Voluntary Sequestration – Frequently Asked Questions
How does the sequestration process work?
Make an appointment with us. During the consultation, we will assist you in determining whether sequestration is indeed the right option. Should you want to proceed with sequestration, there are a lot of legal formalities of which we take care. From the date of the decision to sequestrate it normally takes about seven weeks before we appear in Court. You don’t have to appear in person, we appear on your behalf. During the process, you are protected against execution by your creditors unless you have left it so late that we can’t timorously place the prescribed publications in the Government Gazette which would stop execution by your creditors.
After the Sequestration Order has been granted, the Master of the High Court appoints a Trustee who must take charge of your assets and liabilities. Once a Trustee is appointed we set up a meeting with the Trustee at which meeting we represent you. When meeting with the Trustee we negotiate on your behalf certain important aspects.
Can I be “too poor” to sequestrate?
Yes indeed. There must be a “benefit” for creditor before the court will grant a sequestration order.
What is a “benefit for creditors” and how is it calculated?
Should we try to explain this concept thoroughly it will take a lecture of many hours. For your
This means that if you have for example an immovable property in your estate of which the value is a million rand and the value of the property (as determined by a valuator) is, for example, R800,000.00, then that creditor must receive at least R800,000.00 excluding the cost of realisation such as auctioneer’s costs etc. The creditors that do not hold any security must each receive a dividend of at least 20 cents in the rand. Traditionally the Courts required that there should be a dividend of 10 cents in the rand, but in a court decision in January 2010, his Lordship Judge Bertelsman decided that a proper dividend for creditors is 20 cents in the rand. Many Judges follow this decision.
Over and above these requirements, there must also be enough assets or cash in the insolvent estate to ensure that the administrative costs of the estate are paid. The frustration that we as Insolvency lawyers experience is that some judges may require a dividend of ten cents in the rand for concurrent creditors as suppose to other judges that may require up to twenty cents in the rand. My advice is to approach a competent lawyer who understands the calculation of benefit for creditors and will do it on your behalf.
Will my Application for Sequestration succeed?
We have dealt with about 2300 insolvency cases. Thus far only 5 of these Applications did not succeed. We can’t pretend that we will always succeed, but on a balance of probabilities, we have succeeded in passing 99.85 of all applications that we handled.
Why don’t I simply wait for my creditors to sequestrate me?
Creditors are not keen to bring a “hostile” Sequestration Application, because it is normally cheaper for them to follow execution steps via the Sheriff. Hostile sequestration Applications are normally brought against debtors who have very large estates and have hidden their assets from creditors. Such a creditor would most properly hold an insolvency inquiry against such a debtor. And insolvency inquiry is a process in the insolvency law by which the insolvent, his family, auditor, employees, auditors etc. can be in interrogated to get information regarding the assets and other relevant affairs pertaining to the insolvent estate.
What do I tell my creditors?
Once you have given us instructions, you use the famous term “Speak to my lawyer”. Once you have given us instructions, you must not try to deal with your creditors yourself. That is why we get paid. There are a lot of creditors who will tell you that they don’t speak to attorneys. The simple answer to this is that, if they do not wish to speak to your attorneys, they will speak to nobody. It is a basic principle under South African Law, that once you have an attorney on record, your opponent is obliged to speak to your attorney and not to you in person.
The practical problem is that many of the creditors have call
Can “they” take my salary?
There are certain sections in the Insolvency Act as
Will I lose my furniture?
In terms of the Insolvency Law, there are certain assets which your Trustee has to attach. Regarding your household furniture, there are certain exceptions. We have done about 2300 insolvency matters, and in every instance, we have succeeded in negotiating on behalf of our client for the household furniture to be excluded from the Insolvent Estate. The worst case scenario is that your furniture is appraised, and you have to buy back your furniture from your Insolvent Estate, while the furniture stays in your possession. The “insolvency value” of furniture is very low because it is evaluated at a forced sale value, such as when it is sold in execution by a sheriff.
Can “they” take my tools of trade?
In terms of Section 82(6) of the Insolvency act, your trustee is not allowed to take your tools of
Can “they” take my children’s assets?
No. Your child’s estate belongs to him/her. The devil lies in the detail. If your son plays cricket, it is rather easy to prove that the cricket bat in your son’s room belongs to him. When your son is born and grandpa and grandma bring him his first present, that child is starting to accumulate his own estate – it belongs to him, not his parents. It will obviously be difficult to prove that the new BMW parked in front of your house belongs to him.
What happens to my insurance policies?
Insurance policies consist of different categories. A retirement annuity is protected against your insolvent estate. Also protected against your insolvent estate are any funds that pay out to you in terms of a claim for personal injury. Policies ceded to creditors have become the property of your creditors and they can deal with those policies in whatever manner they deem fit. All policies which are not ceded and do not fall under the Pensions Act (or other protection in the Insolvency Act) form an asset in your insolvent estate. There are legal ways to protect your policies if they fall within certain parameters on which we will advise you on.
Will my cell phone contract be cancelled?
No. Your sequestration does not automatically cancel your cell phone rental agreement. If you simply carry on paying your cell phone you will simply carry on using it. You can however not after you have elected to keep the contract, stop paying a few months down the line after sequestration and then rely on the sequestration.
Do I still have to pay maintenance to my ex-wife?
Yes. The sequestration does not affect a maintenance order. You can obviously approach the maintenance court to reduce your maintenance.
Parking tickets, Television licenses, Speeding fines and other statutory fines?
Parking tickets, speeding fines, television licenses etc. are all excluded from your sequestration and you must still pay it.
Can I start a new business while I am insolvent?
If you have the permission of your Trustee you can indeed start a business while you are insolvent. This is, however, the short answer. To run a business of which the assets and income are protected against your insolvent estate, it is a more involved process in which we will assist you.
Can “they” attach money due to me in terms of a claim for personal injury or defamation?
No. This is prohibited by Section 23(8) of the Insolvency Act, irrespective of whether the course of action has arisen prior to the date of your sequestration or thereafter.
Will they take my wife’s jewellery?
