court requires credible, admissible evidence to
override the assumption of solvency when the debtor’s asset valuation
exceeds liabilities.
2.2.2 Free residue sufficient to pay costs of sequestration
Costs of Sequestration: These include the costs of surrender and
general administrative costs (Section 97).
Definition of Free Residue (Section 2): The portion of the estate not
subject to any preferential rights (e.g., special mortgages,
hypothecs, pledges, or retention rights). It also includes the balance
of proceeds from encumbered property after the encumbrances are
settled.
Calculation of Free Residue: Consider the surplus value of
encumbered assets over the encumbrances (Ex parte Van Heerden,
1923). Goods bought on instalment agreements contribute to the
free residue if their market value exceeds the balance outstanding
(Mindel v Shaer, 1937).
Cession of Rights: If the debtor cedes a right to payment, it may not
automatically fall within the free residue. The cession can only be
challenged if creditors take action (Ex parte Nortje, 1928).
Debtors Without Assets: A debtor with only liabilities and no assets
cannot surrender their estate, even if sequestration costs are
guaranteed (Ex parte Collins, 1927). However, an estate with only
liabilities can still be compulsorily sequestrated (Miller v Janks,
1944).
Insufficiency of Free Residue: If the free residue is insufficient to
meet sequestration costs, the court must refuse the application (Ex
parte Swanepoel, 1975; Ex parte Shmukler-Tshiko, 2012).A
guarantee for costs cannot remedy insufficiency because it doesn't
create an asset in the debtor's estate (Ex parte Theron, 1923).
Uncertainty Regarding Free Residue: If it’s unclear whether the
free residue is sufficient, the court may grant the application if a
satisfactory guarantee for costs is provided to the Master (Mindel v
Shaer). The guarantee removes uncertainty.
2.2.3 Sequestration and its Advantage to Creditors
Definition of "Advantage to Creditors"
In voluntary sequestration, the debtor must prove that
sequestration will benefit creditors.
In compulsory sequestration, the creditor only needs to show there
is reason to believe sequestration will benefit creditors.
Voluntary sequestration has a higher burden of proof for the debtor
compared to compulsory sequestration because the debtor has
more insight into their financial position.
Reason for Stricter Burden in Voluntary Sequestration
The debtor is expected to provide detailed information about their
finances.
Creditors often lack access to detailed financial information about
the debtor.
Preventing abuse: Courts want to prevent debtors from using
sequestration to escape their liabilities with no real benefit to
creditors (e.g., "friendly sequestrations").
Court Scrutiny of Applications
Courts are cautious about voluntary sequestration applications
prepared by specific law firms due to potential superficiality.
Applications often have similarities in format and content, which
suggests they are not genuine.
Courts look for:
Detailed financial information: income, assets, liabilities, and
expenses.
Avoidance of irrelevant information: such as family history or
sympathy-seeking details.
Applications must be genuine and contain reliable, detailed financial
information.
Common Issues in Applications
Failure to provide details on income (e.g., salary, commissions).
Incomplete or vague statements about expenses (e.g., petrol
without vehicle details).
Household goods listed without explanation of how the debtor will
survive without them.
Failure to explain why National Credit Act relief wasn't pursued.
Focus on irrelevant history rather than current financial
circumstances.
Buy-Back Arrangements
Some sequestration cases involve buy-back arrangements, where
the debtor repurchases their assets at a forced-sale value in
installments.
These arrangements may not truly benefit creditors, as they allow
debtors to retain assets while creditors receive only minimal
dividends.
Such arrangements are questionable in terms of meeting the
requirement of "advantage to creditors."
Key Court Rulings
In Ex parte Concato and similar cases (2016), courts found that
superficial applications fail to meet legal standards.
In these cases, details about the debtor's income, expenses, and
assets were often missing or insufficient, leading to the rejection of
the application.
Conclusion
Applications for sequestration must be based on genuine and
detailed financial information.
Courts are wary of abusive practices that benefit debtors at the
expense of creditors, such as friendly sequestrations or buy-back
arrangements that don’t provide real benefits to creditors.
The goal is to ensure sequestration is used in a manner that is truly
to the advantage of creditors.