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Voluntary Sequestration
Over-indebted consumers have the option of applying for voluntary sequestration also known as voluntary surrender. This process is possible where the consumers’ liabilities exceed their assets and there is a sufficient dividend or reasonable prospects that a sufficient dividend can be realised if the consumer is sequestrated.
One effect of sequestration is that one’s debt is “written off” and the creditors must submit all their claims to the Trustee of the insolvent estate who is appointed by the court once the sequestration application is granted.
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Voluntary Sequestration also known as ‘voluntary surrender’
Sequestration is governed by the Rules and Regulations set out in the Insolvency Act 24 of 1936. To be sequestrated the debtor has to be declared insolvent by the High Court. The legal definition of insolvency requires that the debtor’s liabilities, fairly estimated, exceed his assets, fairly valued. In other words, a debtor has to be bankrupt. And when he or she applies for sequestration it is in effect an application to be declared bankrupt and to gain protection from certain creditors.Sequestration can be voluntary or compulsory. Voluntary surrender, as it is also known, means the debtor approaches the court without being forced to do so, while compulsory sequestration occurs when one of the creditors approaches the court, to declare the debtor insolvent and to separate the debtor’s estate from him or her in order to secure the creditor’s claim.
The sequestration process is designed for the benefit of the creditors to ensure they at least get something meaningful back for the credit they extended. The courts have ruled that the minimum threshold should be that the realisation of an insolvent’s assets should equal at least 20 percent of the debt due, so creditors may receive at least 20 cents for each Rand of debt owed to them. This is known as the dividend from the proceeds of realisation of the estate’s assets. This dividend can be paid either by the sale of any movable or immovable assets that you may have or it may be paid via a once off cash payment or a cash payment that is spread over a period of several months.
Once the court determines that the debtor’s assets are insufficient to pay all his debts in full, he or she is declared insolvent. The court then determines whether the value of the insolvent’s estate is sufficient to meet the minimum criteria for sequestration. If the court is satisfied it will grant a sequestration order against the debtor.
The sequestration order serves to separate the debtor from his or her assets. One may even say the court seizes the property or estate of the debtor. The debtor’s estate or assets are then handed over to the Master of the High Court. The Master appoints a trustee for the estate and this trustee oversees the disposition of the debtor’s estate, which effectively means the trustee sees to it that the assets in the estate are disposed of in order to realise capital with which to pay the debtor’s creditors.
Click for a summary of sequestration and how to come out of sequestration
The purpose of sequestration is to ensure the orderly and equitable distribution of a debtor’s assets, where they are insufficient to meet the claims of all creditors.
Sequestration allows you to start a new beginning without any debts. Where you cannot afford to pay your creditors, directly or via the debt review process, then sequestration may be your solution. Consumer’s looking to exit debt review or administration can also consider sequestration as an option.
You must be insolvent and the court must be satisfied that your sequestration will be to the advantage of your creditors and therefore in the best interest of your creditors. Traditionally a dividend of at least 10 cents in the Rand for concurrent creditors is seen as advantageous to creditors. Recent case law has however moved the threshold higher in that it has been ruled in 2010 that a dividend of at least 20 cents in the Rand is advantageous to creditors. This dividend can be paid either by the sale of any movable or immovable assets that you may have or it may be paid via a once off cash payment or a cash payment that is spread over a period of several months.
If you meet the qualifying criteria, then an application to surrender your estate will be made to either a Provincial or Local Division of the High Court.
Sequestration stems from the debtor being declared insolvent. An insolvent is restricted from obtaining credit, he or she is regarded as not fit to hold certain official positions, is barred from entering certain contracts, and cannot follow certain vocations.
Once a sequestration order is granted, all civil debt legal proceedings against the debtor must seize. This means that any judgments taken against the debtor for debt, become null and void, including those that enforce emolument attachment orders.
The claims of all creditors are treated as one, creating what is legally known as a concursus creditorium, or a ‘coming together of creditors’ and no creditor is allowed to pursue any claims against the debtor where it may negatively affect the claims of other creditors.
A creditor’s right to recover a debt in full, is restricted and replaced by the right to prove a claim against the insolvent’s estate, in order to share with all other creditors, the proceeds of realisation of the insolvent estate’s assets. In other words, creditors are only allowed to claim portions of the entire estate’s value and not the entire debt owed to them. The portion that each creditor is allowed to claim, is governed by a pecking order of creditors, which ensures that the distribution is equitable and fair to all creditors.
Debts are in effect reduced to what is referred to as the dividend, and the insolvent only pays what value his or her estate can realise.
Creditors have to prove their claims with the Master of the High Court, or the appointed trustee, which means that the insolvent may be able to reclaim some of his or her assets, where a claim is not proven.
Any on-going legal proceedings for debt must stop immediately and once the notice of surrender of your estate is published, any assets that have been attached under a writ of execution cannot be sold. This also means that any harassment for unpaid debt will stop, because the threat of legal action becomes toothless.
Emolument attachment orders, better known as garnishee orders against your salary must stop.
Certain assets may be returned to the insolvent’s possession, where these are essential to his or her ability to make a living. Thus, assets that are essential to the insolvent’s trade may be recovered.
Immovable property, or any vehicle may have to be sold to pay creditors.
An insolvent’s credit record is negatively affected, in that the sequestration is recorded on his or her credit records for a mandatory period of 10 years. Thus, the insolvent will not be able to obtain credit during this time.
To come out of sequestration, a rehabilitation application has to be made to the High Court, which granted the sequestration in the first instance. Certain limits apply as to when and how an insolvent can apply for rehabilitation.
Click here for more about rehabilitation
An insolvent is prohibited from holding certain positions, carrying certain types of business and bearing office, until such time as a rehabilitation order is granted by the High Court.
If you do not have any assets to dispose of, you may still be able to apply for sequestration, if you have a regular income. Please complete the assessment form below
If the consumer has disposed of or plans to dispose of any assets before he or she applies for sequestration, the following must be taken into account from the Insolvency Act.
Section 29 of the Insolvency Act 24 of 1936 provides as follows:
(1) Every disposition of his property made by a debtor not more than 6 months before the sequestration of his estate … which has had the effect of preferring one of his creditors above another, may be set aside by the Court if immediately after making of such disposition the liabilities of the debtor exceeded the value of his assets, unless the person in whose favour the disposition was made proves that the disposition was made in the ordinary course of business and that it was not intended to prefer one creditor above another.
(2) Every disposition of property made under a power of attorney whether revocable or irrevocable, shall for the purposes of this section and of section 30 be deemed to be made at the time at which the transfer or delivery or mortgage of such property takes place.
Section 30 deals with “undue preferences to creditors” and provides as follows:
(1) If a debtor made a disposition of his property at a time when his liabilities exceeded his assets, with the intention of preferring one of his creditors above another, and his estate is thereafter sequestrated, the court may set aside the disposition.
(2) For the purposes of this section and of section 29, a surety for the debtor and a person in a position by law analogous to that of a surety shall be deemed to be a creditor of the debtor concerned.
Section 31 – Collusive dealings before sequestration
(1) After the sequestration of a debtor’s estate the court may set aside any transaction entered into by the debtor before the sequestration, whereby he, in collusion with another person, disposed of property belonging to him in a manner which had the effect of prejudicing his creditors or preferring one of his creditors above another.
(2) Any person who was a party to such collusive disposition shall be liable to make good any loss thereby caused to the insolvent estate in question and shall pay for the benefit of the estate, by way of penalty, such sum as the court may adjudge, not exceeding the amount by which he would have benefited by such dealing if it had not been set aside; and if he is a creditor he shall also forfeit his claim against the estate.