Insolvency and Liquidation

 

 

 

No, you do not need to be a business owner. As long as the Creditor can prove that the Debtor owes him the monies and did not adhere to the payment plan in question and committed an act of Insolvency, the Creditor can continue with a Compulsory Sequestration Application.

Creditors must lodge their claims with the appointed trustee within the prescribed timeframe.

If the court grants the sequestration order, a trustee is appointed to take control of the debtor's assets, liquidate them, and distribute the proceeds to creditors according to their claims.

   
 

Under Section 9(1) of South Africa's Insolvency Act, compulsory sequestration allows creditors to force a debtor's estate into insolvency when debts remain unpaid. This legal process enables creditors to recover owed funds through asset liquidation. Unlike voluntary sequestration, where the debtor applies, compulsory sequestration is initiated by creditors, providing a structured approach to managing unmanageable debt.

Voluntary sequestration is initiated by the debtor, while compulsory sequestration is initiated by the creditor.

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Compulsory Sequestration in South Africa

Are you a creditor struggling to recover unpaid debts?  When standard collection methods fail, Compulsory Sequestration in South Africa offers a powerful legal avenue to potentially recover outstanding amounts by placing an insolvent debtor's assets under control for the benefit of all creditors.

Compulsory Sequestration: When Creditors Initiate Insolvency Proceedings

Compulsory sequestration in South Africa is a legal procedure initiated by a creditor to recover outstanding debt from an insolvent debtor.  When a debtor is unable to meet their financial obligations and normal debt recovery methods have failed, a creditor can apply to the High Court to have the debtor's estate sequestrated. This process effectively places the debtor's assets under the control of a court-appointed trustee, who will then manage and distribute these assets to repay creditors, as much as possible, according to legal priorities.

Key Features of Compulsory Sequestration

Unlike voluntary surrender (where a debtor applies for sequestration), compulsory sequestration is driven by the creditor. It begins when a creditor, who is owed a liquidated debt (like money lent or due for services), applies to the High Court.

  • Creditor-Driven Process The creditor is the applicant in court, seeking to sequestrate the debtor's estate.
  • Liquidated Claim Requirement The creditor must have a clear, quantifiable claim for a minimum amount (currently R100 for a single creditor, or R200 for combined creditors).
  • Acts of Insolvency The creditor must demonstrate that the debtor is insolvent and has committed an "act of insolvency." These are specific actions or inactions defined in the Insolvency Act that indicate a debtor's inability to pay their debts (see details below).
  • Benefit to Creditors The court must be convinced that sequestration will benefit creditors generally. This means there must be a reasonable prospect of some dividend being paid to creditors, making the process worthwhile.
  • Trustee Appointment If sequestration is granted, a trustee (or curator initially) is appointed by the court to take control of the debtor's assets, investigate their financial affairs, and distribute assets fairly amongst creditors according to legal priorities.
  • Debtor Restrictions During Insolvency During sequestration, the debtor faces legal limitations. They are generally prohibited from incurring further debt, acting as a company director, or serving as a trustee of a trust.

Proving Compulsory Sequestration: Requirements for Creditors

To successfully apply for compulsory sequestration, creditors must convince the court of the following:

1. Meeting Claim Requirements

  • Single Creditor Liquidated claim of at least R100.
  • Multiple Creditors (Combined) Liquidated claims totaling at least R200.

2. Debtor Insolvency and "Acts of Insolvency"

Creditors must prove the debtor is insolvent (liabilities exceed assets) and has committed at least one "act of insolvency" as defined in Section 8 of the Insolvency Act. These acts are legal indicators of insolvency and include situations where a debtor:

(a) Flees or Remains Absent Leaves or stays away from South Africa (or their home) to avoid or delay debt payments, with proven intent to evade.
(b) Fails to Satisfy Judgment Does not pay a court judgment debt and fails to point out sufficient disposable property when requested by the Sheriff.
(c) Disposes of Assets (Prejudice) Disposes of, or attempts to dispose of, assets in a way that prejudices creditors or favors one creditor over others.
(d) Removes Assets (Prejudice) Removes, or attempts to remove, assets with the intention of prejudicing or favoring certain creditors.
(e) Offers Arrangement with Creditors Offers to make an arrangement with creditors to be released from their obligations (e.g., a compromise or payment plan proposal signaling financial distress).
(f) Fails to Apply for Surrender Fails to proceed with a voluntary surrender application after giving notice of intention to surrender.
(g) Notice of Inability to Pay Provides written notice to creditors that they are unable to pay their debts (a clear admission of insolvency).
(h) Business Transfer and Inability to Pay As a business owner, attempts or succeeds in transferring their business (as per Section 34(1) of the Insolvency Act) but is then unable to pay their debts.

3. Advantage to Creditors

The creditor must demonstrate to the court that sequestrating the debtor's estate will likely benefit the body of creditors. This typically means showing that there are realisable assets of sufficient value to warrant the costs of sequestration and provide a meaningful return to creditors.
 

The Compulsory Sequestration Process in Court

  • Application to Court The creditor's attorney files a Notice of Motion with the High Court, detailing the debt, acts of insolvency, evidence of benefit to creditors, and requesting sequestration.
  • Provisional Sequestration Order If the court finds sufficient prima facie evidence, it may grant a provisional sequestration order. This is an interim order that starts the sequestration process and sets a return date.
  • Return Date Hearing A court hearing is scheduled where the debtor can oppose the application and present their evidence. All interested parties (including other creditors) are notified.
  • Final Sequestration Order After considering all evidence, if the court is satisfied on a balance of probabilities that the debtor is indeed insolvent, has committed an act of insolvency, and sequestration will benefit creditors, a final sequestration order is granted. This order formally sequestrates the debtor's estate.

Prove Your Case with Expert Legal Assistance from Aucamp Attorneys

Compulsory sequestration is a complex legal process with stringent requirements and evidentiary burdens on the creditor. Successfully navigating this process demands expert legal knowledge and meticulous preparation.  Aucamp Attorneys provides creditors with experienced legal representation throughout compulsory sequestration proceedings, from assessing the merits of your case and gathering evidence to preparing court applications and representing you in court. Contact us today to discuss your debt recovery options and explore whether compulsory sequestration is the right course of action for you.