It is not the normal practice that a Trustee will attach your jewellery. Should your jewellery be very expensive, it can become a problem. We will assist you in this matter.
Will “they” take my firearms?
Before the Laws on firearms became very strict, firearms were deemed to be an asset in your insolvent estate. Because Trustees find it extremely difficult to get rid of your firearms, they will normally sell it back to you at a nominal amount such as R100.00 per firearm, whilst it stays in your possession. Should the Trustee attach the firearm he must prove that he has a storage facility which must adhere to a book full of rules. Firearms have become a burden for Trustees and they just want to get rid of this burden.
Can “they” take my pension?
No. Section 23(7) of the Insolvency Act prohibits the attachment of your pension, an annuity funds or any other funds that full under the Pensions Act.
How long will I be able to stay on in my house which falls into my insolvent estate?
From the day that you give us instructions to sequestrate you, you will normally stay on in your house for a period of at least four and a half to five months. This is not because we can work magic and wonders. It is simply because it takes about seven weeks to get the sequestration order. Thereafter a trustee must be appointed by the Master of the High Court. Under normal circumstances, this takes about two weeks. Once the trustee is appointed, the two creditors meetings must be held. This takes another two months. The trustee can legally not deal with the property before the second meeting of the creditors has been convened. If you then add up these periods, it is about four and a half to five months.
How long will I be able to keep my car?
Once we have placed an advertisement in the Government Gazette in which you give notice that you intend to sequestrate, all execution steps against you stop. Once you have been sequestrated and the trustee has been appointed, the creditors would normally want their assets back immediately. The short answer is that you will keep your car until shortly after sequestration. We have over many years in thousands of cases only a few times had a situation where a banking institution approach the court before the sequestration order was granted and asked the Court for an order in terms whereof they take possession of the vehicle simply to keep it safe.
Will I be able to open a bank account after my sequestration?
Yes indeed. Banks won’t allow you to open a current account or a credit card account, but they will certainly allow you to open a savings account. In practice, this is no problem because virtually all savings accounts are these days linked to a banking card which can be swiped anywhere in the world. If you have internet facilities and the facility to swipe your card, this poses no problem. A practical hint is that you must open a savings account with a banking institution to which you don’t owe money. In terms of Section 23(9) of the Insolvency Act, no creditor can attach any amount you hold in an account in your name.
In practice, the banks, unfortunately, grab you money if your salary is paid into an account at the same banking institution to which you owed money in your sequestration. As your attorneys we then normally have a nice fight with the bank of which the result is that they pay you back, just to grab the next amount which you pay in. Our advice is that it is simply a practical solution to open a bank account with a banking institution to which you don’t owe money.
Should I keep on paying my creditors after I have given my Attorneys Instruction to sequestrate me?
No. Should you keep on paying certain creditors, you will prefer them above other creditors. Under South African Law, this is not allowed.
What are the most common practical problems after sequestration?
If you have lost your business, you must secure a new source of income. If you have lost your house, you must obviously find accommodation. Last but not least is the small matter of transport. If you have lost your vehicle in the sequestration you must get wheels somewhere. Many people who are insolvent ask a friend or family member to buy a car, which the insolvent uses and pays off. If you enter into an agreement with such a person in terms whereof you buy the car from him while it is still under finance, that agreement is unenforceable, because the vehicle does not belong to the other person and he cannot legally dispose thereof.
Can I put all my assets in trust?
This is a short question with a very long answer. We will advise you in this regard.
Can my employer fire me because I am declared insolvent?
There are certain positions which are excluded in the South African Law for example; you are not allowed to be a Director of a company, the Managing Member of a Close Corporation, Actuary etc. With regards to your employment, you can only be fired, if there is a condition in your Letter of Appointment in terms whereof you are not allowed to be an insolvent whilst in the employ of your employer. We have dealt with a specific matter where the Head of a division of one of the big banking institutions in South Africa was declared insolvent and the bank wanted to fire him. Because it was not a condition in his terms of employment, the bank was unable to fire him and we successfully negotiated on behalf of our client.
Someone “from the bank” has called me and he wants to collect my car because the payments are in arrears. Must I hand it over?
The banks, instead of making use of proper legal process, use a point collection agent who will use intimidation to collect your car. They work for a fee and their only interest is to collect their fee when collecting your car. The only person who is legally entitled to collect your car is a Sheriff of the Court with a Court Order in his hand. The collection agents use intimidation to force you to sign a voluntary surrender of your vehicle/asset. In short, get legal representation.
Will I be able to get a car?
If your car is financed under a Hire Purchase Agreement, your vehicle vests in the insolvent estate and you will certainly lose it. If however the vehicle is financed on a Lease or Rental Agreement then the creditor has an option to allow you to keep on paying the vehicle and also keep possession of the vehicle. The reason for this is that a vehicle bought on Hire Purchase becomes your property. If it is financed under lease or rental agreement, the creditor retains ownership of the vehicle. In case of rental you obviously will never become the owner of the vehicle. In case of a lease agreement, the agreement is normally structured in such a way that you become the owner of the vehicle once the last instalment has been paid.
In practice, many of our clients buy a vehicle from their parents, children, etc on a private sale. Many people who are insolvent (or are listed on credit bureaus) enter into agreements where a third party sells them a vehicle which is financed on that third parties name. Such an agreement is legally not binding, because the seller of the vehicle is not the owner and he can’t sell you something which he does not legally own.
If you have a vehicle in your insolvent estate which is paid off, we will, in so far as possible negotiate with your trustee for you to buy back the vehicle from the insolvent estate. How then do you get a vehicle? – You must make a plan!
"Will I be able to rent a house?
There are thousands upon thousands of people who are sequestrated. All of them live somewhere. In our experience, it is not difficult to find landlords / rental agents who are willing to rent a property to an Insolvent.
Am I allowed to enter into a contract after sequestration?
The general rule is that you are allowed to enter into any contract which does not pertain to assets which fall into your Insolvent Estate. You are for example allowed to enter into a cell phone contract, rental agreement, antenuptial contract etc. You are even allowed to enter into credit agreement if you have disclosed that you are insolvent and the creditor is willing to grant you credit. The discretion in granting you credit is with the creditor.
