Compulsory Sequestration

02 May

One way in which a debtor's estate may be sequestrated is by compulsory sequestration. Whereas an application for voluntary surrender is made by the debtor himself, an application for compulsory sequestration is made by one or more creditors. To have the required standing to apply for such a sequestration, a creditor must have a liquidated claim of not less than R100 (or, where the application is by two or more creditors, not less than R200 in aggregate). The court may grant an application for the sequestration of a debtor's estate is it is satisfied, and the applicant creditor has proved:

  • that the creditor has established a claim which entitles him, in terms of section 9(1), to apply for sequestration of the debtor's estate;
  • that the debtor is in fact insolvent, or has committed an act of insolvency; and
  • that there is reason to believe that it will be to the advantage of creditors of the debtor if his estate is sequestrated.

The aim of the creditor in such an application is, as a rule, to obtain payment of a debt, or at least part payment. The onus of satisfying the court of these three matters rests on the sequestrating creditor: There is no onus on the debtor to disprove any element.

Locus standi

Section 9(1) allows proceedings for the compulsory sequestration of a debtor's estate to be instituted by

  • a creditor (or his agent) who has a liquidated claim against the debtor for not less than R100; or
  • two or more creditors (or their agents) who in aggregate have liquidated claims against the debtor amounting to not less than R200.

The fact that a creditor holds security for his claim does not debar him from applying, even if the value of the security exceeds the amount of the claim. An agent who applies on behalf of the creditor must be authorised to do so. Lack of authority cannot be cured by ratification once the application has been launched. A liquidated claim is a monetary claim, the amount of which must be fixed by agreement or judgment.

Act of insolvency

Although a creditor may have good reason for believing the debtor is insolvent, he will usually not be in a position to prove that the debtor's liabilities exceed his assets. If, however, the creditor can establish that the debtor has committed one or more acts of insolvency, he may seek an order sequestrating the debtor's estate without having to prove that the debtor is insolvent. 

Therefore, a debtor's estate may be sequestrated even though he is technically solvent. An act of insolvency need not be committed vis-à-vis the sequestrating creditor. Section 9(1) gives any creditor of the debtor the right to apply for sequestration once the debtor commits an act of insolvency—whether or not the debtor directed the act at the creditor concerned or intended it to have any bearing on that creditor's affairs. 

An act of insolvency committed by a spouse in a marriage in community of property operates as an act of insolvency by both spouses, and is therefore a good basis for sequestration of the joint estate. An act of insolvency may be proved and relied upon even though it is contained in a communication that would ordinarily be privileged from disclosure, such as an offer marked “without prejudice”.

Conduct designated acts of insolvency

  • s 8(a): Absence from Republic or dwelling
  • s 8(b): Failure to satisfy judgment
  • s 8(c): Disposition prejudicing creditors or preferring one creditor
  • s 8(e): Offer of arrangement with any of his creditors for releasing him wholly or in part from his debts.
  • s 8(g): Notice of inability to pay[edit]
  • s 8(h): Inability to pay debts after notice of transfer of business

Reason to believe that sequestration will be to the advantage of creditors

Before the court may grant a final order of sequestration, it must be satisfied that there is reason to believe that it will be to the advantage of creditors if the debtor's estate is sequestrated.“Creditors” means all creditors, or at least the general body of creditors

The question is whether or not a “substantial portion” of the creditors, determined according to the value of the claims, will derive advantage from sequestration. Some might not be advantaged—they might even be disadvantaged—but the bulk must not be.For sequestration to be to the advantage of creditors, it must yield “at the least a not negligible dividend.” 

The courts have accepted different amounts as “not negligible”—five cents in the Rand considered sufficient in one case, ten cents considered insufficient in another; in Ex Parte Ogunlaja (2011), for the North Gauteng High Court, at least 20 cent in the Rand. If, after the costs of sequestration have been met, there is no payment to creditors, or only a negligible one, there is no advantage.

To enhance the size of his estate, the debtor may renounce in favour of his creditors the protection afforded by section 82(6) in respect of particular movable assets so that these assets may be sold along with the rest of his property. The fact that there will be a significant amount for distribution after the costs of sequestration have been satisfied does not necessarily mean that sequestration will be to the advantage of creditors. 

Sequestration is, in a sense, merely an elaborate means of execution and, because of its costs, an expensive one too.It is necessary to compare the position of creditors if there is no sequestration with their position if there is a sequestration. Sequestration will only be to the advantage of creditors if it will result in a greater dividend to them than would otherwise be the case—for example, through the setting aside of impeachable transactions, or the exposure of concealed assets—or if it will prevent an unfair division of the proceeds of the assets of some creditors being preferred to others.

The court does not have to be satisfied that sequestration will benefit creditors financially, merely that there is reason to believe that it will: “The facts put before the court must satisfy it that there is a reasonable prospect—not necessarily a likelihood, but a prospect which is not too remote—that some pecuniary benefit will result to the creditors.” The onus of establishing advantage to creditors remains on the sequestrating creditor throughout, even where it is clear that the debtor has committed an act of insolvency and despite that the trustee, by invoking the machinery of the Act, will unearth or recover assets which will yield a pecuniary benefit for creditors.

Application for sequestration

Prior to the adjudication on the application, the applicant must furnish a copy of the application to the debtor. The court may, in its discretion, dispense with this requirement and make a provisional order of sequestration without advance notice to the debtor if it is satisfied that this would be in the interest of creditors or of the debtor.

The court would be justified in dispensing with prior notice only in cases of urgency, where there is a reasonable likelihood of irreparable loss if the debtor is forewarned of the impending application. It is no longer permissible for a court to grant a provisional order ex parte merely because the applicant creditor has clear documentary evidence, such as a nulla bona return.

Court’s discretion

Even if the court is satisfied that the requirements have been established on a balance of probabilities, it is not bound to grant a final order of sequestration:

  • The debtor might produce independent evidence that he is, in fact, solvent; or
  • The debtor might have counter claim against creditor; or
  • The creditor might have had ulterior motives - the court must uphold justice and fairness on both sides.

In each case, the court has an overriding discretion, to be exercised upon a consideration of all the circumstances. The court may, therefore, exercise its discretion against sequestration, notwithstanding proof of an act of insolvency and the other requirements.

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