THE LAW OF INSOLVENCY AND LIQUIDATION



THE LAW OF INSOLVENCY AND LIQUIDATION

Courtesy of: General Principles of Commercial Law

INTRODUCTION

The free enterprise or market economic systems, economic activity is always attended by some measure of risk. Persons or enterprises may experience problems due to, for example, drought, mismanagement or attempts to elevate their standard of living beyond what is financially realistic.

When a person’s liabilities exceed his or her assets, this is normally evidenced by an inability to pay his or her debts. Two problems in particular arise when a debtor’s debt cannot be paid:

a) With regard to the creditors, the claims of those who proceed to act against the debtor first, may be met in full while the remaining creditors receive very little or nothing at all.

b) With regard to the debtor, the possibility exists that his or her financial difficulties may never be overcome since the creditors will always be ready to attach any assets the debtor may acquire.

With a view to the protection and benefit of all concerned, legal machinery has been created by which the estate of the debtor can be sequestrated and a fair distribution of the assets can be made among the creditors. The Insolvency Act 24 of 1936 provides for the sequestration of the estates of the insolvent debtors. Included under the definition of the debtor are natural persons, partnerships and certain other entities or associations. A company and a close corporation are not regarded as debtors within the Insolvency Act and have to be wound up or liquidated under the Companies Act 61 of 1973 or the Close Corporations Act 69 of 1984. Winding-up will be discussed below. A sequestration order may be obtained in of two ways, namely voluntary surrender and compulsory sequestration.

VOLUNTARY SURRENDER

The insolvent himself or herself approaches the court and applies for the acceptance of the voluntary surrender of his or her estate. All the partners of the partnership have to apply for the voluntary surrender of its estate. The court can accept the voluntary surrender if the following requirements are met:

a) The insolvent must comply with the prescribed formalities. These formalities pertain mainly to notification of the creditors to enable them to object the application.

b) The insolvent has to prove that he or she is indeed insolvent, that is, that the estate’s liabilities exceed its assets.

c) The surrender must be to the advantage of the creditors. This advantage must be a financial benefit- there should be a reasonable prospect that each ordinary creditor will receive a not negligence dividend. When there is an appreciable risk that the creditors might eventually costs, sequestration will not be regarded as beneficial to the creditors.

d) There must be sufficient assets to cover the costs of sequestration. The costs of sequestration include among other items, the cost of bringing the application to court and the fees that have to be paid to the trustee.

It is important to note that the court still has the discretion to refuse the application even if all the requirements have been complied with.

COMPULSORY SEQUESTRATION

In this case one or more of the creditors approach the court to obtain a sequestration order. A creditor with a liquidated claim of at least R100, or two or more creditors who together have liquidated claims of at least R200 against the insolvent, may bring such an application. A claim is liquidated if its amount has been ascertained either by way of agreement or through a judgment of the court.

The following must be proved by the creditor:

a) That he or she has the necessary claim against the insolvent.

b) That the insolvent is indeed insolvent, or that he or she has committed one or more of the acts of insolvency. It is obvious that it would more often than not be impossible for the creditor to prove that the liabilities of the debtor exceed his or her assets. After all, the creditor might not have access to the books of the insolvent. In order to simplify the creditors task, the Insolvency Act mentions a number of acts of insolvency. When a person commits one of these acts, it is very often the case that he or she is indeed insolvent. Instead of proving that the debtor committed one of these acts.

c) That there is reason to believe that the sequestration will be to the advantage of the creditors. The concept ‘advantage of creditors’ has been discussed in the section on voluntary surrender.

The court first grants a provisional sequestration order and remands the case to enable the debtor and other creditors to oppose the granting of a final order on the return day.