My son’s car is financed on my name, what will happen to the car after sequestration?
If you are sequestrated and the finance is in your name, the car will form part of your insolvent estate.
How do I prove that stuff does / does not belong to me?
Under South African law, ownership is determined by facts. This means that the mere fact that, for example, a motorcar is registered in my name does not mean that I am the owner. If someone claims ownership of the vehicle then it must be proved by a balance of probabilities that the vehicle belongs to the person who alleges that the vehicle belongs to him. This will be determined by answering, for example, the following questions:
- Who paid for the vehicle?
- Who paid the insurance premium on the vehicle?
- Who had use of the vehicle?
- Who was responsible for repairs of the vehicle?
There are certain exceptions to this rule where registration is deemed to be equal to ownership; like for example when immovable property is registered in someone’s name it is deemed to be a legal fact that that person is the owner of the property. The same rule applies to shares held in a company.
I have a photocopier / laptop / television under rental agreement!
If you have items under a rental agreement, ownership of the assets vest in the person from whom you rent it. You can at the time of sequestration choose to cancel the agreement and hand back the assets to the
Who the heck are “they”?
In our experience clients refer to a whole bunch of people or groups as “they”. When you enter into an agreement with a bank or creditor, then the bank or creditor is the so-called “they”. If you are unable to pay your debt and the matter is handed over to the attorneys, then the attorneys become “they”. Once you are sequestrated, there is only one “they” in your life and that is your trustee. No person, creditor, sheriff, or attorney can attach any of your assets or income. The trustee is in a very powerful position but he must always execute his function within the parameters within the Insolvency Act.
Can I sequestrate whilst / after I have been placed under debt review?
Yes indeed. The only requirement is that the debt review order must be set aside before the High Court can make a sequestration order. We normally arrange this for our clients.
Will I have to pay back my creditors before I can apply for rehabilitation?
When you are sequestrated, in layman’s terms your debt is written off. In legal terms, your debt is not written off. Your debts as well as your assets now vests in a Trustee who must deal with it. You do not have to pay back any debt of which the cause of action has risen before the date of sequestration. Should you have incurred “new” debt after sequestration that debt must obviously be paid. (Also see the Question “Contribution”)
How about a “friendly divorce” before sequestration?
Should you be married out of community of property, a “friendly divorce” will take you nowhere because the creditors’ claim/s have already vested against your estate, or your spouse’s or both, depending on what sureties and contracts were signed. Should you be married in community of property, a friendly divorce won’t normally help you because the creditors claim is against the communal estate even where only one of you have signed the credit agreement, surety etc. There are extremely exceptional cases where a friendly divorce can achieve protection for the spouse who hasn’t incurred the debt, even when you are married in community of property.
What is the effect of a marital property system where the accrual is applicable?
Whether you are married with or without the accrual system is irrelevant in so far the marriage is not dissolved. Marriage is only dissolved where one of the spouses passes away or if you divorce. Spouses and/or your Trustee can’t claim the accrual from the solvent spouse’s estate as long as the marriage exists.
Can creditors take my assets while I am in the process of sequestration?
There are three different processes by which you can be sequestrated. These processes are explained under a different FAQ’s. For good legal reason, we normally follow the process known as “surrender of estate”. This is the process where you approach the Court personally and ask the Court to help you. The Insolvency Act prescribes that your intention to sequestrate must be publicized by way of registered post to your creditors as well as by publications in certain media, inter alia in the Government Gazette. Once the publication of your intention to sequestrate has appeared in the Government Gazette, no creditor is allowed to sell any of your assets, even if the execution process against you has gone so far that the Sheriff has attached your assets.
Which are the three processes acknowledged in our law by which someone can be sequestrated?
There are three manners in which you can be sequestrated. The first is by way of “surrender of estate”. In this process, you approach Court as the Applicant of your own sequestration. My advice is that this is an appropriate manner.
The second process is referred to as “friendly sequestration”. This is the process where a friend or family member brings a sequestration Application against you. Many judges take a dim view on this process because they are of the opinion that a friend is used to hide certain facts from the Courts which would not fall within the knowledge of the friend that brings the Application.
The third process, what we will call in laymen’s terms a “hostile application”. Hostile sequestration is where one or more of your creditors apply to Court for your sequestration. It would without exemption appear from the Court papers that the Application is hostile because there will normally be allegations that you are dishonest, and that you are trying to hide your assets from the creditors.
What is the effect of placing an advertisement in Government Gazette in which I publish my intent to surrender my estate?
When applying to Court for an Order in terms whereof your estate is surrendered (sequestrated), part of the process is that your Attorneys must place an advertisement in the Government Gazette in which you disclose your intention to apply for your sequestration. Once this advertisement has been placed in the Government Gazette, it almost has the effect of a provisional sequestration order. The reason for this is that the legislator intended to stop your creditors from taking all your assets, and by the time you are sequestrated, you don’t have any assets left.
Even if a creditor has already attached your assets, and the advertisement is placed after the attachment but before the assets are sold in execution, that sale of execution has stayed. In practice, once we notify your creditor’s attorneys that we have placed the advertisement in the Government Gazette, they will hold back on the legal proceedings so as to provide you with an opportunity to bring an Application for your sequestration.
During and after Sequestration
I have forgotten about one or two small creditors and they are not mentioned in my application for sequestration, will I be held liable to pay them?
Section 4 of the insolvency act stipulates that all your known creditors must be listed. It is no problem if you did not know about the creditor, If you, however, left out a creditor to whom you owe, for example, a Million Rand, you will have to disclose to the creditor that you have left him out, If he is difficult about it, you might have to approach court again and ask the court to condone your oversight.
Am I allowed to have a credit card and cheque account while I am under sequestration?
Yes. Many people (even liquidators, trustees & attorneys) believe that you are not allowed to have and use a credit card and/or cheque account while under sequestration. If you have had these accounts before sequestration and they are not overdrawn, you can still use them, as long as you use your own money. You are not allowed to incur debt; you must at all times keep the balance in the green.
