Sequestration & Liquidation
We have all heard the words ‘insolvent’ ‘insolvency’ ‘sequestration’ These words are often associated with panic and fear of financial destruction. The legal test of insolvency to be applied is whether your liabilities as a debtor, fairly estimated exceed your assets, fairly valued. Therefore, a person has sufficient assets to discharge his liabilities, although satisfying the test of insolvency, is not treated as insolvent for legal purposes unless his estate has been sequestrated by an order of court.
What is a Sequestration Order?
A sequestration order is a formal declaration that a debtor is insolvent. The order is either at the instance of the debtor himself (voluntary sequestration) or at the instance of one or more of his creditors (compulsory sequestration).
Main Objective of a Sequestration Order
The main objective of a sequestration order is to secure the orderly and equitable distribution of the debtor’s assets to the debtor’s creditors, where they are insufficient to meet the claims of all his creditors. The legal machinery that comes into operation on sequestration is designed to ensure that whatever assets the debtor has are liquidated and distributed among all his creditors in accordance with a predetermined or fair order of preference.
Apart from any provision in the Insolvency Act, nothing may be done which would have the effect of diminishing the estate assets or prejudicing the rights of creditors. This position was clarified by Innes CJ in Walker v Syfret NO 1911 AD 141 166:
‘The sequestration order crystallizes the insolvent’s position; the hand of the law is laid upon the estate, and at once the general body of creditors have to be taken into consideration. No transaction can thereafter be entered into with regard to estate matters by a single creditor to the prejudice of the general body. The claim of each creditor must be dealt with as it existed at the issue of the order.’
The primary purpose of insolvency is for the benefit of creditors, and accordingly, courts will not sequestrate a debtor’s estate unless it is shown that the sequestration will be to the advantage of creditors.
Obtaining a Sequestration Order
A debtor’s estate may be sequestrated in two ways:
The debtor himself (or his agent) may apply to court for acceptance of the surrender of his estate – voluntary surrender
A creditor or creditors (or his or their agent) may apply to court for the sequestration of the debtor’s estate – compulsory sequestration.
The procedure and requirements for each manner differ in material respects however the consequences of the sequestration order are the same. The court has the discretion to award or not award the sequestration order.
Debtor in Terms of the Insolvency Act
A debtor in terms of the Insolvency Act can be a natural person, a partnership, a deceased person, a person incapable of managing his own affairs, an entity or association of persons that is not a juristic person. If the debtor is married in community of property, the he or she does not have a separate estate and so the joint estate of the spouses must be sequestrated. Thus, in a voluntary surrender, both spouses must apply for the sequestration order to be granted; in a compulsory sequestration, both spouses must be cited as respondents.
One may ask how can this process even be launched by the bare term “friendly sequestration”. Nothing prevents a debtor from having his estate sequestrated by an amicable creditor. The debtor may arrange with a friend to whom he owes a debt and whom he is unable to pay, the he(the debtor) will commit an act of insolvency- and the friend will then apply for compulsory sequestration on the strength of the act of insolvency. Thus, an application for sequestration which is brought by a creditor who is not at arms-length is generally referred to as ‘friendly sequestration’.
A ‘friendly sequestration’ implies that the main object of the sequestrating creditor is to come to the assistance of the debtor or that he is actuated by friendly considerations. The court’s primary concern is with the interests of the creditors rather than with the interests of the debtor, however the court will scrutinize the application to determine whether sequestration would be to the advantage of creditors and would accordingly use its discretion.
The Legal Position of The Insolvent
The Insolvency Act does not deprive an insolvent person of contractual capacity generally and therefore he may enter into binding contracts. However, to protect creditors, the Insolvency Act does impose certain restrictions such as the insolvent may not make a contract which purports to dispose of any property of his insolvent estate and he may not, without the written consent of the trustee, enter into a contract which adversely affects, or is likely to adversely affect, his estate or any contribution which he is obliged to make towards his estate.
Sequestration does not place any general restriction on the right of the insolvent to follow the employment or vocation of his choice, however he may not, without the consent in writing of his trustee, carry on, be employed in any capacity in, or have any direct or indirect interest in, the business of a trader who is a general dealer or a manufacturer. If the insolvent pursues a vocation without the required consent, he commits a criminal offence, and any contracts he concluded in the course of an authorized vocation are voidable at the option of the trustee.