OBTAINING A

SEQUESTRATION ORDER

Week 2
Chapter 2 & 3
Voluntary sequestration & compulsory sequestration
CASE LAW
 Why would you want this?

VOLUNTARY SURRENDER

Chapter 2
Sequestration proceedings can commence in 1 of 2 ways; but the consequences
after commencement is the same:

Compulsory sequestration
This is when the creditor applies for sequestration of the debtor.
(sec 9(1) of the Act)

Voluntary sequestration
This Is when the debtor himself applies for sequestration. Also known as
Surrender sequestration.
(sec 3(1) of the Act)
 2.1 WHO MAY APPLY

Estate belonging to (debtor) Applicant

Natural person Debtor or agent
Deceased debtor The executor
prodigal Curator bonis
partnership Any partner or agent
Spouses in COP (or joint estate) Both spouses
 2.2 REQUIREMENTS FOR THE COURT
TO ACCEPT THE SURRENDER

1) The debtor’s estate is insolvent – how do we know when this is?

2) There must be sufficient money to cover the sequestration costs

• The debtor must own property of sufficient value to pay all costs of the sequestration which will
be payable out of the free residue of the estate.

• (can’t guarantee you will pay costs because the court can see you’re in financial trouble, so unless
there is actual free residue, they will refuse the application)

1) Sequestration will be to the advantage of the creditors

• This is the whole essence of the law of insolvency

• The debtor must prove that the sequestration will be to the benefit of the creditors by showing
a future budget of the debtor’s losses. (don’t want the debtor to be able to abuse the system)

• ”Will be” not “reason to believe” → factual proof

Ex parte Van Heerden 1923 CPD 279 → FREE RESIDUE

“It is necessary,” the court held, “to consider whether the surplus of the proceeds of
the immovable property, after satisfying the mortgage bonds which have a preferential
claim thereon, can be considered as ‘free residue’ within the meaning of that
expression as used in the Act.”

The definition of “free residue” must be taken to refer to that portion of an estate
under sequestration when liquidated, which is not subject to any right of preference.

In estimating the free residue in an estate, the surplus in value of immovable property
over the amount of mortgage bonds thereon may be included in such estimate.
With regards to costs of the Sequestration and the Free Residue:
Three classes of Creditors:
Secured
• Creditor that holds security for his claim. Definition of security is in sec 2: “security”, in relation to
the claim of a creditor of an insolvent estate, means property of that estate over which the creditor
has a preferent right by virtue of any special mortgage, landlord’s legal hypothec, pledge or right of
retention
➢ Special mortgage: means a mortgage bond hypothecating any immovable property or notarial
mortgage bond hypothecating specifically defined movable property.

Preferent
• These are creditors entitled to receive payment before other creditors, but there is no security over
the debt (costs of sequestration, income tax, salary or remuneration of employees)
• Ito sec 2, preference means in relation to any claim over an insolvent estate, means the right of
payment for that claim from the assets of the estate in preference from other claims.

Concurrent
• No advantage and the creditors are paid from the remainder of the “free residue” after the secured
and preferent creditors have been paid.
• Free residue in sec 2 means: in relation to an insolvent estate, means the portion of the estate
which is not subject to any right of preference by reason of any special mortgage, legal hypothec,
pledge or right of retention.
 2.3 PRELIMINARY FORMALITIES

2.3.1 Notice of intention to surrender:

• The debtor must publish a notice of surrender in the Government Gazette and in a
newspaper circulating in the magisterial district where he resides. Publication of the notice
must take place not more than 30 days and not less than 14 days before the date of the
hearing. (alert creditors in case they want to oppose) 14 – 30 d

2.3.2 Notice to creditors and other parties

• Within 7 days after the publication of the notice to surrender, the debtor must send a copy
of the notice to:

• Each creditor – whose address he knows/ can find out

• Trade unions and employees – employees should be made aware (jobs might be at stake)

• SARS
Ex parte Goldman 1930 WLD 158 → “NEWSPAPER”

the court had to decide whether the document in which the debtor published his
intention to surrender constituted a newspaper.