Am I allowed to have a cheque account or credit card after my sequestration?
Yes, as long as you keep the account in credit. Banks would normally not allow you to open a credit card or cheque account after you have been sequestrated.
Will the bank allow me to open a credit card and/or cheque account while I am under sequestration?
I have banked with the same bank for many years and I always had a good credit record. Will my bank assist me?
Must I keep on still pay my municipal levies after I have given instruction to my attorney to sequestrate me?
You are not allowed to prefer one creditor above the others after you have made the decision to sequestrate.
Must I keep on paying water and lights after I have given instruction to my attorney to sequestrate me?
It’s advisable to keep on paying your utility bill, otherwise, they will cut off your water and lights.
I have received a subpoena to appear in Court. Must I still appear in Court after I instructed my attorney to attend to my sequestration?
Yes. Only the Magistrate can excuse you from appearing in Court. In practice, however, Magistrates has an arrangement between attorneys by which you can be excused from Court. We will deal with these negotiations with the opposing attorney on your behalf.
What is the position regarding assets or debt that I have in other countries than South Africa?
The general assembly of the United Nations has on 15th December 1997 adopted a resolution, which was also sponsored by South Africa after which the South African Parliament has adopted the cross border insolvency Act No 42 of 2000. The essence of the cross border insolvency act is that, if you have debt overseas you have to notify those creditors if you apply for sequestration. They then have the same rights to claim from your estate than the South African creditors. With regards to your assets that are held in another country, they form part of you insolvent estate and your trustee/liquidator may apply to the competent court in that country that your sequestration order is extended to that country. This also applies to companies.
What are the exclusions in the International Insolvency Convention, regarding countries other than South Africa?
In certain countries, for example, The United Arab Emirates, the non-payment of your debt is deemed to be a criminal offence and you can be jailed for not paying your debts. We dealt with quite a few of these matters and we have given our clients proper advice in this regard.
What is the role of the Trustee in my life after sequestration?
The Trustee is not interested to be involved in your life. He has a job to do and that job is to realise the assets which fall in your insolvent estate, where after a dividend is distributed amongst creditors. Before the dividend can be distributed amongst creditors the Master of the High Court must approve the distribution.
My relationship with the Trustee?
My advice is that you must give your trustee your full co-operation. The trustee is in a position of trust regarding his relationship to the Master of the High Court and he is furthermore in a fiduciary position regarding the creditors. If you give your full co-operation to the trustee there is no reason whatsoever for the trustee to become your adversary.
Rights and obligations during sequestration
Rights and obligations during sequestration
You are essentially obliged to do the following:
Trustee Meeting- Attend a meeting with your trustee (which we will set up). We will be present at this meeting to assist you – we don’t know of any other attorney firm that represents their clients when meeting their Trustee.
Creditor Meeting- Attend the meeting of creditors which will be held at either the offices of the Master of the High Court or at your local Magistrate’s Court (keep in mind that these creditors meetings are simply meetings). It does not mean that you will be interrogated. Should an interrogation happen, you will be afforded the opportunity to get legal representation. This happens very rarely. One of the reasons why you must attend the meetings is because you have firsthand knowledge of the amounts that creditors are owed and you can assist the Trustee to spot false claims against your insolvent estate.
Updated Contact details- During your sequestration, your Trustee must be kept up to date with your work address, residential address and contact numbers.
Monthly Income and Expenditure Statment- You must for a period of normally three to six months submit a monthly income and expenditure statement to your Trustee. Some Trustees require that you send your income and expenditure statements to them for 12 months.
Have a specialist attorney in Insolvency Law- Make sure you use an attorney who is a specialist in Insolvencies. Insolvency Law is specialised and an interesting fact is that Insolvency Law in many instances differs vastly from “normal” law. Just one interesting example of this difference is that when you are involved in normal litigation, any settlement proposals by you is prejudice and may not be used against you in the case. The very opposite is the case in the Insolvency Law. If you make a settlement proposal, that proposal can be detrimental to your case.
Can I be a Trustee of a Trust during insolvency?
Contrary to popular belief, you can be a trustee under certain circumstances. The answer to this question is involved and we will advise you accordingly.
Can I be a member of a Close Corporation while I am under Sequestration?
In terms of the Close Corporation Act, you are not allowed to be the “Managing Member” of a Close Corporation while you are under sequestration. No one really knows what this means. Does it mean that you are not allowed to have the majority membership interest in the Close Corporation, or does it mean that you can hold the majority members interest but you are not allowed to be the Chief Executive Officer of the Close Corporation? I don’t know. In terms of the new Companies Act of 2010 which became effective on 1 May 2011, no new Close Corporation can be registered after 1 May 2011. Existing Close Corporations will not be affected.
Can I be a director of a Company while I am under Sequestration?
Unfortunately not. Under the interim version of the Act, an Insolvent was allowed to be a Director of a Company. Shortly before the New Companies Act became effective, the Act was amended and we are back at the previous position as it was in the old companies act.
What is the position of people who worked for me?
Your sequestration terminates their employment contracts. The employees, however, rank second to creditors who hold security (bondholders etc) and they even rank before SARS.
Am I allowed to immigrate?
Yes because insolvency is a civil matter you will qualify for a visa and immigration is legal.
Am I liable for my debts of the company/close corporation/business trust?
There is a misconception that the mere fact that you are a Director of a company or member of a Close Corporation or trustee of a trust makes you liable for the debt of that entity. You will only be liable for the debt of your company/close corporation/trust if you have signed surety for that legal entity’s debt. Should you have acted grossly negligent or fraudulent in your capacity as director/member/trustee, the corporate veil can be lifted between yourself and your business and you can become liable in person. Only the Court can give an Order that the company veil is lifted.
What happens if I incur debt after my sequestration?