THE ACTS OF INSOLVENCY

The Insolvency Act sets out a number of acts of insolvency that can be committed by a debtor. They are:

a) The debtor leaves the Republic or remains absent from the Republic or departs from his or her house with the intention to evade or delay payment of his or her debts. It will seldom be possible for the creditor to produce direct evidence of the debtor’s intention. Our courts are prepared to infer the debtor’s intention from the surrounding circumstances, for example, circumstances indicating that the debtor had realised that his or her estate might possibly be sequestrated in the near future.

b) The debtor, upon the demand of the sheriff, fails to satisfy a court judgement given against him or her, or fails to point out to the sheriff disposal property sufficient to satisfy it, or if the return made by the sheriff indicates that he or she did not find sufficient disposal property to satisfy the judgement. The sheriff must first give the debtor the opportunity to point out sufficient realisable property. If the sheriff cannot find the debtor or the debtor refuses to co- operate, the sheriff can look for realisable property.

c) The debtor disposes of any of his or property with the effect of prejudicing the creditors or of preferring one creditor above another. An attempted disposition, which would have the same effect, also constitutes an act of insolvency. The counter value received for the disposition as well as the financial position of the estate at the time of the disposition (that is whether it was solvent or insolvent) is important considerations in determining whether the effect of the disposition was prejudicial.

d) The debtor removes or attempts to remove property with the intent to prejudice the creditors or to prefer one creditor above another. The effect of the removal is not important- it is the intention can be inferred from the surrounding circumstances.

e) The debtor makes or offers to make any arrangement with any of the creditors for releasing him or her wholly or partially from the debts. If a compromise is reached or proposed in respect of a disputed debt, it is not an act of insolvency.

f) The debtor, after having published a notice of intention to surrender the estate which ahs not lapsed or been withdrawn, fails to submit a substantively correct and complete statement of affairs with the Master, or fails to apply for the acceptance of the surrender of the estate on the date indicated by the notice. Note that the notice of intention to surrender lapses fourteen days after the intended date of the application. Such a notice can be withdrawn only with the written consent of the Master.

g) The debtor gives written notice to any one of the creditors that he or she is unable to pay of the debts. It is important that the notice must convey the debtor’s inability to pay. If the debtor notifies a creditor that he or she is unwilling to pay, it will not be an act of insolvency.

h) The debtor, being a trader and having given notice of the intended transfer of the business, is unable to pay all its debts. The effect of the publication of such a notice is that all liquidated debts owed by the business become payable immediately, even if they were originally intended to be payable at a future date only.

THE CONSEQUENCES OF SEQUESTRATION

As soon as the person’s estate is sequestrated, various consequences follow for the insolvent. It affects the insolvent’s personal status, property, as well as civil legal proceedings instituted by or against him or her. It could also have an impact on certain contracts concluded before the sequestration.

When a partnership estate is sequestrated, the court simultaneously sequestrates the estates of all the partners, except if there is a legal bar to the sequestration of the particular partner’s estate. The sequestration of a partnership estate or of the private estate of any of the partners results in the dissolution of the partnership.

THE PERSONAL CONSEQUENCES OF SEQUESTRATION

Certain offices may not be held by an insolvent person, for example that of director of a company. An insolvent may not without the written consent of the trustee do business as a general dealer or manufacturer nor be in the employ of such a business nor be directly or indirectly involved with it. The insolvent furthermore has certain obligations relating to the sequestration process, for example the attendance of meetings and the duty to supply the trustee with an explanation of the insolvency. As regards the insolvent’s capacity to conclude contracts, the written consent of the trustee is needed to conclude contracts that might adversely affect the estate or any contribution the insolvent has to make towards the insolvent estate. The insolvent has no capacity to dispose of any property of the insolvent estate. Apart from these limitations, the insolvent’s contractual capacity is not affected.