The document was the African Jewish World, "a weekly journal devoted to Jewish interests
in South Africa," printed in Johannesburg and mostly in Yiddish in Hebrew characters. The
advertisement itself was in the English language and characters.

The court held that this was not a newspaper as contemplated in the Act.
Ex parte Barton 1926 CPD 252 → correct JURISDICTION

In Ex parte Barton, it appeared, upon the debtor's application for leave to surrender his
estate as insolvent, that he had previously lived in Durban and that all his creditors were in
Natal.

The court held that the application should be postponed in order for the notice of the
application to be published in a Natal newspaper and for the debtor's schedules to lie for
inspection at Durban
2.3.3 Lodging a statement of affairs with the Master:

A statement of affairs must contain:

1. A list of creditors These Docs are used to assess

2. A list of debtors whether the 3 requirements
3. A list of immovable assets and their values will be met!
4. A list of any movable property
5. A list of any burdened movable assets [ i.e. pledged, hypothecated, subject to a lien
or under attachment in execution of a judgment]
6. A balance sheet
7. A detailed statement of the causes of the debtor’s insolvency
8. An affidavit made by the debtor verifying the statement of affairs is true
 2.4 EFFECT OF A NOTICE TO
SURRENDER

1. Stay of sales in execution

• No assets in the estate may be sold. it is unlawful to sell any property in the estate which
has been attached under a writ of execution or other similar process, unless the person
charged with the sale could not have known of the publication (3rd party sales).
2. No withdrawal of notice without consent :A notice of surrender cannot be withdrawn
without the written consent of the Master.
3. Curator bonis may be appointed
• The curator takes over the role of managing the debtors estate. The master may appoint a
curator as a safe guard to prevent the debtor from dealing with the property as he or she
pleases.
4. Risk of potential compulsory sequestration if
These are Acts of
• the debtor fails to lodge a statement of his affairs
insolvency which give
• lodges one which is incorrect or incomplete in a material effect right to
• fails to make application to court on appointed day a creditor to apply for
compulsory
• Fails to withdraw such a faulty statement. sequestration.
 The notice of surrender lapses if:

1.The court does not accept the surrender,

or
2.If the notice is properly withdrawn (consent of MHC after giving
reasons),
or
3.If the debtor fails to make the application within 14 days after
date advertised as the date of the hearing.
 Insolvency Act, 1936 (Act No. 24 of 1936)
First Schedule : Forms Form A : Notice of Surrender of a Debtor's Estate
(Section 4 (1)) FORM A

•NOTICE OF SURRENDER OF A DEBTOR'S ESTATE (SECTION 4 (1))

•Notice is hereby given that application will be made to the
__________________________________________ Division of the Supreme court on
____________________ the ________________________________ day of
_______________________________________________19 _______ at
___________________ o'clock in the forenoon or as soon thereafter as the matter can
be heard, for the acceptance of the surrender of the estate
______________________________________________of
____________________________________________________________________
___and that a statement of his affairs will lie for inspection at the office of the Master of the
Supreme Court at ______________________(and at the office of
______________________________(and at the office of
________________________________________) for period of fourteen days as from
the ____________________ day of ___________________________19______

__________________________________________ Published to notify creditors,

Attorney for ______________________________ SARS, employees and trade
unions
 2.5 APPLIC ATION FOR SURRENDER

Notice of motion supported by an affidavit, containing:

1. [particulars of applicant] Full name, status, occupation & address of the applicant [show
jurisdiction + locus standi]
2. An allegation of insolvency and facts to establish this
3. Explanation on how the insolvency came about
4. An averment that the applicant owns realisable property of sufficient value to defray all the costs of
sequestration which will be payable out of the free residue of the estate
5. An allegation - it will be to the advantage of the creditors if the debtor’s estate is sequestrated,
[supporting facts]
6. Details of any salary or income that the debtor is receiving.
7. A description of the procedural steps followed by the applicant prior to bringing the
application supported by documents proving that each step has been taken. (i.e. did they try debt
counselling first and other methods)
8. Any other information that may influence the court in granting or refusing the surrender