In terms of Section 20(2)(b) of the Insolvency Act, all assets you acquire after sequestration form part of your insolvent estate. If you have however incurred debt after sequestration then the creditor has a claim against your “new” estate and Section 24(2) of the Insolvency Act stipulates that should such a creditor institute a claim against you it is deemed that as far as that, in so far he claims from you, your “new” estate does not form part of your insolvent estate. Should you have entered into a credit agreement and you have not disclosed to the creditor that you are insolvent, he can lay a criminal charge against you and if you are found guilty you can be punished with a jail sentence of a maximum of two years. Should you incur debt without having entered into a credit agreement, for example, you are found guilty and becomes liable for example a motorcar accident, such liability is not deemed to be a debt that you incurred, and you can’t be charged criminally because you incurred liability in this manner. This is called an “incidental debt”.
Will I lose my business when declared insolvent?
Whether you lose your business or not will mainly depend on:
- How your corporate structure is set up;
- Whether the business (if it is set up in a separate legal entity than yourself) is profitable and;
- Whether your company/close corporation/business trust has signed surety; and
- To what extent.
We will properly advise you in this regard.
Can/should I start a business on someone else’s name?
No! We will advise you on the proper mechanism through which you keep control of your business. The main problem in starting a business on someone else’s name is that if that person turns against you, gets sequestrated, divorces or passes away, you run the risk of losing the business.
What about my good name?
Should judgement be taken against you, the judgement is listed on the credit bureau for a period of five years. Your creditor has the option to renew this adverse information on credit bureaus should you not have paid the creditor in full after the expiry of a five year period. Should you sequestrate, judgements, as well as the sequestration, is listed on the credit bureaus until you are rehabilitated. The “normal” period for rehabilitation is four years. Once you are rehabilitated credit bureaus are obliged to remove adverse information of which the cause of action has arisen before your sequestration from your record at the credit bureau. Only the “rehabilitation” notice is carried for a period of five years after you have been rehabilitated.
What is the effect of my sequestration on a lease agreement?
Should you have leased premises at the time of your sequestration, the lease agreement is not automatically cancelled by your sequestration. In practical terms should you lease a residential property, you simply keep on paying your rent and you stay on in the property. Should you have leased commercial property, or wish to terminate your lease in residential property, the trustee must give written notice to the landlord in which he terminates the lease in writing. Should the trustee not give notice within three months of his appointment that he terminates the lease agreement, the agreement is terminated.
If I am the beneficiary in someone’s will and that person passes away, what happens to that inheritance?
There is a misconception, namely that once you are sequestrated you immediately thereafter start a new estate. This is not true. As your attorneys, it is our duty to advise you on legal structures to protect such an inheritance that you may receive.
Am I allowed to obtain credit after my sequestration?
In terms of the Insolvency Act, you are not prohibited to obtain credit if the creditor who grants you the credit was properly informed that you are insolvent.
Can the Trustee attach my spouse’s assets, if my spouse is not sequestrated?
In terms of Section 21 of the Insolvency act, solvent spouse’s assets also vest in your insolvent estate. The Trustee is not allowed to “mix” your asset with your solvent spouse’s assets. Your solvent spouse’s assets are deemed to be a separate category asset and the Trustee must release these assets to your spouse if your spouse can prove that these assets are acquired capital or income not coming from you. In practice, this happens at the first consultation with the Trustee, after the Trustee has been properly informed regarding the acquisition of these assets by your spouse. Should the Trustee not release your spouse’s assets, an Application must be brought to Court for the release of the assets. The release of your solvent spouse’s assets is hardly ever contentious.
Am I allowed to move domestically or to immigrate?
Because insolvency is not a criminal matter, there is no restriction on your movement albeit within the country of South Africa or to another country. There is, in terms of international insolvency convention, an agreement between virtually all countries in the world (excluding mostly the Arabic countries) in terms whereof, should you have been declared insolvent in a certain country you are deemed not to be insolvent in any other country in the world. If at the time of your sequestration you hold assets in another country than in South Africa, your sequestration in South Africa can be extended to that country after a Court Order in the other country has been granted.
What is meant by a “disposition” in the Insolvency Act?
If you “get rid” of assets in your estate, whether you are insolvent or not, you have “disposed” of an asset. There are certain manners in which you can dispose of an asset namely: You can donate it to someone, you can demolish it, you can gamble it away, you can hand it over to someone else in terms of an agreement, you can hand it over to the Sheriff of the court in terms of a Court Order or you can consume it.
Sequestration through the Ages!
Sequestration is almost as old as mankind itself. In difficult times the Jews had a law in terms whereof a creditor was obliged to write of a debtor’s debt if the debtor was unable to pay the creditor within a period of seven years. This was known as “the year of grace”. This method of debt relieve was at least structured and civil.
The old Romans were a rough bunch. In the early Roman times, if you could not pay your debt, you would become a slave of the creditor and he was allowed to kill you if he wanted to. What normally happened was that the debtor was killed and his body was cut up in pieces. Each creditor then received a body part. The method behind the madness is that the Romans believed that, should all your body parts not be rested in one grave, your spirit would haunt your family. To prevent your family from being be haunted by this restless soul, they would buy the body parts from the creditors and bury it in one grave.
In terms of Roman law, the heirs of a deceased person not only inherited his assets, but they also inherited the debts. It follows logically that many heirs now became bankrupt themselves. The law did not very much mind the fact that the heir inherited the problem. The heir’s fate was sealed. He was delivered to creditors.
The Romans were, however, a clever bunch and they saw a “loophole” in the law. So as to ensure that debtor’s children would not inherit his spot of bother, the debtor would free a slave and make the slave his only heir. The poor slave then inherited the insolvency and borne the brunt of the creditors. In later Roman times, this practice was abandoned and the debtor was sold as a slave without being killed and divided amongst his creditors.
Further developments in the Romans law aimed at removing the debtor from the commercial environment by sequestrating him and protecting creditors from incurring further losses. The debtor’s assets were divided amongst creditors. During this time insolvency was deemed to be a criminal offence.
In modern time the main aim of sequestration is to prevent creditors from incurring further damages. It is interesting to know that only as recent as 1923 (in the matter ex parte Pretorius) it was decided that insolvency is indeed a civil matter and not a criminal offence.