THE EFFECT OF SEQUESTRATION ON THE PROPERTY OF THE INSOLVENT

The sequestration of a person’s estate results in the loss of ownership in the estate and causes the insolvent estate to vest tin the Master and then in the trustee as soon as one is appointed. However, the following property of the insolvent is excluded from the insolvent estate:

a) Clothes and bedding and such portion of the household furniture, tools and other essential means of subsistence as is determined by the creditor’s or, if no creditors have proved claims, by the Master.

b) Remuneration for the work done by the insolvent done after the sequestration. The trustee can, however, lay claim to that part of the remuneration that is not needed for the support of the insolvent and his or her dependants. The trustee has to approach the Master to determine the amount of the remuneration to which the insolvent estate is entitled.

c) Any pension to which the insolvent is entitled for services rendered as well as pension moneys protected by other statutes.

d) Compensation for loss suffered in the insolvent’s personal capacity. Loss suffered in the insolvent’s personal capacity, means loss as a result of bodily injury or infringement of his or her personality, for example for pain and suffering or medical costs. It does not include damages awarded for loss or damage to the insolvent’s property.

e) The proceeds of the above exempt items or any property the insolvent has acquired with such proceeds.

f) Benefits under certain long-term policies such as life or disability policies. The policy must have been in force for at least three years and the insolvent or his spouse must be the life assured under the policy. The first R50 000 would not form part of the insolvent estate. Assets acquired with policy benefits are protected for five years from the date on which the policy benefits were provided. If the policy was ceded as security for a debt, the policy benefits required to meet the bill will, however, form part of the insolvent estate.

THE EFFECT OF SEQUESTRATION ON CIVIL LEGAL PROCEEDINGS

All civil proceedings by or against the insolvent and that relate to the estate, are stayed until a trustee has been appointed. A sequestration order does not effect pending criminal proceedings.

THE EFFECT OF SEQUESTRATION ON UNCOMPLETED CONTRACTS

The sequestration of a person’s estate does not, as a general rule, terminate contracts concluded prior to sequestration. A notable exception to this rule is a contract of employment. The sequestration of the employer’s estate has the effect of terminating the contract.

An uncompleted contract is a contract in terms of which one or both of the parties must still perform. If the insolvent has already performed in terms of the contract, but the other party has not yet performed, the trustee can claim performance from the other party.

If neither the insolvent nor the other party has performed, the trustee can claim performance from the other party, but then the trustee has to tender full performance of the obligations of the insolvent estate. If the trustee does not wish to proceed with the execution of the contract, but the other party has not performed, the trustee can claim performance from the other party.

If neither the insolvent nor the other party has performed, the trustee can claim performance from the other party, but then the trustee has to tender full performance of the obligations of the insolvent estate. If the trustee does not wish to proceed with the execution of the contract, it may be repudiated. The other party will then have only a concurrent claim for damages against the estate. Specific performance will not be granted against an insolvent estate contrary to the wishes of the meeting of creditors, since it may lead to one creditor being preferred above others.

If the other party has already performed, but the insolvent has not, the trustee (acting according to the wishes of the creditors) may either uphold the contract and perform, or repudiate the contract. The other party will then have a concurrent claim for the return of his or her performance as well as for damages. For some contracts specific rules apply which differ from the principles set out above.

CONTRACTS OF EMPLOYMENT

The sequestration of the employer’s estate automatically causes the termination of the contract. The employee will have a claim for arrear wages and for damages. The claim in respect of arrear wages, for a period not exceeding three months and to the maximum amount fixed from time to time, will rank as a preferent claim. The employee will have a concurrent claim for any balance of arrear wages as well as for loss resulting from the termination of the contract.

Sequestration of the estate of the employee does not in itself terminate the contract. In certain instances the employee’s insolvency might be a ground for dismissal, but this topic falls out the scope of this chapter.

INSTALLMENT SALE TRANSACTIONS

An instalment sale transaction is a contract of sale in the terms of which moveable property is sold and the purchase price is payable in instalments. The ownership in the property is reserved and passes to the purchaser only once the final instalment is paid. The Credit Agreements Acts 75 of 1980 regulates the transactions. The Insolvency Act regulates the position where the purchaser becomes insolvent. Although in terms of the contract, ownership has not yet passed to the purchaser, sequestration of the purchaser’s estate nevertheless causes ownership in the moveable property to pass to the insolvent estate immediately. The seller who loses his or her ownership is, however, protected because he or she becomes a secured creditor of the estate. The seller will acquire a hypothec (a form of real security) over the property sold.

