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2. VOLUNTARY SURRENDER

Introduction:

As already mentioned, there are 2 ways to sequestrate a person’s insolvent estate.

The first is when the insolvent person himself voluntarily surrenders his estate – that
is – he applies to the court and requests that his estate be sequestrated. The
second is compulsory sequestration. Here sequestration is requested by the
disgruntled creditors of the insolvent debtor.

Below is the procedure to be followed and the requirements to be met should a

person wish to surrender his estate:

Section 3: Petition for acceptance of surrender of estate

 This section sets out who may petition (apply to) the court to accept the
surrender of the debtor’s estate

- s3(1) provides that the debtor himself can apply to the court, or the duly
authorised agent of the debtor, or an executor if the debtor is deceased, or a
curator bonis if the debtor is incapable of managing his own affairs.

- s3(2) ALL the members of a partnership (not just one member) or an agent
representing all of them.

- In terms of s17(4) of the Matrimonial Property Act 88 of 1984, where spouses are
married in community of property, the spouses have a JOINT estate and thus
BOTH spouses must apply to surrender it.

Section 4: Notice of surrender and lodging at Master’s office of statement of

debtor’s affairs

 This section sets out the procedure with which the debtor has to comply
BEFORE he even attempts to apply to the court for an order of voluntary
sequestration.

- In terms of s4(1) the first thing that must be done is that the debtor must publish
a notice of surrender [precedent = Form A Sch 1 of Act] in the Government Gazette
and in the Newspaper circulating in the district where the debtor resides OR if the
debtor is a trader (s2 def of trader), then the notice must appear in the
newspaper circulating in the area where his principal place of business is
situated. The notice of surrender must not be published longer than 30 days or
less than 14 days before the date upon the application is to be heard by the
court. [For example if application is to be heard by court on 31 July, count back 30 days and 1 st
July will be the longest date the notice can be published. Count back 14 days and the notice
cannot appear for a shorter period than 17th July].

The notice of surrender must contain various information, for example, all
personal particulars of the debtor, the specific court and date when the
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application for surrender will be made, when and where the debtor’s statement of
affairs will lie for inspection etc…

The purpose of the publishing of the notice of surrender is to alert the creditors to
the intended application in case they wish to oppose it – as they are entitled to do
so. It also gives the creditors some time to decide whether to oppose it. Also,
the statement of affairs, a document which must be lodged with Master (see
below), gives the creditor information regarding the debtor’s financial position and
this allows the creditor to view the debtor’s position as a whole and to assist him
in deciding whether to oppose the application or not.

- In terms of s4(2)(a) within 7 days of publishing the notice of surrender the debtor
is required to deliver or post a copy of the notice of surrender to each and every
one of his creditors whose address he knows or can ascertain. The purpose of
informing individual creditors is to afford even more protection in the event that
they wish to oppose the application, as it cannot be expected that creditors
constantly examine the Government Gazette / newspapers.

- In terms of s4(2)(b)(i) the debtor must post a copy of the notice to every
registered trade union that, to his knowledge, represents any of the debtor’s
employees (obviously if the debtor is not a trader then this provision would not be
applicable to him).

- In terms of s4(2)(b)(ii) the debtor must give notice to his employees

themselves, either by affixing a copy of the notice to a notice board to which the
employees have access inside the debtor’s premises or, if the employees do not
have access to these premises, by affixing a copy of the notice to the front gate
of the premises, or, failing this, to the front door of the premises from which the
debtor conducted any business immediately prior to the surrender.

- In terms of s4(2)(b)(iii) the debtor must post a copy of the notice to the South
African Revenue Service (SARS aka ‘The Tax Man’)

- In terms of s4(3) the debtor is required to lodge with the master 2 copies of a
statement of financial affairs [following the precedent of Form B in Sch 1 of the Act] and
the truth and completeness of the statement of affairs must be verified by an
affidavit. The statement of affairs is exactly as the name applies – a statement
as to the debtor’s financial affairs. The statement of affairs must contain
information like the following:

 A balance sheet.
 A list of immovable assets, the estimated value of the assets and details of any
encumbrances (eg mortgage bond).
 A list of movable assets, the estimated value of the assets and details of any
encumbrances (eg pledges, liens, attachments or if assets purchased by h/p ie
instalment sale and not yet paid for in full). If the movable assets are
merchandise / stock-in-trade, they must be valued at the cost price or market
value whichever is the lower.
 A list of the debtor’s debtors (ie the people that owe the debtor money) and the
full personal particulars of these debtors.
 A list of creditors, their personal particulars and particulars of their claims against
the debtor.
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 A list and description of every account book used by the debtor at the time of the
notice of surrender or at the time when he ceased to carry on business.
 A detailed statement of the causes of the debtor’s insolvency.
 Certain personal info about the debtor, eg, any prior insolvency and
rehabilitation.

