RESEARCH THE LAW
Frequently Asked Questions
- What is insolvency?
- When is a debtor said to be insolvent?
- What are some of the requirements for compulsory sequestration?
- What happens when a company or a person is insolvent/liquidated/sequestrated?
- What is the difference between a liquidator and a curator/trustee?
- Who is responsible for the appointment of a curator/trustee or a liquidator?
- Who is the Master of the High Court and what is its function?
- What is an alternative option to the liquidation of a company?
- What happens when my company goes into business rescue?
- Who is responsible for payment of the costs incurred by the liquidation and sequestration process?
- What is voluntary liquidation, or voluntary sequestration? Better known as voluntary surrender of one’s estate?
- What about ‘collusive dealings’ that may have taken place before the sequestration?
- What does the liquidation or sequestration process entail?
- When is the liquidation or sequestration process completed?
1. What is insolvency?
The Insolvency Act, 24 of 1936, defines the term "insolvent" as a debtor whose estate is under sequestration and includes such a debtor before the sequestration of his estate seen in context. The Insolvency Act also defines the term "insolvent estate" as an estate under sequestration, however the Act does not define the term "insolvency". According to South African case law, the test for insolvency is whether the debtor's liabilities exceed his assets. The mere inability to pay debts is not necessarily indicative of a state of insolvency.
In this regard, the courts have drawn a distinction between factual and commercial insolvency. Factual insolvency is found where a debtor's liabilities exceed his assets, while commercial insolvency refers to the situation where a debtor is unable to pay his debt due to a cash flow or other problems, but his assets still exceed his liabilities.
A private person would also be deemed insolvent if it is proved that he has committed an act of insolvency as provided for in Section 8 of Insolvency Act, as is also the case with a company which commits an “act of insolvency” in terms of Section 344 of the Companies Act, 61 of 1973.
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14. When is a debtor said to be insolvent?
- In terms of the Insolvency Act, 1936, a debtor who cannot satisfy the claims of all of his creditors may be sequestrated (declared insolvent) by the court. The main purpose of such an order is to secure an equitable distribution of the debtor’s assets among all his creditors. Execution in the usual way against the property of an insolvent debtor invariably results in one or a dew creditors being paid in full and the majority receiving nothing towards the satisfaction of their claims-if you are a creditor with unpaid debts you may have to consult with an experienced attorney to ensure you do not end up in this position.
- Sequestration seeks to ensure that whatever assets the debtor has are distributed pro rata among all creditors in accordance with a predetermined order of preference.
- Although sequestration does not exist to alleviate the position of the debtor, it does hold certain advantages for him or her: for one thing it liberates the person immediately from debt-collection proceedings initiated by dissatisfied creditors; and secondly, it offers the person, once the insolvency has run its course, of becoming rehabilitated (regaining his or her solvency), and amassing a new estate free of the shackles of old debts.
For this reason the debtor’s estate may be sequestrated in 2 ways:
- The debtor himself (or his agent) may apply to court for acceptance of surrender of the estate, also referred to as voluntary surrender.
- A creditor or creditors (or his or their agent) may apply to court for the sequestration of the debtor’s estate, also known as compulsory sequestration.
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16. What are the requirements for compulsory sequestration?
The issue of winding up close corporations and companies unable to pay their debts has become very involved and complex with the advent of the new Companies Act, 2008.
A distinction under the old Companies Act, 1973 ( set out below) in relation to liquidation was, technically, never ‘solvent’ v ‘insolvent’ companies, but rather ‘companies able to pay their debts v ’companies unable to pay their debts’, with factual insolvency merely being a factor to be taken into account in determining these questions.
It is essential to consult with a commercial lawyer on these issues as they are aware of the various divergent views out there, and are able to address and distinguish any case law that is supportive of your case.
A debtor commits an act of insolvency in the following circ*mstances:
- Departure/absence from South Africa
If he or she leaves South Africa, or is out of South Africa and remains absent from it with the intent by doing so to evade or delay payment of the debts.