The affidavit must be sworn in and signed before a commissioner of oaths independent of the office in
which it was drawn.
 2.6 COURT’S DISCRETION

• When adjudicated upon, the following documents must be before the court:

1. Notice of motion and supporting affidavit

2. Debtor’s statement of affairs, incorporating the verifying affidavit

3. Any sworn valuation necessary (if requested to show how much your assets are worth –
MHC can request this)

4. Proof of publication of notice of surrender

5. Proof by affidavit that an applicant has delivered or posted copies of the notice as required.

6. A certificate from the Master – what decision had he made on what was lodged

7. Any opposing affidavits by creditors

8. Debtor’s replying affidavit

 Court’s discretion to set aside the order

The court has discretion even if all the requirements have been met.
The factors they will consider may be:

1. Gross extravagance and running up debts on a pretentious scale you’re going to be

sequestrated anyway so why not take a trip to Bali
2. Creditors are not pressing for payment and willing to give time
3. Ulterior motive money coming in later in the year
4. Failure to give a full and frank account of financial position hiding money
5. Papers were deficient in a number of respects (condonation not applicable)
6. Would the NCA (National Credit Act) be more appropriate if all creditors were
credit providers ito the NCA
 2.7 COSTS OF SURRENDER

• “Free residue” is defined in section 2 as “that portion of the estate which is not subject to any
right of preference by reason of any special mortgage, legal hypothec, pledge or right of
retention.” It includes the balance of the proceeds of encumbered property after discharge of
the encumbrances.

Type of costs:

• costs of the sheriff to attach

• master's fees

• remuneration of curator bonis (not necessarily always appointed) and/ trustee

• Valuation costs of property listed in the statement of affairs

 2.8 SETTING ASIDE THE ORDER

• Court’s discretion

• No appeal lies against the order of refusing to accept a surrender, but any
aggrieved by an order accepting a surrender may appeal against such an order.
Creditor can appeal if the voluntary sequestration was ordered (he might think he
could be paid more if he claimed separately) but if the application was rejected, the
debtor cant appeal (he will have to wait for compulsory sequestration or use another
method i.e. debt counselling)

• Unlike an order of rehabilitation, an order rescinding a sequestration order does not

have the effect of releasing a debtor from the liability of his debts. He is simply placed
in the position he had occupied before the order was granted, as to both his person
and property.
Ex parte Van den Berg 1950 (1) SA 816 (W)

Ramsbottom J lamented the use of the machinery of sequestration to distribute a

very small amount to creditors ….after paying the costs of realisation and the cost of
administration ‘as using a sledgehammer to break a nut’.

He
cautioned against the use of the ‘expensive machinery of sequestration’ opposed to the ord
inary litigation process.

Application was intended to defeat the claims of the creditor

Ex Parte Ford 2009 (3) SA 376 (WCC)

In Ex parte Ford 2009 (3) SA 376 (WCC) the court refused to grant a sequestration order
following an application for voluntary surrender since the applicant-debtors did not,
according to the court, avail themselves adequately of debt relief measures provided for by
the NCA where the bulk of the debt consisted of credit agreements regulated by the NCA.

The fact that no proper consideration had been given in the context of debt-counselling to
any other option beyond administered debt collection such as the possibility of declaring
the credit agreements to be reckless credit in terms of the NCA before applying for
voluntary surrender, played a significant role in the court’s decision not to grant the
sequestration order
 COMPULSORY
SEQUESTRATION

Chapter 3
 3.1 REQUIREMENTS

1. Applicant has established a claim which in terms of

section 9(1) entitles him to apply for sequestration of the
debtor’s estate; Liquidated claim

2. The debtor has committed an act of insolvency or is

insolvent

3. There is reason to believe that it will be to the advantage

of the creditors if the debtor’s estate is sequestrated.

