04 Jul SEQUESTRATION: CURE OR CURSE?
ALL THE QUESTIONS THAT YOU WERE TO EMBARRASSED TO ASK
In the recent times, all of us has at one stage encountered the term sequestrate or had been informed that one of your debtors had been sequestrated. What does this mean? Is it the last resort of economic squandrels or is it a legitimate legal remedy?
In times gone by, the amount of people that were sequestrated, were a lot less, however, the recent 2007-2008 recession and the general cooling down of the economy, had resulted in a large portion of debtors resorting to sequestration.
The basic principle in law is that if a debtor is unable to pay his/her debts, as and when, they become due or the debtor’s liabilities exceed his/her assets, then the debtor is entitled to approach the Court for a voluntary surrender of his/her estate (i.e. being declared insolvent).
A creditor may also apply to Court to declare a debtor insolvent. This process is referred to as sequestration.
A Sequestration Order’s main objective is to ensure orderly and equitable distribution of a debtor’s assets to creditors. In the normal course of events, the debtor’s assets are sold by a Trustee of his insolvent estate. The cash value of the assets (sold on auction or by private treaty by the Trustee) would be distributed by the Trustee to creditors. You will hear that a creditor advises that he received 25c in the Rand for his debt from the Trustee. A creditor being owed R1 000.00 (one thousand rand), would receive a settlement of his claim in the amount of R250.00 (two hundred and fifty rand).
Advantage of sequestration to creditors
Most certainly, the most advantageous aspect of sequestration for a creditor is that the creditor can rest assured that the Trustee (also referred to as the Liquidator), would ensure that all creditors would be treated strictly in accordance with the prescriptions contained in the Insolvency Act. The Trustee appointed by the Master of the High Court, will also launch an investigation to try and establish whether the insolvent had sold or disposed of assets to the detriment of his creditors (eg. a vehicle valued at R100 000.00 (one hundred thousand rand), sold to a friend or family member for R30 000.00 (thirty thousand rand) or “donated” to a 3rd party. Such transactions may be reversed by the Trustee for the benefit of all creditors. It is the duty of the Trustee to take control or possession of the assets for the benefit of the body of creditors. The Trustee may also launch an investigation into the affairs of the insolvent to uncover undisclosed assets. In essence, the Trustee must ensure fairness across the board and manage the process for the benefit of all creditors.
Advantages for Debtor (insolvent)
The sequestration makes an end to most probably the most stressful time that the debtor may have encountered. The insolvent, prior to the sequestration, would in the normal course of business, be bombarded by creditors demanding payment. Various creditors operate from the premise that if they are the most aggressive, then they would be paid and other creditors would suffer the loss. This is exactly the situation which the Trustee would wish to avoid. The insolvent would from launching of the application, enjoy the protection of the sequestration process and would in the normal course of events, refer the creditor to the attorney of record or the Trustee (if already appointed). The attorney of record or the Trustee, once appointed, would proceed to explain the process to the creditor. All legal processes, summonses, execution of Judgements, are stayed by operation of Law and the Trustee takes control of the insolvent estate.
The insolvent is declared insolvent for a period of 10 (ten) years, during this period the insolvent may not incur any further debts. The insolvent may operate a bank account with the consent of the Trustee, however he/she may not apply for credit facilities.
The insolvent may not legally enter into a contract of whatever nature, without disclosing the fact to the other contracting party, the Trustee must also expressly consent to the contract in writing for such contract to be legally binding. Insolvents, who ignore this provision, may face criminal charges for such contraventions.
The insolvent may not act as a Director, Shareholder of a private company or be Trustee of a Trust during the period of his/her insolvency.
The Insolvent may however retain certain assets, for eg:
- Personal wearing apparel
- May receive remuneration for work done
- Pension would be excluded from assets that will be handed over to the Trustee; and
- Certain insurance policies would also be excluded.
Finally, it should be noted that it is not in the best interest of the economy for insolvents to be excluded from partaking in the economy as a whole and therefore the insolvent should be allowed to continue with earning a living during the period of his/her insolvency.
If the insolvent is successful in restarting his economic activities, then the insolvent may apply to Court for a rehabilitation Order to allow him/her to resume with their lives. The insolvent’s creditors would have no further claim against the insolvent (now rehabilitated insolvents) new estate. The insolvent can as early as 4-5 years, after being declared insolvent, apply for rehabilitation with the consent of his/her Trustee.
The above is merely a very broad guideline of the consequences of sequestration. It is a process/remedy that in certain circumstances should be considered. If any reader wishes to consider being sequestrated, it should be discussed with an Insolvent Practitioner (attorney) for more specific information and details.