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CML 2010S
Class Numbers 1170 and 1172 Jane Franco
SECTION 3 : INSOLVENCY
(Lectures 7- 11 September 2015)
The section numbers referred to in the relevant legislation are given for your ease of
reference you do not need to memorise the actual section number unless otherwise indicated.

1. TERMINOLOGY AND CONCEPTS

What is insolvency?
Insolvency is a legal status assigned to natural and juristic persons when their financial
situation is such that their liabilities exceed their assets or they are unable to pay their
debts. Note, a person is not legally insolvent until he has been declared so by an order of
court.
Aims and objectives of the law of insolvency
1. To allow creditors to be paid in their order of preference ;
2. To maximise the assets for distribution among the creditors. This is done by
minimising the legal costs that would have been incurred if the debtor had not been
declared insolvent and if each creditor had tried to sue him individually for their
debts. In addition the law of insolvency creates mechanisms for enquires and
investigations which may uncover assets or lead to the return of certain assets to the
estate for distribution among creditors.
3. To prevent the debtor from further diminishing his (or its) estate. This is done by
taking his assets away from the insolvent person (or the control of the directors in the
case of a company) and placing them in the hands of the trustee or liquidator, as the
case may be.
4. Ultimately insolvency should be for the benefit of the creditors, this is the main
purpose. It is not intended as a punishment for the debtor, nor as means to help him
out of a financial predicament.
Lets have a look at some terminology:

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Sequestration
This is the method by which the estate of a debtor is wound-up.
In the Insolvency Act (section 2), a debtor is defined as a natural person, a partnership or
a trust. So we will use the word debtor and insolvent interchangeably
When a person is declared insolvent by the court, he is divested of his assets (ie all his
assets are taken away from him- he does not own them anymore).They are placed in the
hands of a trustee. The trustee winds up his estate for the benefit of the creditors.
Winding-up/sequestration is the process whereby the assets of the debtor are taken over
by the trustee, sold, and the proceeds distributed among the creditors
Sequestrations are governed by the Insolvency Act 24 of 1936 and the common law. The
Insolvency Act is reproduced in your Course Reader.
Liquidation
This is the method by which juristic persons are wound-up when they are declared
insolvent by the court eg companies and close corporations.
The assets of the company are removed from the control of the directors and placed in the
hands of a liquidator who sells them for the benefit of the creditors.
Once the process of winding up is complete, the company is dissolved, it ceases to exist.
Liquidations are governed the Insolvency Act 1936 , the Companies Act of 1973 (relevant
sections of which are reproduced in your Course Reader) and the Companies Act of 2008
as well as the common law and where applicable , the Close Corporations Act 1984.
Concursus creditorum
This is extremely important. To understand this, lets look at the following example:
Distribution of the estate of Joe Bloggs
Assets
House
Car
Cash

250 000
20 000
30 000

Liabilities
Bond on house
Income tax
Furniture store
School fees

200 000
95 000
6 000
4 000

TOTAL

300 000

TOTAL

305 000

You will see later that the creditors have a set order of ranking, called an order of
preference. So the bank has what we called a secured claim over the house because of the
mortgage bond, which means that it takes first from the proceeds of the sale of the house.

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The house will be sold for 250 000, then the bank will have the first right to have its debt
settled from the proceeds of that sale so it gets 200 000 and then there is 50 000 left over
for the other creditors.
Lets see what we have left:
50 000 from sale of house
20 000 sale of car
30 000 cash
TOTAL 100 000
SARS has what is called a preferent claim so they must be paid their 95 000 next.
This leaves us with 5000.
The furniture store and the school are what is known as concurrent creditors and they are
at the bottom of the ranking, so they take last. They must take pro rata from the 5000.
They are owed a total of 10 000.