- Failure to satisfy judgement
If the court has given judgement against him and he fails, upon the demand of the sheriff to satisfy it or to indicate to the sheriff disposable property sufficient to satisfy it, or it appears from the return made by the sheriff that he has not found sufficient disposable property to satisfy the judgement
- Disposition of property
If he makes, or attempts to make any disposition of any of his property which has, or would have the effect of prejudicing his creditors or of preferring one creditor above another
- Removal of property
If the debtor removes, or attempts to remove, any of his property with intent to prejudice his creditors or to prefer one creditor above another
- Arrangement for release from debts
If the debtor makes or offers to make, any arrangement with any of his creditors for releasing him wholly or partially from his debts
- Failure to act in terms of surrender
If, after having published a notice of surrender of his estate, he fails to lodge a statement of his affairs, or lodges a statement which is incorrect or incomplete in material respects, or fails to appear for surrender of his estate on the date mentioned in the notice.
- Written notice of inability to pay
If he gives notice in writing to any of his creditors that he is unable to pay any of his debts
- Inability to pay after notice of sale of business
If, being a trader, he gives notice of his intention to sell his business and is thereafter unable to pay all his debts.
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2. What happens when a company or a person is insolvent/liquidated/sequestrated?
When a company is deemed to be insolvent, the company is liquidated and a liquidator is appointed to realise the assets of the company in order to settle the company’s debt or liabilities to the advantage of the creditors.
When an individual is declared insolvent, he is sequestrated and a curator is appointed to take control of his assets for the purpose of realising them in order to settle his debt to the advantage of his creditors.
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3. What is the difference between a liquidator and a curator/trustee?
Once a natural person is sequestrated, the Master of the High Court appoints a trustee/curator who must take control of the assets. In the case of a company, close corporation or certain other legal entities, the person appointed by the Master is referred to as a liquidator. Both a curator/trustee and liquidator fulfil the same duty and have the same rights and responsibilities.
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4. Who is responsible for the appointment of a curator/trustee or a liquidator?
Once a provisional liquidation or sequestration order is obtained, it is the duty of the Master of the High Court to appoint a provisional curator or liquidator. A curator or a trustee is appointed in the insolvent estate of an individual in terms of Section 56 of the Insolvency Act and a provisional liquidator is appointed in the insolvent estate of a company or close corporation in terms of Section 368 of the Old Companies Act, 61 of 1973.
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5. Who is the Master of the High Court and what is its function?
The Master of the High Court is an institution which is the guardian of insolvents, minor children and the estates of deceased persons. Trustees and liquidators will report to the Master in the execution of their duties.
According to the Department of Justice and Constitutional Development the function of the Master of the High Court is to provide efficient, cost effective and specialised services of the supervision, custodianship, arbitration and information regarding deceased and insolvent estates and trusts. The Master is also to serve estate practitioners, beneficiaries of estates and trusts, minors and mentally challenged persons in South Africa for the purpose of safeguarding those beneficiaries' financial and proprietary rights.
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6. What is an alternative option to the liquidation of a company?
If it appears that it is reasonably unlikely that a company will be able to pay all of its debts within the following six months or it appears to be reasonably likely that the company will become insolvent within the next six months, the directors of such a company can make a decision to place the company under business rescue.
When a person or individual is over-indebted and entering the realms of insolvency, he is entitled to consult a debt counsellor in terms of Section 86 of the National Credit Act, 34 of 2005, for an evaluation of his state of indebtedness and to make a formal application for debt review. The effect of a debt review process is in essence that an arrangement is made with the insolvent's creditors in terms of which a debt counsellor apportions the insolvent's income to the satisfaction of his creditors.
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7. What happens when my company goes into business rescue?
In the event that a company is eligible for business rescue, the Registrar of Companies appoints a business rescue practitioner to effectively take control of the company’s assets and business dealings and institutes a business rescue plan in terms whereof the company’s prospective rescue is set out.