The creditor who claims

sequestration bears the full onus to
prove all of these elements
 A creditor (or his or her authorized agent) with a
liquidated claim of not less than R100

• A liquidated claim is a monitory claim that is

determined or determinable
THE
APPLICANT IS Examples of liquid claims:
E N T I T L E D TO
A P P LY I N
• claim for the price of goods sold and delivered
TERMS OF S • claim based upon provisional sentence summons (legal
9(1) proceedings based on liquid claims)
“ L I Q U I DAT E D
CLAIM” • a claim for return of the price paid under a sale which
has been cancelled due to the seller’s repudiation
• Delictual claim for the theft of a fixed and
determinable sum of money

Two or more creditors (their agents) with liquidated

claims not less than R200
A liquid amount:

S 9(2)A liquidated claim “which has accrued but isn’t yet due” by the time of the
application is heard must be regarded as liquidated for these purposes. (for example, you
sold your car to X and agreed X would pay you at the end of December when he gets
his bonus, this amount has accrued to you but it isn’t due yet, for the purpose of
sequestration this amount will be factored into you assets as it is a liquid amount due to
you).

R100:

The claim needs to be + R100 at the time of the application for the provisional
order of sequestration AND when the order is made final. The debtor cant pay some
of the claim to get it below R100 but a third party can.
For example, Jack is being sequestrated, he owes his creditor R500, the creditor applies
for a provisional sequestration order as it is over R100, before the order is made final
and before Jack’s account is officially sequestrated, Jack’s dad pays the creditor R450.00.
Now the creditor does not have a claim above R100 at the time of the final order
because he is only owed R50. Thus, the order wont be made final.
 • A creditor might not always know
whether the debtor’s liabilities exceed his
assets, aka whether he is actually insolvent,
T H E D E B TO R
HAS
so there are certain “acts of insolvency” that,
COMMITTED if committed by the debtor, the creditor will
A N AC T O F be able to approach the court for a
I N S O LV E N C Y sequestration order.
OR IS
I N S O LV E N T
• In COP – one spouse commits act – the
combined estate is subject to sequestration
The following are acts of
insolvency (s 8)
• Absence from the Republic or dwelling
with the intention to evade or delay
payment of his debts commits an act of
insolvency.
• Failure to satisfy judgment
• Disposition prejudicing creditors or
preferring one creditor.
• Removal of property with intent to
prejudice or prefer a creditor
• Offer of arrangement
• Failure to apply for surrender
• Notice of inability to pay to the creditors
• Inability to pay debts after notice of
transfer of business
1. Absence from the Republic or dwelling
with the intention to evade or delay
payment of his debts commits an act of
insolvency.

Creditor must establish that:

• the debtor had an intention to evade or delay
payment of debts
• that this is the only probable inference that
can be drawn Cant even be a slight
chance he was on
honeymoon
Not sufficient to prove that he just departed or is
absent; he could just be visiting a sick family
member or doing something for work. There
would have to be more evidence—for e.g. he
appointed another co-director to run the
company business, disposed of his office
equipment, terminated the lease of the property
he was residing at, closed bank accounts,
disconnected his phone etc.
2. Failure to satisfy judgment

Consists of 2 separate acts of insolvency;

1) The debtor, upon demand by the sheriff, fails to satisfy judgement or to

indicate sufficient disposable property to satisfy the judgement, or;
2) Where the sheriff, without presenting the writ to the debtor (this will only
happen if the writ could not be served on the debtor personally), fails to find
sufficient disposable property to satisfy the judgement and states this fact in his
return.
These 2 deeds are separate, but are not independent from each other. The 2nd act
only applies if the first act cannot be established (i.e. personal service was not
possible)

In other words, if the judgement for compulsory sequestration was

made, this person doesn’t have enough money / assets to cover the
prospective judgement amount (or a sufficient amount thereof)
3. Disposition prejudicing creditors or preferring one creditor.