So each will get:

5 000
100c
10 000

= ie a dividend of 50c in the rand for their claim ie they will each only have half of their
respective debts paid.
Bear in mind, the nature of insolvency is that the debtor does not have enough to pay all
the creditors in full, so in most cases, the concurrent creditors will receive less than 100c
in the rand.
(We will look later at the ranking of creditors in more detail and at security extensively in
the next topic.)
Concursus creditorum means that the position of each and every creditor is frozen as at
the date of sequestration or liquidation and from that date onwards, no creditor may do
anything to alter his position. So the furniture, for example, cant now try to become a
secured or preferent creditor.
2.

MANNER OF SEQUESTRATION

In this section, we are going to be looking only at sequestrations, ie the wining up of

insolvent individuals, partnerships and trusts.
Now there are two ways of sequestrating: voluntary surrender or compulsory sequestration.
Only the High Court can make sequestration orders.

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Lets look at voluntary surrender first:
Voluntary Surrender and Substantive Requirements
Here the debtor himself applies to court to be declared insolvent/sequestrated.
Why would the debtor want to do this?
One of the effects of sequestration is that the debtor is absolved of any debts incurred before
sequestration. So his creditors cannot sue him personally, they must put in a claim against the
insolvent estate and it will be dealt with by the trustee . If there is not enough money in the
estate to settle the debts, the debtor cannot be sued personally, that is the end of it, even if
some creditors do not get 100c in the rand as you saw in our example above. In other words,
the insolvent is absolved of his debts.
Note on people married in community of property and partnerships:
In the case of a couple married in community of property, remember that there is a single
joint estate, so both spouses must apply for the sequestration of the joint estate, so both
spouses are declared insolvent. Section 17(4)(a) MPA)
In the case of a partnership, all partners must apply for the sequestration of the joint
partnership estate as well as their individual separate estates. (Section 3(2) and 13 Insolv Act)
For example, Alex Brown is married in community to Barbara Brown . Alex Brown owns a
business, Good Food, in partnership with Sindi Dube who is married out of community of
property to Max Dube. If the partnership is in financial trouble who will be sequestrated?
1.

Good Food, the partnership estate will be sequestrated (Section3(2) and 13

Insolvency Act)
2. Alex Brown (as a partner)
3. Barbara Brown (because she is married to him ICP)
4. Sindi Dube (as a partner)
Max Dube? (NO because married OCOP)
Substantive requirements for voluntary surrender
These requirements must be proved to the court by the debtor:
1.

The debtor is in fact insolvent ie liabilities exceed assets

2.

There are enough realisable assets to cover the costs of sequestration ie assets
which can be sold to cover the costs
This would include, for example the legal costs, the trustees fees and other costs.
The reason that this is important is that there is always a danger that if there is not
enough money to cover the costs, then the concurrent creditors who make a claim,
may have to contribute to costs out of their own money. So in our example, the

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school, may, instead of only getting 50c in the rand, have had to pay in money to
cover costs and get nothing at all.
This is sometimes why creditors dont even bother to make a claim against an
insolvent estate.
So if the court can see that arent enough assets to cover the costs, then it wont
grant the order.
Therefore a person can be too broke to be declared insolvent! It is important that
you understand this notion. Sequestration, because of this requirement and others,
is not a process for the very poor. The costs of sequestration can run into tens of
thousands, if not more. Sequestration is therefore for middle to high net worth
people who nonetheless are in financial difficulty. Remember you can be worth
R3 million, but owe R4 million.
3.

The sequestration will be to the advantage of creditors

This means that the concurrent creditors must receive a non-negligible dividend.
In other words, they must receive some monetary benefit that is not insignificant
or too small.
The amount of a non- negligible is not set out by the courts or the Insolvency Act,
it all depends on the facts of each case and the courts have even held that
dividends of 5c in the rand could be non-negligible. So again you can see that one
can be too broke to be sequestrated.

4.

All the procedural requirements have been complied with. You do not need to
know what these are for the purposes of this course- your lawyer will deal with
that aspect! Just know that there are certain procedural requirements that must be
complied with.