During business rescue proceedings the creditors of the company are actively involved in the administration of the business rescue. The creditors' participation in the business rescue proceedings is governed by Section 145 of the New Companies Act, 71 of 2008. In terms of Section 145 each creditor is entitled to notice of and participations in all court proceedings, decisions or meetings. Each creditor also has a right to vote to amend, approve or reject a proposed business rescue plan and if such business rescue plan is rejected a further right to either propose an alternative business rescue plan or present an offer to acquire the interests of any or all of the other creditors who voted against the approval of the business rescue plan. A committee of creditors may consult with the practitioner in relation to any matter relating to the business rescue proceedings, but may not instruct nor direct the practitioner in the performance of his duties.
Read more about Business Rescue here.
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8. Who is responsible for payment of the costs incurred by the liquidation and sequestration process?
In the event that a company or an individual’s assets are realized or sold in order to pay its debts, and it becomes apparent that the value of the assets is not enough to settle the debts of a company or an individual, thus creating a shortfall in the estate of such a company, the creditors of that company or individual which have proved claims against the estate may be held liable to contribute to the administration costs of the estate, pro rata according to the value of their claims. A trustee / curator / liquidator is entitled to receive, for his services, a reasonable remuneration to be taxed by the Master generally according to the prescribed tariff. The said remuneration is generally based on the proceeds or the value of the insolvent estate's assets. The trustee / curator / liquidator would be entitled to a certain percentage of the proceeds generated by the realisation of the insolvent estate's assets as prescribed by the relevant tariffs applicable thereto.
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9. What is voluntary liquidation, or voluntary sequestration? Better known as voluntary surrender of one’s estate?
In the event that a company is insolvent, the directors of that company can decide by way of a resolution that the company should be liquidated. The company’s voluntary application for liquidation is then submitted to the Registrar of Companies and is duly registered, after which a provisional liquidator is appointed. In the case of an individual, the individual himself can make an application to the court for the surrender of his estate. The court will, however, only grant such an application if it is convinced that the individual is insolvent, that there is an actual advantage to the individual’s creditors if he were to be sequestrated and that the realisation of his assets will be sufficient to cover the administration costs of the sequestration.
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18. What about collusive dealings before the sequestration?
- After the sequestration of the debtor’s estate, the court may, upon application, set aside any transaction entered into before the sequestration, whereby he, in collusion with another person, disposed of property belonging to him in a manner which had the effect of prejudicing his creditors or preferring one of his creditors above another.
- Any person who was party to such collusive disposition shall be liable to make good any loss thereby caused to the insolvent estate in question and shall pay for the benefit of the estate, by way of penalty, such sum as the court may adjudge, not exceeding the amount by which he would have benefitted by such dealing if it had not been set aside; and if he is a creditor he shall also forfeit his claim against the estate.
- Such compensation and penalty may be recovered in any action to set aside the transaction in question.
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10. What does the liquidation or sequestration process entail?
The creditor of a company or individual can apply to the court for the liquidation of a company or for the sequestration of an individual debtor. If the court is convinced on the face of it that the company or individual is insolvent, the court will make a provisional liquidation or sequestration order. The application for liquidation or sequestration, along with the provisional order, should always be brought to the attention of the insolvent and all his creditors. Upon the issue of the provisional liquidation or sequestration order, a date is fixed upon which any person or entity can approach the court in order to submit why the company or individual should not be liquidated/sequestrated. Once the court is convinced that the company or individual is indeed insolvent, a final liquidation/sequestration order is made.
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11. When is the liquidation or sequestration process completed?
The liquidator or curator which has been finally appointed to take control of the assets of a company or individual is responsible for the drafting of a final liquidation and distribution account which is to be submitted to the Master of the High Court, which shows what the assets and liabilities of the company or individual at the time of liquidation or sequestration were, how such assets were realised and how the value of the realised assets was distributed to the creditors of the company or individual.
In terms of Section 107 of the Insolvency Act, 24 of 1936, a trustee/curator/liquidator shall sign every account which is submitted to the Master of the High Court and he shall verify by his affidavit that the account is a full and true account of the administration of the estate in question up to the date of the account and that, as far as he is aware, all the assets of the estate have been disclosed in the account.
Once the Master is satisfied that the liquidation or sequestration process has been completed, the status of the company or individual in question is accordingly changed and the rehabilitation process of that company or individual can commence.
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