How long does the winding up of my estate take?
When you obtain credit from a financial institution, or even if you open a bank account, you sign a load of documents. Amongst these documents are normally sureties, permission to the bank to apply set-off should one of your accounts be in the black and another in the red. It is important too; once you have paid off your debt at the bank, demand that sureties be cancelled. The mere fact that your business for which you have signed surety has paid off its debt does not mean that the surety is cancelled. The cancellation of the surety by the bank must be in writing.
What is an insolvency inquiry?
Section 65 of the Insolvency Act stipulates that your trustee (under the instruction of one or more creditors) can hold an insolvency inquiry. The aim of an insolvency inquiry is to obtain information about your insolvent estate should you not have made full disclosure or should you have hidden assets and the trustee finds out about it. The act allows the trustee to subpoena yourself, your family members, your employees as well as any person who has information about your insolvent estate. If you are subpoenaed to appear in an insolvency inquiry and you refuse or fail to attend the inquiry, you can be charged criminally. If you or anyone else who is subpoenaed to appear at the inquiry fail or refuse to make full disclosure about the affairs in your estate you can also be charged criminally.
Under which circumstances can my trustee lay criminal charges against me?
You can be charged criminally if you commit the following
- Hidden assets or business books from your Trustee (Section 132);
- within 2 years before you sequestration, hidden liabilities or lied about your assets when obtaining credit (Section 133);
- Failed to keep proper books and records of your business (Section 134);
- Fraudulently preferred creditors or incurred debt without the reasonable expectation that you can pay such debt (Section 135);
- Neglected or refused to give information, assets or documents to your trustee on his request (Section 136);
- Obtained credit during sequestration without disclosing that you are insolvent (Section 137);
- Failed to appear at a meeting convened to hold an enquiry about your insolvent estate (Section 139);
Can I be jailed for not paying my debt?
No. It is interesting to know that only as recently as in 1923 it was finally decided that insolvency in South Africa is a civil matter and not a criminal matter (Ex parte Pretorius). Before 1994 you could, in fact, be jailed for non-payment of debt. A debtor could not be put in jail because he owed money. The creditor’s attorney would take the debtor to Court and would ask the Magistrate to make an Order in terms whereof the debtor should pay a certain amount per month. Should the debtor fail to make that payment he could be jailed for not complying with the Court Order. After 1994 the law has changed and a debtor can’t be jailed for non-payment.
Who appoints the trustee and how does he get appointed?
The trustee is appointed by the Master of the High Court. The Master has absolute discretion when appointing a trustee. Normally the trustee who has been supported by creditors gets appointed on the basis that he must have rallied the support of creditors in number and value. This means that if you have for example ten creditors and a certain trustee has rallied the support of the majority, say for example six creditors he will get appointed. If the creditor was also supported in value, for example, your total debt is R100,000.00 and the trustee has the support of creditors
If there are two different trustees who have rallied support and one trustee has the majority in number and the other has the majority in amount, they will both be appointed. In any event, the Master will also appoint a previously disadvantage trustee which normally does not partake in the day to day administration of the insolvent estate.
Can’t I simply hide my assets and then say that I have lost all my money at Monte Casino?
In terms of Section 135(3)(b) of the Insolvency Act, it is a criminal offence if you, at a time when your liabilities exceeded your assets (insolvent) gambled or made speculative investments.
At the time of my sequestration I owed SARS VAT (value added tax)?
SARS has a preferred claim in your insolvent estate. In layman’s terms, this means that SARS gets paid before your concurrent creditors (those creditors who do not hold any security). When presenting your sequestration application to Court, you must prove to Court that your preferred claims will be paid in full. A Court will not give a sequestration Order if this is not proven in the Court papers. Should, during the winding up of the estate, the yield from the realisation of your assets be insufficient to pay the full amount owed to SARS, in practice the shortfall on your VAT gets written off.
There are however very strict stipulations in the VAT act which allows SARS to institute criminal actions against you, should your VAT not be paid in full, irrespective whether you are sequestrated or not. The technical aspects regarding VAT are rather involved and we advise that you consult a competent lawyer who can assist you, should SARS issue criminal summons. We have dealt with hundreds of criminal summons issued by SARS in this regard, and our success rate is extremely high.
What happens at SARS?
SARS is a preferred creditor in your insolvent estate and SARS ranks in order of preference after your creditors who hold the security, and employees who might have claims against your insolvent estate. After you have been sequestrated SARS must issue you with a new tax number. With this new tax number, you start on a clean slate with SARS. All credits and debits that was due to and from SARS before the date of sequestration vests in your insolvent estate. After sequestration all amounts due by or to you from SARS fall in your “new” estate.
I own an undivided share in an immovable property. What is the legal position?
The basic principle is that the share that vests in your name form part of your insolvent estate. Let’s refer to this as the “insolvent’s undivided share”. The trustee must sell the “insolvent’s undivided share” to someone. In practical terms, the person/s who owns the “other undivided share” in the immovable property is normally the “natural” purchaser. The person/s who owns the “other undivided share” in the property faces a problem, namely that they have normally signed surety for the full outstanding bond along with yourself.
Because the Insolvency Act prescribes that all property belonging in your estate must be sold, the person that owns the “other undivided share” in the property cannot simply “take over” the “insolvent’s undivided share” and keep up payments to the bank. This means that the other person must obtain a bond for your undivided share and buy your undivided share from your estate. The purchase price of your undivided share must be paid into your estate account which is under the control of your trustee. The trustee then deducts the administrative costs in your estate from the amount that was paid into the trustee’s account and he then pays the remainder of the purchase price to the bondholder once the estate is finally wound up and the Master of the High Court has approved the Trustee’s distribution account.
My advice to clients who holds an undivided share in an insolvent estate is normally to obtain a bond for the full value of the property at another financial institution than the bank which held the bond in the first instance. I give this advice for practical reasons namely that the banking institution that, in the first instance held the bond normally gets totally and utterly confused if this is dealt with in any other way.
