Insolvency Law MRL 3701

Study unit 1: Introduction to Insolvency Law Case Law: NB: Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly and another NNO 1984 (1) SA 160 (W) Meaning of “insolvency” Common meaning – a person is insolvent when he is unable to pay his debts, however, The legal test for insolvency is whether the debtor's liabilities, fairly estimated, exceed his assets, fairly valued. The inability to pay debts Is merely evidence of insolvency. A person who has insufficient assets to discharge his liabilities (although he satisfy the test for insolvency) is not treated as insolvent for legal purposes unless his estate is sequestrated by an order of the court. Sequestration order = formal declaration that a debtor is insolvent Sequestration order can be granted: 1. at the instance of the debtor himself (voluntary surrender) or 2. at the instance of one or more of the debtor's creditors (compulsory sequestration) Note: a debtors estate is sequestrated NOT the debtor himself HOWEVER both debtor's estate and debtor himself may be described as insolvent “Insolvent”has 2 meanings: 1. debtor's estate has been sequestrated 2. debtor's liabilities exceed his assets Purpose of a sequestration order – to secure the orderly and equitable distribution of a debtor's assets where they are insufficient to meet the claims of all his creditors – to execute against property of a debtor who is in insolvent circumstances means that a few creditors will be paid and the other will receive little or nothing – therefore the purpose is to liquidate all assets and distribute it among all creditors ito a predetermined (and fair) order of preference – the law proceeds from the premise that once an (provincial)order is granted, a concursus creditorum (coming together of creditors) is established – the interest of creditors as a group has preference over individual creditors – debtor cannot burden his estate further with any debts – creditors right to recover his claim in full is replaced by the right (on proving a claim against the insolvent estate) to share with all other proved creditors in the proceeds – may not diminish estate assets or prejudice any creditors rights – law of insolvency is primarily for the benefit of the creditors therefore the court will not sequestrate the estate of a debtor if it is not to the benefit of the creditors – therefore, will not resort to sequestration if debtor (although insolvent) has only 1 creditor and he has a judgment against the debtor – normal execution proceedings will offer a less expensive means of payment – court will not order sequestration is all assets will be consumed just by placing the estate under sequestration – only if there is an appreciable dividend for the creditors – sequestration wasn't designed to alleviate the position of the debtor but this is the effect as he is relieved from legal proceedings by creditors and allows him to rehabilitate and free him from unpaid debt. – Insolvency law ensures that creditors receive an equitable share of the debtor's estate – sequestration not only affect the debtor's estate but also the debtor personally as he is restricted to enter into other agreements and his capacity, to hold office, to litigate, it restricts the creditor's ordinary remedies – Sequestration proceedings instituted pursuant to breach of a credit agreement could not be classified as legal proceedings to enforce the agreement as envisaged by Sec 129(b) of the National Credit Act What may be sequestrated? Act provides for the sequestration of the ESTATE of a debtor 1. Meaning of “Estate” • a collection of assets, but if you only have liabilities then you will have a estate for sequestration purposes • joint estate of spouses married in community of property is also an estate • married in community of property – you do not have a separate estate even if you do business independently from your spouse, spouses are both debtors on sequestration of the estate • on divorce each spouse regains separate estate which needs to be sequestrated separately • Sec 17(5) of Matrimonial Property Act – sequestration does not extinguish the liability of the solvent spouse for debts of the joint estate • HOWEVER if divorce takes place AFTER a creditor has already acquired the right to apply for a sequestration of the joint estate then the creditor is required to sequestrate the separate estates of both spouses • out of community of property – there is a separate estate which can be sequestrated BUT solvent spouse's assets are affected as they vest in the trustee of the insolvent estate until the solvent spouse can establish his/her title to them • debtor whose estate has been sequestrated may during his insolvency acquire a new estate under a title valid against his trustee. This new estate may be voluntary surrendered or sequestrated . Compulsory sequestration is possible even where the assets in the 2nd estate have been dissipated by the time the application for sequestration is made 2. Meaning of “debtor” • = a person/partnership or the estate of a person/partnership, which is a debtor in the usual sense except a body corporate or a company or other association of persons which may be placed in liquidation under the law relating to companies (Sec 2) • Magnum Financial Holding v Summerly & Another – an entity/association of persons is regarded as a debtor in the usual sense of the word • Sec 337 – 426 of Companies Act 61 of 1973 – governs liquidation of insolvent companies = this was left in operation in Companies Act 71 of 2008 to apply to winding up and liquidation of companies • Entities that may be placed in liquidation: ◦ company ◦ external