Where all 4 of the requirements are met, then the court may grant the order, but it doesnt
have to. The court has a discretion. Even if all the requirements are met, it may still refuse to
grant the order. For example, it may refuse to do so if the application was brought with an
improper motive ie to defraud creditors.
Compulsory Sequestration and Substantive Requirements
Here, a creditor or a group of creditors applies for the sequestration of the debtors estate.
Remember, in voluntary surrender, the debtor himself applied for sequestration.
What we have already said about married people and partnerships will also apply here ie both
spouses married in community of property will be sequestrated because there is a joint estate;
and all the partners of a partnership are sequestrated together with the partnership.

Requirements for compulsory sequestration

The onus (burden) of proving these requirements lies on the creditor who is applying for
sequestration:
1.

The creditor must be entitled to make the application

In order to satisfy this requirement , the creditor must show that he has a claim for
not less than R100 or if there are two or more creditors, that they have claims
which , in aggregate come to more than R200.

2.

The debtor is insolvent or has committed an act of insolvency

So there are two options here:
Lets have a look at the first one the debtor is insolvent this means simply that
liabilities exceed assets (i.e. he is actually insolvent)
Now, as you can imagine, this may be difficult to prove as a creditor does not have
an intimate knowledge of the debtors financial affairs, so if the creditor cant
prove this, she can rely on the second option, an act of insolvency.
The Insolvency Act (sec 8) lists the different acts of insolvency which can be
committed by the debtor. The creditor only has to rely on one to bring the
application:
(The acts of Insolvency are set out below numbered as they appear in the Act ie
sec 8 (a) (h)).
(When looking at these acts of insolvency you will note that the idea is that they
indicate that the debtor is unable to pay his debts and therefore indictors of
insolvency)
a.

If he leaves his home or the Republic to avoid paying a debt.

b.

If he fails to pay a judgment debt (in other words, someone got a

judgement against the debtor ordering him to pay money owed and he has
failed to do so or he does not have enough property that can be sold to
satisfy the debt).

c.

If he makes (or attempts to make) a disposal of his property (including

cash) which prejudices his creditors or prefers one creditor over another.
An example of prejudicing creditors would be selling assets way below
market value, while failing to meet your debts;
An example of preferring one creditor over another would be: A is in debt
to B and C, and neither of them are secured creditors or in any way
preferred). A then pays B in full and pays C nothing even though both
debts were due and payable.
Note, it is only the effect of the disposal of property that is important here,
not the intention.

d.

If he removes or attempts to remove property (including cash) with the

intention to prejudice or prefer creditors.
Now, here intention becomes important. The kind of thing we are dealing
with here is where the debtor tries to hide his assets, for example maybe by
storing them at a friends house etc; transferring money overseas In other
words he is trying to put assets beyond the reach of creditors.

e.

If the debtor makes an offer of arrangement.

Here the debtor makes or attempts to make an arrangement with a creditor
in terms of which he is released from the whole or part of the debt. The
arrangement must show an inability to pay debts in full, not a refusal to
pay in full. A request for an extension of time to pay the full debt or to pay
it in instalments does not qualify as an act of insolvency here.

f.

If debtor fails to make the application for voluntary surrender timeously.

Before the debtor makes the application to court for voluntary surrender,
he must publish a notice of surrender in the newspaper and government
gazette. , this will be an act of insolvency and one of the creditors can then
bring the application. The purpose is to alert creditors to the fact that the
debtor is going to apply for voluntary surrender.
A debtor commits this act of insolvency if he does not apply to the court
for voluntary surrender within the statutory time limits. In the event of
such a failure a creditor may rely that failure as an act of insolvency on
which to base the creditors application for compulsory sequestration.
There are other elements to section 8(f) which are based on other
procedural requirements for voluntary surrender, but for this course, you
do not need to know about them as we have not dealt with the procedural
requirements in any detail.

g.

