Insolvency, Liquidation & Rehabilitation

In terms of South African Insolvency Law a natural person, a trust, a partnership, a deceased estate and a married couple’s joint estate are sequestrated while a company or close corporation is liquidated.

In simplified terms, if a person’s debt has become too great and is impossible to manage and such persons liabilities exceed his/her assets, the individual is insolvent (bankrupt).

In certain cases such a person can eliminate his debt and re-obtain a normal life free of debt. This is done by way of a procedure involving an application to court for the sequestration of such a person’s estate.

Upon sequestration, a trustee is appointed by the Master of the High Court that is placed in control of the insolvent’s estate. Creditors are then no longer able to pursue the insolvent directly.

There is a misconception that the insolvency procedure has been created to allow the people to incur debt and walk away. This is not the case as is the trustees duty to guard creditor’s interests and an application for the sequestration of a debtor’s estate can be a very effective procedure to compel the debtor to pay. The insolvency procedure is therefore to the advantage of both insolvents and creditors alike.

What are the requirements?

  • Your liabilities must exceed your assets.
  • The sequestration or liquidation must be to the advantage of your creditors.
  • There must be sufficient free residue (in other words assets) to pay the costs of the sequestration of liquidation application.

Voluntary Sequestration

This is where a debtor applies to court for the sequestration for his own estate.

The following persons may apply:

  • Estate of natural person: the debtor or his agent.
  • Partnership: all the partners resident in South Africa or their agent.
  • Estate of a deceased debtor: executer.
  • Joint estate of spouse married in community of property: both spouses.
  • Estate of person unable to manage in community of property: both spouses.
  • Estate of person unable to manage his own affairs: curator bonis.

Compulsory Sequestration

This is where a creditor applies to court for the sequestration of his debtor’s estate.

A creditor who has a liquidated claim of not less than R100 or two/more creditors who in aggregate have a liquidated claim of not less than R200, may apply for the compulsory sequestration of the debtor’s estate.

A liquidated claim is a money claim with the amount of which is fixed and terminated either by agreement, judgement or otherwise.

Liquidation

Companies may be liquidated by the court for a variety of reasons in terms of Section 344 of the Companies Act.

In liquidation applications you have to establish commercial insolvency. This means an inability to pay debts as and when they become due in the ordinary course of business.

Methods

  • Compulsory liquidation by the court.
  • Voluntary liquidation by a creditor or a member.
  • Liquidation of a closed corporation.

Grounds for Liquidation

  • Inability to pay debts
  • Liabilities exceed assets

It is just and equitable to do so, for example internal disputes make it impossible to carry on business.

Once a liquidation order has been made by the court , a liquidator is appointed by the Master of the High Court. His duty is to take control of all the assets, convert dues to cash and then to pay creditors in proportion to their claims.

If the representatives have personal assets of some value and they have incurred personal liability the threat of liquidation can be a very effective means of debt collection.

Rehabilitation

Subject to complying with certain requirements, an insolvent can be rehabilitated (ie. He can be declared no longer insolvent). Generally this can happen four years after the date upon which the insolvent’s estate was sequestrated. However under certain circumstances this can take place sooner.

Rehabilitation occurs automatically upon the expiry of ten years from the date of sequestration. In other instances an application to the High Court is needed. The court orders has the discretion and there are various factors that the court would consider before granting a rehabilitation order.

It is not always necessary for an insolvent to be rehabilitated. If being an insolvent has no negative consequences or disadvantages for the insolvent, there is no reason to incur the legal costs as an application for rehabilitation.

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