company (company registered outside the RSA) ◦ any other body corporate • Body Corporate = a juristic person/universitas, I.e an association of persons that has perpetual succession and is capable of holding property & suing/being sued in its corporate name • DEBTOR embraces the following ◦ a natural personally ◦ a partnership (even one whose members are all juristic persons) ◦ a deceased person & a person incapable of managing his own affairs ◦ an external company that doesn't fall within the definition of external company (I.e a foreign company that has not established a place of business in the RSA) ◦ an entity/association of persons that is not a juristic person, such as trust • A Body Corporate established ito the Sectional Titles Act 95 of 1986 is a body corporate referred to in the definition of “debtor” in the Insolvency Act and is not capable of being sequestrated, cannot be wound up Jurisdiction of the Court Which court has jurisdiction? • Rule – only a Provincial/Local division of the High Court • Magistrates Court may preside over prosecutions for criminal offences under the Insolvency Act, proceedings to set aside voidable dispositions, provided the ordinary jurisdictional limits as to offence, person, amount imposed by Magistrates Court Act are not exceeded Jurisdiction over a debtor and his estate Sec 149(1) – court has jurisdiction over a debtor and in regard to the estate of a debtor if: • on the date when the application for voluntary surrender/compulsory sequestration of the debtor's estate is lodged with the Registrar of the court, the debtor is domiciled/owns property/is entitled to property situated within the jurisdiction of the court (sec 149(1)(a)) (domicile/property within jurisdiction) OR • at any time within the 12 months immediately preceding the lodging of the application, the debtor ordinarily resided/carried on business within the jurisdiction of the court (Sec 149(1)(b)) (residence/business within jurisdiction in preceding 12 months) Domicile/property within jurisdiction • a personal right (a right to a performance of some kind)is taken to be situated where the debtor, liable to render the performance, is domiciled • Nahrungsmittel GmbH v Otto – N applied to sequestrate the estate of O (German citizen and imprisoned in Germany). N said court has jurisdiction as O had been awarded costs in an earlier court case decided in SA. Because of this O owned/was entitled to property situated with the court's jurisdiction. Court: the location of the right to costs, being intangible property without any physical address followed the domicile of the debtor liable to pay the costs. Debtor was Germany company situated in Germany therefore not in SA jurisdiction. Residence/business within jurisdiction in preceding 12 months • debtor need not ordinarily have resided/carried on business for entire 12 months preceding application – important – AT ANY TIME during that period. • Ordinary residence means more than a temporary stay Jurisdiction in litigation against third parties • Sec 149 – deals with when a court has jurisdiction over a debtor & his estate, NOT relevant where the trustee of an estate litigates against a 3rd party • in proceedings to set aside a voidable disposition made to a 3rd party prior to sequestration, ordinary rules of jurisdiction apply and the trustee cannot rely on Sec 149 Competing courts – removal to another court • Court having jurisdiction may refuse/postpone the surrender/sequestration if it appears that the estate should be sequestrated by another court in RSA • Court may order transfer of the case – transferee court need not have original jurisdictional • court should take into account when transferring ◦ convenience of the parties ◦ convenience of the court ◦ general disposal of litigation • essential enquiry is where the estate may more conveniently be administered (therefore what would happen AFTER the order is granted) The Master • Master is appointed ito Administration of Estates Act 66 of 1965 to each area of the Provincial and local divisions of the High Court. • Functions – custody of all documents relating to insolvent estates • Master is entitled to charge prescribed fees, payable to the Department of Justice and Constitutional Development at a Magistrates Court/directly into bank account of department • Master is creature of statute – only have powers as granted to him by the legislature • He cannot act unless empowered by the statute expressly/implied • Not a judicial officer and therefore cannot issue court orders/judgments • Sec 151 of Insolvency Act – any person aggrieved by decision, ruling, order, taxation of the Master may bring it under review by the court after notice to the Master • to be reviewable the order/ruling/decision/taxation must be final in effect • person is aggrieved if his rights have been infringed/legal grievance • right of review is not limited to the party against whom the Master's decision/ruling was pronounced or proved creditors • Even trustee of estate may bring review • Type of review – court has power to either appeal or review with the additional power of receiving new evidence and entering into and deciding the whole matter afresh • court are not restricted to cases where some irregularity/illegality has occurred • court's powers are however not unlimited • ONLY if master has erred/misdirected himself in a material respect based on what was placed before him that the court can intervene & exercise its power under Sec 151 Condonation of Irregularities • Sec 157(1) – nothing done under the Act will be invalid by reason of a formal defect/irregularity unless a substantial injustice