Written notice of inability to pay ***

This is very important as this is the one that is used most often.
Here the debtor writes to one of his creditors saying that he is unable to
pay his debts. It must show an inability to pay, not a refusal. A written
request for an extension of time to pay or to pay instalments would qualify
as an act of insolvency here.

h.

If the debtor is unable to pay his debts after publishing a notice of sale of
business. Dont worry about this one now, we will look at it in more detail
later.

Note: A debtor who has applied for a debt review under the National Credit Act will NOT be
regarded as having committed an act of insolvency. Sec 8A Insolvency Act 1936 as amended
by the National Credit Amendment Act 2014.
3.

There must be reason to believe that the sequestration will be to the advantage of
creditors. This is the same as the requirement for voluntary surrender, so have a
look at your notes there. However the burden of proof for this requirement is
slightly lighter than under voluntary surrender as the creditor only has to show

4.

that there is reason to believe advantage to creditors as opposed to that there

will be advantage to creditors.
All of the procedural requirements have been complied with. You do not need to
know what these are for the purposes of this course- your lawyer will deal with
that aspect! Just know that there are certain procedural requirements that must be
complied with.

If all 4 of these requirements are met, then the court may grant a provisional order of
sequestration. Again the court has a discretion, just like with voluntary surrender.
A provisional order is a temporary order. The order will have a return date, when the
parties must return to court and on that date, interested parties (ie the debtor and other
creditors) may object. If no objections are raised, or the objections are unsuccessful, the
court may make the order final. Again the court has a discretion.
Friendly Sequestrations
The term friendly sequestration is not used in the Act.
NB! Technically it is a compulsory sequestration.
But the courts have used the term to describe an application for compulsory sequestration
made by a creditor, at the request of the debtor, and with the debtors co-operation.
The main motive is usually to assist the debtor in escaping from his financial problems.
Remember one of the effects of insolvency is absolution from debts.
The application is often bought by a relative or a friend. Usually it is based on the act of
insolvency of a notice of an inability to pay, Section 8(g).
This dictum from Craggs v Dedekind; Baartman v Baartman and Another 1996 (1) SA 935
(C) at 937 sets out the type of circumstances under which such applications are made and the
courts attitude to them:
Friendly sequestrations seem to share certain characteristics. Although like
pornography they may be hard to define, they are easy to recognise The debt which
the sequestrating creditor relied upon is almost always a loan. It is usually quite a
small loan, very often made in circumstances where it would have been apparent to
the whole world that the respondent was in serious financial difficulty. Despite this,
the loan is customarily made without security of any sort. It is seldom evidenced by a
written agreement The only writing that is produced to the court the letter stating,
with appropriate expressions of dismay that the debt cannot be paid, and, sometimes,
for good measure, setting out the details of the (debtors) assets and liabilities. Very
often debtor and creditor are related: fathers commonly sequestrate sons, wives
sequestrate husbands and sweethearts sequestrate each other, without, I am sure, any
damaging effect on their relationship.

The advantages for the debtor in achieving sequestration in this way rather than voluntary
surrender, are the following:
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It avoids all the time consuming procedural requirements for voluntary surrender. The
procedural requirements for compulsory sequestration are less onerous and less time
consuming.
The burden of proof with proving advantage to creditors is lighter in the case of
compulsory sequestration (reason to believe as opposed to will be)
It is also easier to prove insolvency in a compulsory sequestration because you can
rely on acts of insolvency rather than actual insolvency.