Should the solvent person who holds the undivided share refuse to buy the insolvent’s share, the trustee can, in the end, sell the insolvent’s undivided share to a 3rd person for a nominal amount for example R1,000.00. This creates a major problem for the solvent person who holds the undivided share because the 3rd person now owns, for example, one half of the property whilst he is not legally responsible to pay the bond.
The legal mud pool does not end here. The solvent person who owns the “other undivided share” and who would normally be the surety and co-principal debtor for the debt of the insolvent, is in terms of his agreement with the financial institution liable to pay the full bond because the 3rd person who purchased the undivided share for a nominal amount (for example R1,000.00) can now be held liable by the solvent partner for expenses incurred by him on the communal property. This might sound rather confusing. My advice is to get proper legal advice in this regard.
I have a purchaser who is interested to buy my immovable property?
Once you have started the process of sequestration your estate is in limbo. Even if you have received an offer on your property and you have for example accepted the offer, you are not allowed to sell your property during sequestration. After the sequestration, the trustee gets appointed and he must elect whether to go ahead on the offer/agreement to purchase the property or not. Should the trustee decide to not accept the Offer to Purchase, he will ask the relevant creditor whether the creditor agrees. Should the creditor agree then further permission must be obtained from the Master of the High
The bank has, irrespective of the fact that I am insolvent, given me an overdraft and a credit facility on my credit card. Am I allowed to go into overdraft?
Any “new creditor” (i.e. a creditor who allowed you credit after sequestration) can allow you credit, but you have an obligation to disclose that you are insolvent before using the credit facility. If the creditor is aware of the fact that you are insolvent and still gives you credit, then the agreement is legal and binding on both parties.
Can a judgment against me be set aside?
Only under certain circumstances. You must, within 21 days after you have learned that summons was taken against you, issue court papers in which you ask the court to set aside the judgment. You must, in essence, prove to the court that you have a valid defence that is strong enough that there is a good chance that, if you were aware of the summons and defended it, you would have succeeded. It is almost impossible to defend the summons if you are summonsed because you did not keep up the payment of your car, equipment or property.
I did not even know that they took judgment against me!
Once you sign an agreement and you choose a legal address (a so-called “domicile” address) then the creditor can serve the summons on the address that you have chosen, whereafter it is legally deemed that you have received the summons. The service was legal and the judgement taken is also legal.
I have not heard from a creditor for more than 3 years. Is the debt written off?
If the debt became due and payable and the creditor has not issued summons against you in 3 years, the debt has prescribed. The creditor cannot sue you anymore. If they have taken judgement against you, the mere fact that your name does not appear on the credit bureau does not mean that the debt is written off. If the judgment was taken in a Magistrate’s Court, it is valid for 30 years and the creditor can still act against you. If the judgment was taken in a High court, it is valid for the rest of your life.
What sometimes happens in practice is that the attorney who acts for the creditor cannot collect the debt, because the debtor is unable to pay and he has no assets which can be sold. He then advises his client to let it be and he closes his file. Back at the ranch, judgment was taken. Big problem: the banks often sell their old debtors book. The institution which buys the debtors book can execute against you.
Can “they” put me in jail if I do not pay my debt?
The South African Law never made provision for putting someone who cannot pay his debt into jail. In the old South Africa (before 1994) there was however a loophole in the law. If a debtor could not pay his debt, the creditor would subpoena the debtor to appear in front of a Magistrate who would hold a financial inquiry and make an Order in terms whereof the debtor was supposed to pay his creditor/s a certain amount per month. If the debtor failed to make this payment, he could be jailed for a period of three months for not complying with the court order. It is interesting to know that the very first act that was changed when Nelson Mandela came to power was exactly this law. In the new South Africa, you cannot be jailed for not paying your debt.
I fear the unknown?
During about 1990 a toy company in America interviewed children. They wanted to determine if children could give them the ideas for the ultimate toy. They expected that boys would come up with a wonderful robot that would shoot laser beams and kill their younger sister. One of the many questions that children were asked was to name the animal they feared the most. Guess what animal that was? A Dragon! A Dragon does not even exist! What we learn from this is that people fear the unknown. Our advice is that, should the ghost and dragons haunt you in the middle of the night, make a note of that which you fear and call us the next day. In our business, we have enough experience to properly advise you whether your fear is real or just a dragon.
I feel guilty!
Please don’t tell the bank that you feel guilty. They will most properly have a service charge for that as well, do not feel guilty. If it was not your intention to incur debt intentionally and not pay your creditors, you would be worthy of your guilt feelings. I have ever so often explained to my clients that should you be a piano player who has a contract to play the piano every Friday night and you lose your fingers, you simply can’t play the piano anymore, irrespective of whether you feel guilty or not. A simple matter of fact is that life happens. You simply do not have control over every aspect of your life. During the period 2007 until end of December 2009, the interest rates in South Africa hiked with 5,5%. Thousands upon thousands of people and companies were not able to bear this brunt and they went under. Feeling guilty could not change the situation.
What is meant by a voidable transfer of business?
Should a trader transfer his business or any part thereof in terms of a contract outside the normal conduct of business and he has not published his intention to dispose of his assets in two Afrikaans and English papers as well as in the Government Gazette within a period of at least 30 days maximum 60 days before the transfer of the assets, then the sale of that business (or part of the business) is void with regard to its creditors and for a period of six months it is void against a claim by die trustee should he be sequestrated within six months of such transaction. In terms of Section 34(2), the effect of the publications is that all liquidated claims which would become payable in future become payable immediately.
What does “collusion” mean? (Section 31)
The most import element of Section 31 is that the insolvent must have colluded with someone else when in disposing of his assets. This is very logical. Should any person pass his assets to another person there will always be at least two parties involved. The insolvent must have colluded with someone else to dispose of his assets in such a manner that it would prejudice his creditors. There must have been secret collusion. Section 31(1) stipulates “…… the Court can set aside such legal action”. In the case, Gert de Jager (Pty) Ltd versus Jones N.O. the Court decided that the trustee must prove that the parties who have colluded with the insolvent must have known that the debtor was insolvent and that other creditors would be prejudiced or that an undue benefit was created for a creditor. Someone who is involved in such collusion is:
- Liable for the damages that the insolvent estate has incurred because of this disposition;
- He forfeits his claim against the Insolvent Estate; and
- He can be fined with an amount equal to the benefit he would have enjoyed, should the disposition have not been set aside.