has been done thereby which in the opinion of the court cannot be remedied by any order of the court • What is the effect of this section? ◦ If a formal defect/irregularity has not caused a substantial injustice, the procedural step in question is valid (court may condone the defect in these circumstances – this seems incorrect as sec 157 doesn't confer on the court the power to do so. ◦ If formal defect has caused a substantial injustice, but the prejudice to the creditors can be remedied by an appropriate order, the defect is not fatal, provided, the party concerned complies with the corrective order ◦ if formal defect has resulted in substantial injustice & the prejudice to creditors cannot be cured by any order, then the procedural step is invalid • What is “formal”? ◦ defect is not formal if it might cause prejudice to creditors ◦ defect is not formal if the provision which was breached aims at some definite object which could be defeated by the lapse in procedure ◦ defect is not formal if the provision breached is peremptory (imperative) as opposed to merely directory (directive) ◦ defect is not formal if the rights of a creditor would in any way be affected ◦ Ex parte Slabbert – a formal defect is simply a departure from a prescribed or established procedure. • Additional grounds on which a breach in procedure may be overlooked/condoned: ◦ where the deviation is so slight as to fall within the maxim de minimis non curat lex (the law is not concerned with trifles) ◦ where all interested parties have waived compliance with the provisions of the Act ◦ where the provision in question is not peremptory and has substantially been complied with ◦ where it was impossible for the party concerned to have complied with the Act • difficult to reconcile last 2 grounds(substantial compliance & impossibility) with Sec 157(1) • if defect not “formal” for purposes of Sec 157(1) and none of ground for condonation is present then procedural step is invalid South African Law Insolvency Act • Roman Dutch Law was followed • 1803 – Desolate Boedelkamer established – administration of abandoned estates & execution of civil sentences including estates of all persons obtaining cessio bonorum (transfer of property) • 1818 – Desolate Boedelkamer abolished, sequestrator was appointed to exercise functions of chamber • 1829 – office of sequestrator was abolished as it wasn't a success. • 1829 – Ordinance 64 of 1829 was passed to regulate administration of insolvent estates • all other ordinances was appealed by Ordinance 6 of 1843 which was a landmark in SA law of insolvency • Ordinance 6 of 1843 ◦ abolished cessio bonorum ◦ was taken over by other colonies & republics • After Union in 1916 – Insolvency Act 32 of 1916 replace existing statutory law • Now Insolvency Act 24 of 1936 is in force Constitution • Constitution of the RSA 1996 • Insolvency law pose a potential threat to a number of fundamental rights ◦ right to equality (sec 9) ◦ right to freedom and security of the person(sec12) ◦ right to privacy (sec 14) ◦ right to access to information (sec 32) ◦ right to property (sec 25) ◦ right to just administrative action (sec 33) • Constitutional Court has been called on to consider constitutional validity of several insolvency provisions ◦ sec 21 of Insolvency Act (upheld) ◦ sec 44 of Insurance Act 27 of 1943 (held invalid) ◦ sec 66 of Insolvency Act (held invalid to the extent that it empowered a presiding officer at an interrogation who is not a judge or magistrate to issue a warrant of committal to prison) • mere fact that insolvency provision conflicts with fundamental right does not mean provision is constitutionally invalid • constitutional invalidity has 2 fold inquiry: ◦ does provision conflict with fundamental right? ◦ If yes is the limitation reasonable & justifiable in an open and democratic society based on human dignity, equality, freedom • all relevant factors must be taken into account to decide the latter issue: ◦ nature of the right ◦ importance of the purpose of the limitation ◦ nature and extent of the limitation ◦ relation between the limitation and its purpose ◦ less restrictive means to achieve the purpose Study Unit 2: Voluntary Surrender – Requirements Case Law: NB: Ex parte Henning 1981 (3) SA 843 (O) There are 2 ways in which a debtor's estate may be sequestrated: 1. The debtor himself or his agent may ito Section 3(1) of the Insolvency Act apply to court for acceptance of the surrender (Voluntary Surrender) 2. A creditor(s) may apply to court for the sequestration of the debtor's estate ito Section 9(1) of the Insolvency Act (Compulsory Sequestration) Who may apply for Voluntary Surrender? 1. Debtor himself or agent expressly appointed and authorised by the debtor (estate of natural person) 2. The executor of the deceased debtor (deceased estate) 3. The curator bonis, on behalf of a debtor who is not capable of handling his own affairs. 4. Members of a partnership that is a debtor or an agent appointed and authorised by the partners who are resident in the Republic (partnership estate) 5. Spouses married in community of property ito the Matrimonial Property Act with regards to a joint estate. Requirements for Voluntary sequestration The court will only grant a sequestration order where it is satisfied that all the requirements and preliminary formalities have been complied with: 1. Debtor's estate to be insolvent A debtor is insolvent where his liabilities exceed his assets. This is determined by a statement of affairs which the debtor is expected to prepare (eg. Tenza case). The test for insolvency is whether it is established that the debtor is without funds to pa