So sometimes, friendly sequestrations can be an abuse of the court process, particularly

where the sequestrating creditor acts in collusion (in bad faith to defraud creditors) with the
debtor for example:
They may put false evidence to the court and the debtor may not actually be insolvent
(so maybe the debtor is trying to defraud creditors and avoid paying debts in full) or
There may not really be an advantage to creditors, and creditors may have to
contribute to costs (so perhaps assets are over- valued in the application) or
The sequestrating creditor may not even be a genuine creditor (perhaps the section
8(g) letter (notice) was a fraud as no debt ever existed between the two parties).
For these reasons the courts have adopted a cautious approach to friendly sequestrations, they
scrutinise them very carefully and may require more from the friendly creditor than
otherwise.
So for example the court may require hard evidence that the applicant is a genuine creditor ie
a copy of the cheque to prove a loan, not just the section 8(g) letter/ notice.
On the other hand, the court cannot reject an application for sequestration, simply because it
is a friendly one ie because the debtor and creditor are friends or relatives.
If after careful scrutiny, the court is satisfied that all the requirements for compulsory
sequestration are genuinely met, and there is no evidence of collusion, the court may grant
the order.

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3.

MANNER OF LIQUIDATION/WINDING UP OF JURISTIC PERSONS

Points to note:
1.

A company may be wound up/liquidated if is unable to pay its debts i.e insolvent.
In addition companies that are ABLE to pay their debts can also be wound-up for
reasons other than insolvency. For example (sections 80 and 81 of Companies Act
2008):
if there is a deadlock in management (i.e directors have reached a
deadlock)
or a deadlock among shareholders
or if it is just and equitable to wind up the company- this could be any
number of circumstances, for example the company can no longer
fulfil its objectives e.g.perhaps an engineering company set up to mine
has lost its mining rights; or distrust, oppression amongst shareholders
or members no longer wish to continue the business
That is all you need to know in this regard
In this course we are focussing on the situation where a company is wound-up
because it is unable to pay its debts, ie it is insolvent.
2. In so far as insolvent companies are concerned, the Companies Act 1973 applies.
(the old Act)

Turing now to look at winding-up of insolvent companies, this can occur in two ways, either
there is a winding-up by the court or a voluntary winding-up.
Winding up by the Court
Sec 344(f) and 345 Companies Act 1973.
A company may be wound-up by the court if it is unable to pay its debts.
Depending on the circumstances, the application for liquidation may be brought by a
creditor(s) or the company itself (via a directors or shareholders resolution)
Sec 345 sets out three situations in which it is deemed that the company is unable to pay its
debts. Any one of them can be used as a basis for the application to court for liquidation:

1.

Statutory demand which has not been met:

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If a creditor who is owed R100 or more has left a letter of demand at the companys
registered office, and the company has not paid the amount for three weeks, or failed to
secure payment.
The company must have failed to pay without a valid reason, so eg if the company disputes
the indebtedness, then the section cannot be invoked.
2.

Nulla Bona Return

This happens when someone sued the company for a debt which was due and got a judgment
against the company ordering it to pay the amount owed. The company did not pay the
money it was ordered to pay and it does not have enough movable or immovable property to
sell in execution to satisfy the debt. The fact that the company did not pay the debt and that it
didnt have enough property to sell in execution (nulla bona return) is a ground for
liquidation
Note: These first two grounds set out facts that may indicate an inability to pay debts, even if
there is no hard evidence of actual inability to pay. These are similar to the acts of insolvency
for sequestrations.
3.

Actual inability to pay debts

Here there must be proof that the company is actually unable to pay its debts.
Normally you would prove inability to pay by showing that liabilities exceed assets. However
even if a company has assets which exceed its liabilities, it may still be wound-up if it cannot
pay its debts ie cash-flow problem, not liquid. We call this commercial insolvency.
Note, the court always has discretion to wind-up a company. For example it may be that
business rescue is more appropriate (on this see later).
Voluntary Winding-up
Section 349 and 351 353 (Companies Act 1973)
-

This is called a creditors voluntary winding-up but , it is actually initiated by the

members (ie shareholders) who pass a special resolution to wind-up the company. A
special resolution is 75%.

The members would normally do this if the company is unable to pay its debts as it is
a quicker and cheaper than winding up by the court..

The resolution is then registered with the CIPC (Companies and Intellectual Property
Commission. (That is commencement date of liquidation (sec 352).

A liquidator is appointed who acts on the instructions of the creditors. (351(2))

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