insolvency, Voluntary Sequestration or Voluntary Surrender
Insolvency and Voluntary Sequestration or Voluntary Surrender as a debt relief mechanism
If you are overindebted and you cannot pay your debts, you can consider a court application for insolvency and voluntary sequestration as a debt relief mechanism. Sequestration is a legal process to separate you from your assets. You are then declared insolvent or bankrupt.
If you apply for sequestration of your over-indebted estate, this is called voluntary sequestration often referred to as voluntary surrender, because you surrender your assets to a trustee to settle your debt.
The Trustee invites all your creditors to stake their claim and then divides what is available from the realisation of your assets among the creditors as per their rightful claim. One effect of the sequestration process is then that your debt gets written off in return
A sequestration application requires:
1. That your liabilities exceed your assets
2. That there is a sufficient dividend or reasonable prospects that a sufficient dividend can be realised if you are sequestrated. Legally, a sufficient dividend is defined as a minimum of 20% of total outstanding debt.
To determine if you are in fact over-indebted and whether your circumstances warrant sequestration or voluntary surrender of your estate, please complete the form below for a non-obligatory assessment of your case. We shall assess if you are insolvent and if it is necessary to sequestrate your estate, or if there is an alternative to sequestration as a debt relief measure, that may be available to remedy your debt situation.
All queries are responded to in writing within 24 – 48 hours and the response is sent from info@legalrights.co.za . Should you not receive a response, you can email directly info@legalrights.co.za or telephone/WhatsApp 061 490 9492
All about Sequestration aka Bankruptcy in terms of the Insolvency Act
- What to do if you can’t pay your debts
- The main aim of sequestration
- The different types of sequestration
- Prescribed formalities for filing of the different types of sequestration court applications
- Consequences of sequestration
- Advantages and Disadvantages of sequestration
- Sequestration FAQ’s
- How Can I Come out of Sequestration?
- Common Mispercepetions about Sequestration
You may want to read:
LegalRights - Sequestration Enquiry
1) What to do if you can’t pay your debts
Sequestration is governed by the Rules and Regulations set out in the Insolvency Act 24 of 1936. To be sequestrated, you have to be declared insolvent by the High Court. The legal definition of insolvency requires that your liabilities, fairly estimated, exceed your assets, fairly valued. In other words, you must be bankrupt and the sequestration court application is in effect an application to be declared bankrupt and to gain protection from your creditors. 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 your creditors. Sequestration therefore 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.
2) Main aim of sequestration
Albeit that the sequestration process does give relief if you are struggling to pay or cannot pay your debts, the process is also designed for the benefit of your 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 creditors dividend and it can be raised from the proceeds of the realisation of your estate’s assets. If you do not have any assets or the assets you do have are essential for everyday use, you can raise the creditors dividend by setting aside a monthly amount. Hence, the creditors 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 by way of cash payments that are spread over a period of several months, depending upon your affordability.
To be sequestrated, you shall have to be able to provide for the repayment of 20 cents in the Rand of your total debt which is essentially 20% of your total debt. This minimum repayment amount in respect of your total debt is referred to as the creditors dividend and your ability to repay this satisfies the court that your sequestration application will be to the advantage of your creditors and is 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 can be made to either a Provincial or Local Division of the High Court to surrender and sequestrate your insolvent estate. The effect of sequestration on your debt is that your debt is deemed to be is that one’s debt is “written off” and the creditors must submit all their claims to the Trustee who is appointed by the Master of the High Court after the sequestration application is granted.
3) The different types of sequestration
There are two types of sequestration. Sequestration can either be voluntary or compulsory. Voluntary surrender, also known as voluntary sequestration, means you as the debtor approach the court without being forced to do so, whilst compulsory sequestration occurs when one of your creditors approaches the court, to declare that you are insolvent and to separate your estate from yourself in order to secure the creditor’s claim.
The voluntary or compulsory sequestration court application can then be filed at court and the court requested to make a finding that your assets are insufficient to pay all your debts in full and that you are therefore declared insolvent. If the court is satisfied that you are indeed insolvent and can provide for the repayment of 20% of your total debt, it will grant a sequestration order to protect you from any creditors claims.
4) Prescribed formalities for filing of the different types of sequestration court applications
4.1 Voluntary Surrender
Notice of Motion
A Notice of Motion is a document that is drafted to include the request that the court grants the sequestration of your estate. This document is submitted to court to obtain a court date and case number and once it is issued, it is sent to all your creditors to advise of the sequestration court date as well as to SARS.
Founding Affidavit
The Founding Affidavit that forms part of the sequestration court application si deposed to by you, the debtor. In the Founding Affidvait, you set out what has caused your insolvency and that there are no other suitable debt relief options to consider. Hence, why sequestration is often seen as the last option for the debtor in dealing with his or her creditors.
