INSOLVENCY LAW_
MRL3701 SUMMARY
NOTES WITH
QUESTIONS.
Study unit 1: Introduction to Insolvency Law
Case Law:
NB: Magnum Financial Holdings (Pty) Ltd
... [Show More] (in Liquidation) v Summerly and another
NNO 1984 (1) SA 160 (W)
Meaning of “insolvency”
Common meaning – a person is insolvent when he is unable to pay his debts, however,
The legal test for insolvency is whether the debtor's liabilities, fairly estimated, exceed his
assets, fairly valued. The inability to pay debts Is merely evidence of insolvency.
A person who has insufficient assets to discharge his liabilities (although he satisfy the test
for insolvency) is not treated as insolvent for legal purposes unless his estate is sequestrated
by an order of the court.
Sequestration order = formal declaration that a debtor is insolvent
Sequestration order can be granted:
1. at the instance of the debtor himself (voluntary surrender) or
2. at the instance of one or more of the debtor's creditors (compulsory
sequestration)
Note: a debtors estate is sequestrated NOT the debtor himself HOWEVER both debtor's
estate and debtor himself may be described as insolvent
“Insolvent”has 2 meanings:
1. debtor's estate has been sequestrated
2. debtor's liabilities exceed his assets
Purpose of a sequestration order
– to secure the orderly and equitable distribution of a debtor's assets where they are
insufficient to meet the claims of all his creditors
– to execute against property of a debtor who is in insolvent circumstances means that
a few creditors will be paid and the other will receive little or nothing
– therefore the purpose is to liquidate all assets and distribute it among all creditors ito
a predetermined (and fair) order of preference
– the law proceeds from the premise that once an (provincial)order is granted, a
concursus creditorum (coming together of creditors) is established – the interest of
creditors as a group has preference over individual creditors
– debtor cannot burden his estate further with any debts
– creditors right to recover his claim in full is replaced by the right (on proving a claim
against the insolvent estate) to share with all other proved creditors in the proceeds
– may not diminish estate assets or prejudice any creditors rights
– law of insolvency is primarily for the benefit of the creditors therefore the court will not
sequestrate the estate of a debtor if it is not to the benefit of the creditors
– therefore, will not resort to sequestration if debtor (although insolvent) has only 1
creditor and he has a judgment against the debtor – normal execution proceedings
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will offer a less expensive means of payment
– court will not order sequestration is all assets will be consumed just by placing the
estate under sequestration
– only if there is an appreciable dividend for the creditors
– sequestration wasn't designed to alleviate the position of the debtor but this is the
effect as he is relieved from legal proceedings by creditors and allows him to
rehabilitate and free him from unpaid debt.
– Insolvency law ensures that creditors receive an equitable share of the debtor's estate
– sequestration not only affect the debtor's estate but also the debtor personally as he
is restricted to enter into other agreements and his capacity, to hold office, to litigate,
it restricts the creditor's ordinary remedies
– Sequestration proceedings instituted pursuant to breach of a credit agreement could
not be classified as legal proceedings to enforce the agreement as envisaged by Sec
129(b) of the National Credit Act
What may be sequestrated? [Show Less]