The Insolvency Act does not provide for the situation where the estate of the seller is sequestrated, so the general rules apply. The trustee might elect to continue with the contract and receive the remaining instalments. However, the trustee may also repudiate the contract and recover the property from the purchaser, because the ownership still vests in the seller’s estate. The purchaser will then have to be content with a concurrent claim for the return of the instalments already paid, as well as damages.

SALE OF MOVEABLE PROPERTY FOR CASH

The Insolvency Act protects the person who sells movables for cash (as opposed to credit) to a person whose estate is later sequestrated. If the goods were delivered but the purchase price was not paid, the seller can claim back the goods within ten days of delivery by notifying the insolvent, the trustee of the Master in writing. If the trustee disputes the sellers right to claim back the goods, the seller will lose the right unless he or she institutes legal proceedings to recover the property within fourteen days of being notified of the dispute.

If the estate of the seller is sequestrated, the general rules will apply. The trustee can either repudiate the contract or claim repayment of the purchase price from the other party. Ownership in the property vests in the insolvent estate until the price is paid.

SALE OF IMMOVABLE PROPERTY

Where the estate of the purchaser is sequestrated before the immovable property is transferred, the trustee has the usual choice of upholding or repudiating the contract. If the trustee decides to claim transfer, the purchase price must be paid. However, the Insolvency Act provides that the seller can request the trustee in writing to exercise the choice. If the trustee does not exercise a choice within six weeks of receiving the written notice, the seller may apply to court for the cancellation of the contract and the return of the property.

Where the estate of the seller is sequestrated before the property is transferred to the purchaser, the general principals set out above will usually apply. If the trustee repudiates, the purchaser has a concurrent claim for the return of the purchase price already paid, as well as for damages. However, if moveable property intended for residential purposes is sold and the price is payable in three or more instalments over a period exceeding one year, the provisions of the Alienation of Land Act 68 of 1981 protect the purchaser. The purchaser, and not the trustee of the seller’s estate, can determine the outcome of the contract. The purchaser may choose to claim transfer of the property, against payment of the transfer costs and either the outstanding balance of the purchase price, or, if the amount payable in respect of administration and sequestration costs, outstanding levies and release amounts on bonds exceed the outstanding balance, such higher amount. If the purchaser decides not to claim transfer, he or she will, provided the contract plus interest and the cost of certain expenses in connection with the property.

Another provision of this Act can also possibly protect the purchaser to a certain extent, but only if it is invoked before the sequestration. The Alienation of Land Act allows the purchaser of registrable land to claim transfer of the property once fifty per cent of the purchase price has been paid. It will always be a good precautionary measure for a purchaser to claim such transfer as soon as the fifty per cent requirement is met.

CONTRACTS OF LEASE

The Insolvency Act has a special arrangement if the estate of the lessee is sequestrated. The lessor may not terminate the contract, but if the contract provides for such a right of cancellation in the event of the lessee’s insolvency. The trustee has the usual choice of upholding or repudiating the contract, but if the contract is upheld, the lessor must be notified within three months of the trustee’s is being appointed. If the trustee does not exercise this choice, the contract will automatically lapse three months after the date of appointment of the trustee. The rent for the period after sequestration forms part of the cost of sequestration. This means that the lessor has a very good chance of receiving full payment, because of the cost of sequestration is one of the first claims paid from the insolvent estate. If the lessor has suffered any loss, he or she will have a concurrent claim for damages.