Statement of Debtor’s Affairs
A Statement of Debtor’s Affairs is accompanies your Founding Affidavit to form part of the sequestration court application. This statement of debtor’s affairs details all your income, liabilities and assets, if any. It also sets out how the creditors dividend of 20% (20 cents in the Rand) shall be paid.
Advertisements
Once the Founding Affidavit and Statement of Debtor’s Affairs is finalised, advertisements are placed in the Government Gazette and local newspaper to advise of the sequestration court date. The advertisements are also sent to your creditors.
4.2) Compulsory Sequestration
Security for Costs
Where the sequestration process is initiated by your creditor, the sequestrating creditor must give sufficient security to the Master to defray all the sequestration costs until a trustee is appointed. The sequestrating creditor would then obtain a certificate from the Master of the High Court that confirms that sufficient security has been duly provided.
Furnishing interested parties with a copy of the application
Section 9(4A)(a)(iv) of the Insolvency Act, a copy of the sequestration application must also be provided to you, the debtor. However, in terms of section 9(3)(b), the court may dispense with this requirement if there is good cause to do so.
Creditor’s Claim
For a creditor to apply for the compulsory sequestration of your estate, it must have a liquidated claim of at least R100 or if there are two creditors, the total liquidated claim must be at least R200.00.
Actual insolvency or acts of insolvency
In addition to the creditor’s claim, you must have committed an act of insolvency, for instance, your requested extension to pay your debt or advised that you cannot pay your debt.
Advantage for Creditors
For the court to grant a sequestration order, it must be satisfied that the it will be to the advantage of the creditors. The onus of establishing that the sequestration will be to the creditors advantage is less stringent than in the case of a voluntary sequestration application that is filed by the debtor. Reason being, the sequestrating creditor does not fully know the debtor’s financial affairs.
Provisional Sequestration
Where the sequestration is compulsory, the High Court will first grant a provisional sequtration orderf befrpre granting a final order. The provisional order is then served on the debtor by the sheriff and essentially calls upon the debtor to show why his or her estate ought not to be sequestrated finally.
Final Sequestration
If the debtor does not show good cause as to why the court should not grant the sequestration order, a final sequestration order is issued by the court.
5) Consequences of sequestration
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.
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.
6) Advantages and Disadvantages of sequestration
6.1) Advantages of Sequestration
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.
6.2 Disadvantages of sequestration
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.
7) Sequestration FAQ’s
Q: Can I sequestrate without assets?
A: 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 and can afford to set aside an amount each month that can be used to repay your creditors 20 cents in the Rand of the creditors total claim.
Q: Can I dispose of any of my assets before sequestration?
A: The insolvency law regulates the disposal of any of your assets where such disposal occurs within 6 months of your sequestration. 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.
Q: When is the trustee of my insolvent estate appointed?
A: The appointment of the Trustee can take several months and the Trustee is appointed by the Master of the High Court. The Trustee would contact you directly once appointed to advise of the appointment and to request that you transfer the funds that you are holding in respect of the creditors’ dividend into an insolvent estate bank account which the trustee would open on your behalf in order to wind down your estate.
Q: Is my Credit Bureau Status updated to reflect that I am sequestrated once the court order is granted?
A: The sequestration notice listing is submitted by the courts directly to the credit bureaux. You can obtain your latest credit reports to verify that this has been done. The sequestration notice remains on your credit reports for a mandatory period of 5 years after which it is automatically removed by the credit bureaux.
Q: Rental Application Advice: Lastly, I would greatly appreciate your guidance on the following matter: My husband and I plan to rent a property around March next year. Given my sequestration status, will I be able to apply for a rental property jointly with him? Additionally, are there any steps I can take to improve our chances of securing approval for a rental property?
A: It is likely that a potential landlord may decline a rental application in your name. However, there is no prohibition against a landlord concluding a rental agreement where the tenant has been declared insolvent – I would however advise that the lease is concluded in your husband’s name as the tenant and if necessary, your income is presented to the landlord as an additional income in support of your husband’s affordability to conclude the lease agreement.
Q: Does every consumer pay the same amount in order to be sequestrated?
A: Every consumer has their own unique debt profile, and as such, every consumer is likely to have different outstanding balances in respect of his or her debt. The minimum amount that you must repay to your creditors over time is 20 cents in the Rand, calculated on your total debt.
Q: Can I be sequestrated in any court?
A: As the sequestration application affects a person’s legal status, the application for sequestration may only be brought in the High Court with relevant jurisdiction over your estate.
Section 149 of the Insolvency Act sets out which court can hear the sequestration and provides as follows:
(1) The court shall have jurisdiction under this Act over every debtor and in regard to the estate of every debtor who on the date on which a petition for the acceptance of the surrender of for the sequestration of his estate is lodged with the registrar of the court, is domiciled or owns or is entitled to property situate within the jurisdiction of the court; or
(2) At any time within twelvemonths immediately preceding the lodging of the petition ordinarily resided or carried on business with the jurisdiction of the court.