Sequestration is a process by which you are declared insolvent, by an order of the High Court, upon application. Thereafter your assets are handed over to a trustee appointed by the Master of the High Court, who shall, according to the rules of the Insolvency Act 24 of 1936 (the “Act”), liquidate your assets. The proceeds of the sale of your assets are divided amongst creditors in a manner which is prescribed in terms of the Act. In order for the Court to grant an order for sequestration, a benefit to the creditors must be shown.

Sequestrations are basically as old as the hills. In the past a creditor was obliged to write off a debtor’s debt if the debtor was unable to pay the creditor within a period of seven years. This was known as “the years of grace”. Further, in the early Roman times if you were unable to pay your debts you would automatically become a slave of the creditor. How things have changed through the years and thankfully so. In modern times, the main aim of sequestration is to prevent creditors from incurring further damages. It is interesting to note that only as recent as 1923 (in the matter of Ex Parte Pretorius) it was decided that insolvency is indeed a civil matter and not a criminal offense!

During October 2012, the South Gauteng High Court Judge Satchwell handed down several judgements in relation to insolvency matters that were heard ex parte in the motion court during July 2012.

Satchwell J, noted an increasing exploitation of insolvency proceedings of late which is effecting creditors, shareholders, taxpayers and the general South African economy.

During 2008, the economies of the world took huge knocks and the South African economy has not been immune, as can been seen from the rising amount of sequestration applications being brought before the High Courts of South Africa.

It is interesting to note and witness the lengths to which individuals can and will go in order to evade the personal consequences of their indebtedness. What consumers do not realise is that the Courts are becoming far more aware and exercising their discretion and care in terms of the Act and as a result applications are not being granted as easily as anticipated.

Satchwell J further made mention that where persons feel overburdened by the state of their financial affairs, it is disconcerting to discover that such persons feel they may apply for the surrender of their estate, notwithstanding that their liabilities do not exceed their assets, nor is any act of insolvency alleged or proven. It is therefore concerning that “indebted but not insolvent” persons seek to avoid the inconvenience of taking steps to responsibly and proactively administer their financial affairs.

Debtors, beware that insolvency proceedings do not exist for the benefit of the distressed. In Mayet v Pillay 1955 (2) SA 309 N the Court reminded us that: “the machinery of voluntary surrender was primarily designed for the benefit of creditors and not for the relief of debtors”. The insolvency process is therefore not one to enable debtors “to obtain welcome relief from misery” (see Hillhouse v Stott 1990 (4) SA 580 W).

Advantage to creditors must be proven

The Court must always be satisfied that it will be to the advantage of creditors in terms of Section 6(1) of the Act. In addition, the Court should be of the opinion that, prima facie there is reason to believe that it will be to the advantage of creditors in terms of Section 10(c) of the Act and/or the Court should be satisfied that there is reason to believe that it will be to the advantage of creditors in terms of Section 12(1)(c) of the Act. In light of the above, an act of insolvency is insufficient reason on its own for the belief that the sequestration of a person’s estate shall be an advantage to creditors (see Gardee supra at 1070 G).

In summary, applicants must demonstrate a reasonable expectation that a sequestration will exceed the likely proceeds of ordinary execution. “Unless he does that, the laborious and substantially more expensive remedy of sequestration can hardly be thought to be advantageous!” (Manacos supra).

A word of advice

Debtors seek the advice of debt counsellors, as contemplated in the National Credit Act 34 of 2005 and avoid the costly sequestration route. Take action today and get your financial situation and debts under control.

Written by:
Claire Vogelpath-de Iongh, BKM Attorneys
claire@bkm.co.za

Please do not hesitate to contact us on +27 11 788-0083 should you have any further enquiries or email enquiries@bkm.co.za