Where the estate of the lessor is sequestrated, the trustee will have the option of either continuing with the contract or of repudiating it. The lessee will have a concurrent claim for damages. The trustee will eventually have to sell the leased property and terminate the contract. However, if immovable property is involved, the “huur gaat voor koop” doctrine might protect the lessee.

THE EFFECT OF SEQUESTRATION ON THE PROPERTY OF THE SOLVENT SPOUSE

The sequestration of a person’s estate also affects the property of his or her spouse. “Spouse” is given an extended meaning in the Insolvency Act and includes spouses married according to any legal system or custom and a man and a woman who live as husband and wife without being married. The term ‘solvent spouse’ indicates that the consequences to be discussed do not apply to parties to a marriage in community of property, because in such a case both spouses are regarded as being insolvent and there is only one joint insolvent estate.

When the insolvent spouse’s estate is sequestrated, all the property of the solvent spouse also vests in the Master and then in the trustee of the insolvent spouse’s estate. The solvent spouse then has to apply to the trustee or the court for the release of his or her property. The following categories of property have to be released:

a) Property, which belonged to the solvent spouse immediately prior to the conclusion of the marriage.

b) Property acquired by the solvent spouse in terms of an ante nuptial contract.

c) Property acquired by the solvent spouse during the course of the marriage, with a title valid against the creditors of the insolvent spouse. The solvent spouse will have a valid title if, for example, he or she acquired the property with an own salary or if it was received as a donation. If, for example, the property was registered in the name of the solvent spouse in an attempt to put it beyond reach of the insolvent’s creditors, but the spouses have the mutual understanding that the property still belongs to the insolvent, the solvent spouse will not have a valid title against the insolvent’s creditors.

d) The proceeds of property which would otherwise have had to be released or property acquired with such proceeds.

The fact that the trustee might have to release property does not preclude the trustee from recovering that property for the benefit of the insolvent estate at a later stage if the spouse acquired it through an impeachable disposition.

If the trustee or the court does not release the property, it is applied to satisfy the claims of the solvent spouses creditors. Should any balance remain, it is applied for the benefit of the creditors of the insolvent spouse.

There is a special provision allowing a solvent spouse who carries on a separate business as a trader, or would probably be seriously disadvantaged by the immediate transfer of his or her assets to the Master or to the trustee, or to obtain an urgent court order postponing the vesting of all or some of the assets in the Master or the trustee. The solvent spouse will have to provide security to the insolvent estate. This provision is just a temporary measure, the solvent spouse will still have to prove that he or she is entitled to the release of the property, otherwise it will vest in the Master or the trustee once the period for which the order was granted has expired.

IMPEACHABLE DISPOSITIONS

One of the biggest advantages of the sequestration order is the creation of a body of creditors and the equal treatment of creditors. Sometimes, however, an insolvent has disposed of some of the assets prior to sequestration, thereby prejudicing the rights of the creditors. Subject to certain requirements, the court on the application of the trustee can set such dispositions aside or, should he or she fail to do so, on the application of the creditors.

The property or its value will then have to be restored by the recipient. However, if the recipient acted in good faith and gave up any property, security or right in return for receiving the disposition, he or she cannot be obliged to return the property or benefit, unless the trustee indemnifies the recipient for the loss of property or benefit, unless the trustee indemnifies the recipient for the loss of property, security or right. The provisions regarding impeachable dispositions will not affect a person, who, in good faith and for value, acquired any property from a person other than the insolvent.

DISPOSITIONS NOT MADE FOR VALUE

In this case the disposition is made without value, for example a donation, or without adequate value, for example, where an asset is sold far less than its worth. A disposition without value can be set-aside to the extent that, immediately after the disposition was made, the insolvent’s liabilities exceeded the assets. So, if the amount by which the liabilities exceeded the assets is less than the value of the disposition, the disposition will be set aside partially.

The Insolvency Act provides a defence against the trustee’s claim for setting aside a disposition without value. The defence only operates for the benefit of the insolvent’s wife or the children born of the insolvent’s marriage.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download