What does Undue preference (Section 30) mean?
Many clients have told me that they heard “of a magical six months which applies to the disposition of assets”. According to this rumour, any disposition made prior to a period of six months preceding the sequestration is “safe”. This is hogwash. Section 30 of the Insolvency Act stipulates that, should the trustee proof that:
- There was a disposition;
- The insolvent exceeded his assets after the disposition;
- The disposition prejudiced the creditor who has received this benefit;
- The insolvent had the intention of preferring one creditor above the other;
If all the above elements are present, then the disposition can be set aside irrespective of how long ago the disposition was made.
Under Section 30 there is no specific time period which inhibits Section 30. The effect of a disposition under Section 30 is of lesser importance. The Court considers, in essence, the intention to prefer the creditor. In the matter Pretorius N.O. versus Stock Owners Corporation, the Court determined that the trustee must, should he have no direct evidence that the insolvent intended to prefer one creditor over the other, proof that the insolvent has considered sequestration at the time of the disposition.
What does voidable preference mean?
Should the trustee proof that there was avoidable disposition, the disposition becomes nil and void. Section 29 envisages a proper pro rata division of the assets of the insolvent amongst his creditors. In essence, a disposition of Section 29 differs from a disposition in terms of Section 26 in that the disposition under Section 29 has been made to one of the insolvent’s creditors, whereas a disposition under Section 26 has been made to someone who was not a creditor of the insolvent. If a trustee wishes to succeed in setting aside such a disposition, he must prove the following:
- There was a disposition;
- The disposition was made not more than six months prior to the sequestration;
- The disposition was made in favour of a creditor of the insolvent;
- The effect of the disposition was that the creditor who has received the benefit was preferred above other creditors;
- The insolvent’s liabilities exceeded his assets immediately after the disposition.
There are two defences namely:
- The disposition was done in the normal conduct of business;
- There was no intention of preferring the creditor who has received the benefit.
Should you prove these two defences, it is deemed that there was no legal voidable preference.
Certain dealings in terms of an Antenuptial Contract
It is common practice for spouses to make donations to each other in terms of Antenuptial contracts. All donations made in terms of a prenuptial contract can be set aside unless the spouse who has received the benefit from his/her insolvent spouse proves the following;
- The donation in terms of the prenuptial contract brought an immediate benefit to the solvent spouse within three months after the date of marriage; and
- The benefit has passed in terms of a properly registered prenuptial contract; and
- The benefit was given in good faith to a spouse or a child from the marriage; and
- The insolvent’s estate is not sequestrated within two years after the disposition in terms of the prenuptial contract was made. Should you be able to prove all the above, it is deemed that there was no legal disposition made.
What is a disposition without value?
Certain legal actions by an insolvent prior to his sequestration are defined as a disposition without value. This type of transaction can be set aside by the trustee and the assets which were deposed of can be repossessed by the trustee and, if the assets have been lost, the trustee can claim from the person who enjoyed the benefit of the disposition (or the value by which he was enriched in this manner).
The main feature of such a disposition is that there was no legal obligation on the insolvent to dispose of the asset. An example is where you would simply transfer an asset to someone who did not have a legal claim on the asset. Should a trustee wish to set aside such a disposition, the trustee must proof that:
- the insolvent has of his own free will disposed of the asset;
- that the disposition was made in favour of another person; and
- the insolvent received no or insufficient pro quo for the asset.
Once a trustee is appointed he should determine whether dispositions were made. If these dispositions were made, the trustee must determine whether the disposition was made within two years before the sequestration or longer ago than two years. If the disposition was made longer than two years ago, the trustee must prove that the insolvent’s assets were less than his liabilities directly after the disposition and he must also prove that the insolvent did not receive a proper pro quo (counter value).
If the disposition was made within two years before sequestration, the burden of proof that the disposal cannot be set aside vests in the insolvent and/or the person who has received the benefit. They must prove that either the insolvent’s assets exceeded his liabilities directly after the disposition, failing which, he must prove that he has received a proper counter value when disposing of the asset. Section 26 does not try to inhibit the normal conduct of business. It prohibits extraordinary transactions.
What are the categories of “voidable dispositions”?
There are 5 categories of voidable dispositions, namely:
- Dispositions without value, (Section 26 of the Insolvency Act).
- Voidable Preferences (Section 29 of the Act).
- Undue preferences (Section 30 of the Act) certain dealings in terms of an Antenuptial Contract (Section 27 of the Act).
- Voidable transfer of business (Section 34 of the Insolvency Act).
- Collusive dealings (Section 31 of the Act) are not voidable disposals as such; it intends to punish those who assisted you in hiding assets.
What are the so called “voidable dispositions”?
Certain acts by an insolvent in terms whereof he has disposed of assets prior to sequestration are known as “voidable dispositions”. A “disposition” in laymen’s terms means that you have gotten rid of an asset by, for example donating it to someone, selling it, hiding on someone else’s name, lawfully or unlawfully dealing with it in such a way that the value decreases, demolishing it or allow someone to acquire a legal right over the asset which right is stronger than the claims of creditors.
I have heard that all dispositions that I have made longer than six months before my sequestration was granted are safe. Is this true?
The urban myth goes as follows: You can dispose of any asset and then wait for a period of six months, sequestrate, and the disposal is safe. This is absolute and utter hogwash. There is another urban legend which says that if you have ten creditors and you don’t treat them equal when paying them, in other words, you prefer one or more creditor above the others when it comes to payment, you simply have to wait six months where after the creditor (normally your father, brother, wife or son) who was preferred above the other creditors are safe. This is a fairy tale. In the FAQ’s that are answered hereunder, we deal thoroughly with this.
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