A Quick Introduction into Insolvency

You are insolvent when your liabilities, exceed your assets. You must be declared insolvent through an application to the High Court. The purpose of a sequestration order is to enable the fair distribution of your assets to all your creditors in proportion to their claims. But you can be too poor to be sequestrated, the law requires that you must show a benefit to creditors and that has translated into a dividend of at least 20c in the rand. The law of insolvency exists, primarily, to benefit the creditors. That does not mean that you will not derive some form of benefit from the process, the sequestration inevitably relieves you from legal proceedings by creditors, and allows you, to free yourself from all unpaid, pre-sequestration debts. [1]

You may be sequestrated by way of voluntary surrender (yourself, or your agent), or through compulsory sequestration (your creditor/s, or their agent/s). The requirements differ for each process, with voluntary sequestration: (1) your estate must be insolvent, (2) sufficient free residue in your estate to pay for the costs of sequestration, (3) there must be an advantage to creditors. Compulsory sequestration requires the following: (1) the applicant has a claim against you (section 9(1) to enable it to apply for the sequestration of your estate. (2) you committed an act of insolvency, or is insolvent; and (3) reason to believe that sequestration will be advantageous to the creditors. A subset of compulsory sequestrations is that of ‘friendly sequestrations’ (when the creditor is a family member or friend). With a friendly sequestration special care must be taken to prove the actual indebtedness. Conradie J in a 1996 judgement summarised friendly sequestrations as follows:

“Friendly sequestrations seem to share certain characteristics. Although, like pornography, they may be hard to define, they are easy to recognise” [2]

On that titillating note, this article is a simplified explanation of the process. If you wish to discuss this in more detail, please feel free to make contact with us.

Michelle Schoeman
Mobile number: 072 599 2902

[1] R Sharrock, K van der Linde and A Smith “Hockley’s Insolvency Law” (9th ed) p 5
[2] Craggs v Dedekind; Baartman v Baartman & another; Van Jaarsveld v Roebuck; Van Aardt v Borret 1996 (1) SA 935 (C) 937