If the debtor makes or attempts to make, any disposition of any of his property, which
has, or would have, the effect of prejudicing his creditors or preferring one creditor
above another.
There has to be an intention to effect the creditors!!
2 things—the actual disposition or an attempted disposition of property.
Actual disposition: must have prejudiced or preferred
Attempted disposition: if completed, would it have caused prejudice or preference.
E.g. debtor refuses to meet one debt but pays another in full or if he sells an asset
significantly below its market value whilst failing to meet debts that have fallen due.

4. Removal of property with intent to prejudice or prefer a creditor

If he removes, or attempts to remove, any of his property with the intent to prejudice his
creditors or prefer a creditor above another.
Differs from disposition: disposition of the property is not required, mere removal is
sufficient, and there has to be an actual intention to prejudice or prefer, not only to effect
the creditors.
E.g. debtor sends money or goods to a foreign country so it is not to be available for the
settlement of a creditor’s claim / “hides” it at his mom’s house.
5. Offer of arrangement

If he makes, or offers to make, any arrangement with any of his creditors for
releasing him wholly or in part from his debts.
Used often but it is only indicative if it shows the debtor’s inability to pay his
debts.
Often looks similar to notice of inability to pay - often this is in the alternative.
Debtor has to basically acknowledge that he owes the debt in full; aka no dispute,
but that he can’t pay it and offers to rearrange.

6. Failure to apply for surrender

He published his notice of surrender, but he:

• Fails to lodge the statement of affairs
• Or the filed statement of affairs is incorrect or incomplete in a material respect
• failed to apply for acceptance of the surrender on the specified date.
7. Notice of inability to pay to the creditors

If he gives notice to any one of his creditors that he is unable to pay any of his debts.
The notice must be in writing. If it’s done orally = not an act of insolvency.
For e.g. debtor goes to any creditor informing him that he is not in a position to pay
the debt for the time being in writing. Vs offer to arrange → not necessarily in
writing, trying to make a “deal” on how to pay debts but inadvertently showing them
you cant actually pay your debts.

8. Inability to pay debts after notice of transfer of business

This does not include any CC’s or Companies.

If, being a trader, the debtor gives notice in the Gazette in terms of sec 34 (1)
(intention to transfer his business) and is thereafter unable to pay his debts.
Every liquidated liability of the trader due in the future becomes due if the creditor
concerned demands payment. All debt becomes payable should the creditor so
demand after publication in gazette; if THEN you can't pay, it is an act of insolvency.

When you sell your business its typically when you’d have your most amount of
money, so if when your creditors demand payment soon thereafter and you cant pay,
you may as well be sequestrated because when else will you be in the position to pay.
 THERE IS • Under voluntary sequestration we said that the
R E A S O N TO debtor had to show that sequestration WILL BE to
B E L I E V E T H AT the benefit of creditors
I T W I L L B E TO
THE
A DVA N TAG E
OF THE
• Here what needs to be proven is that there is just
C R E D I TO R S I F reason to believe it will be to the creditors’
T H E D E B TO R ’ S advantage.
E S TAT E I S
S E Q U E S T R AT E D
. • Burden of proof is a lot lighter
 FRIENDLY SEQUESTRATION

“amicable” creditor. There is nothing stopping the debtor from arranging with a friend,
to whom he owes a debt that he is unable to pay, that he will commit an act of
insolvency for e.g. a notice of inability to pay his debts, then the friend would apply for
compulsory sequestration on the strength of this act of insolvency.

Craggs v Dedekind: defined friendly sequestration as all having similar characteristics.

The debt is almost always a loan, usually quite a small loan, and it is very often made in
circumstances where it would have been apparent to almost anyone that the debtor
was experiencing financial difficulties. Despite this, the loan is usually given without any
form of security at all, and its seldom recorded in writing or by written agreement.
The only writing that is produced is the letter stating that the debt cannot be paid and
sometimes for good measure, a detailed outline of the respondent’s assets and
liabilities. It is usually done by family or close friends, partners etc.
The mere fact that a sequestration application is bought upon by a creditor who
is prepared to co-operate with the debtor, or is highly motivated to assist the
debtor, does not preclude (prevent) the granting of a sequestration order (Van
Rooyen v Van Rooyen). An order should not be refused just because there is
goodwill between the parties.

But the court must consider that in these situations, there is considerable
potential for collusion (conspiracy) and malpractice. The court is therefore more
strict and looks at these matters with more scrutiny, the inquiry will go beyond
the three main requirements.

The court shouldn’t stop

sequestration between
persons/ entities with mutual
goodwill BUT because most
of these loan agreements are
“unwritten” there is the
possibility of fraud and
collusion
 3.2 APPLIC ATION FOR
SEQUESTRATION

Form and content of application:

Application is brought by way of a notice of motion. And supported by a
founding affidavit.

Steps to take before the matter is adjudicated on:

1. Security for costs

2. Search of Master’s records (aka, check if the debtor’s estate is already
under sequestration) to establish any prior sequestration
3. Filing of application at court
4. Master’s report
5. Copy of papers to debtor and other parties
Provisional sequestration:

The creditor applying for sequestration will approach the court twice (1) to get a
provisional sequestration order [prima facie appearance of insolvency] (2) to have the
order confirmed by the court [insolvency proved on a balance of probabilities].

The court can order a provisional seq order or dismiss the application.
If granted, the rule nisi is applicable and the debtor will have to show cause, on the final
court day, as to why his estate should not be sequestrated.

A provisional seq order preserves the debtor’s estate (stay of sales) and gives the
creditor a right to enforce his claim.

Rule nisi:

A rule nisi is an order granted ex parte directed to a particular person or persons

calling on them to appear in court on a certain fixed date to show cause why the rule
should not be made absolute. → have the option to oppose.

The rule nisi must be served on the debtor, if he cannot be found in his ordinary
residence, the rule must be published at court and in the Government Gazette.

Rule nisi also given to the debtor’s employees and their trade union (if applicable).
 3.3 COURT’S DISCRETION

Even where an act of insolvency has been proven on a balance

of probabilities, the court still has the discretion to not grant
the final order.
 3.4 COSTS OF
PROCEEDINGS
When the final order is granted, the trustee will first pay the
applying creditor’s costs of the order out of the available
funds in the estate, and then proceed to distribute the estate.
 3.5 UNWARRANTED OR
VEXATIOUS PROCEEDINGS

If a creditor is found by the court to have brought about proceedings in a way that is
unwarranted or vexatious, the court will allow the debtor the opportunity to prove if
he has suffered any damages, and then claim damages.

3.6 SETTING ASIDE A

SEQUESTRATION ORDER

An aggrieved party may appeal against a final order or the setting aside of a provisional
order with leave from the court.
The court can also rescind or vary the order as it sees fit.
Amod v Kahn
1947 (2) SA PRESCRIBED
432 (N)
CASE
 Amod v Kahn 1947 (2) SA 432 (N)
Facts

Respondent had a claim against applicant’s son, which was larger than the claim of applicant
against respondent. Sequestration would mean that respondent would no longer have a claim
against the son. In the circumstances, sequestration would not have been to the advantage of
the creditors as a group and the application was dismissed. The applicant appealed.

Legal question

Could a court exercise its discretion in the granting of a sequestration order? Finding Yes, the
court exercised its discretion by refusing an application for compulsory sequestration because
the applicant was clearly abusing the process. The applicant's
correct remedy was to take out a warrant for the execution of his judgment against the debtor,
and then have the debtor's claim against the applicant's son attached in payment of the
judgment debt.

Ratio decidendi

Even if it were assumed that sequestration would have been to the advantage of the creditors,
it was clear that the applicant had brought the application with the exclusive aim of preventing
the debtor from enforcing his claim against the applicant's son. That
amounted to an abuse of the court process, and for that reason the court should in any event
exercise its discretion against the applicant.