- In terms of s4(4) upon receiving the statement of affairs the Master may require
that any property mentioned therein be formally valued by a sworn appraiser or
any person designated by the Master for such a purpose.

- In terms of s4(5) if the debtor resides or carries on business in an area where

there is no master’s office, then the statement of affairs must be lodged with the
magistrate of that district.

- In terms of s4(6) the statement of affairs lies open for inspection during office
hours for any creditor for the period of 14 days from the date stipulated in the
notice of surrender. It is during these 14 days when any creditor can lodge with
the Master (or magistrate as the case may be) an objection to the voluntary
surrender which will be on record when the application for the voluntary
surrender comes before the court. Although not expressly provided for in the Act
creditors also have the right to oppose the debtor’s application in court (see
below).

Section 5: Prohibition of sales in execution of property of estate after

publication of notice of surrender and appointment of curator bonis

 This section of the voluntary surrender proceedings deals with the EFFECT of
the notice of surrender.

- In terms of s5(1) after publication of a notice of surrender, it is unlawful to sell

any estate property which has been attached under a warrant (writ) of execution
or other process, unless the person organising the execution of the warrant (ie
the sheriff) could not have known of the publication of the notice. HOWEVER if
the master is of the opinion that the value of the property does not exceed R5000
he may order that the sale of the attached property go ahead and direct how the
proceeds of the sale must be applied, OR if the value does exceed R5000, then
the court may order that the sale of the attached property go ahead nonetheless
and direct how the proceeds of the sale must be applied.

Further, although the SALES of execution are stayed, proceedings which

ATTACH assets of the debtor are still allowed, so attachments can still be made
after the notice of surrender, however nothing can be sold in execution.

- In terms of s5(2) after publication of the notice of surrender the Master may
appoint a curator bonis to the debtor’s estate. The estate does NOT vest in the
curator bonis – he only performs the functions of a caretaker. He takes custody
of the estate and takes control over it and assumes control over any business of
debtor as well (if the debtor was a trader), as if he were the debtor. S5(2) is
subject to s70 of the Act in that the curator bonis is required to open a bank
account and comply with the provisions therein.
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S5(2) does not prevent the debtor from alienating his assets, or encumbering
them. And, the curator has no power to stop the debtor from squandering his
assets. The appointment of the curator, therefore, does not really go that far in
protecting the interests of the creditors.

The form and content of the APPLICATION for voluntary surrender

Once all the preliminary procedural steps have been complied with, the application
for voluntary surrender may be made. The application itself is brought by way of a
notice of motion supported by an affidavit (precedent = appendix 1 specimens 1.1 and 1.2).
The purpose of the affidavit is to convince the court that the 4 requirements for
voluntary surrender have been satisfied (see below). The affidavit must be signed
and sworn before a commissioner of oaths who is a person NOT from the office
where the affidavit was drawn up (this thus excludes the debtor’s attorney).

It should contain certain information like:

 Full personal particulars of the debtor.

 It should aver that the court has jurisdiction to hear the application and that the
debtor has locus standi to bring the application.
 It should aver that the debtor is insolvent with facts supporting this, like the info in
the statement of affairs.
 An explanation as to how the insolvency occurred (this is to establish whether the
debtor is bona fide in his application).
 It should aver that the debtor owns enough property of a sufficient value to defray
(pay) all costs of the sequestration which will be payable out of the free residue
of his estate (see below).
 It should aver that the voluntary surrender will be to the advantage of the
creditors and that each will get a dividend that is not negligible (not insignificant).
See below.
 It should include details of any salary or income.
 Any other information that may influence the court in granting OR refusing the
application – the debtor must be truthful and honest and disclose all material
facts (an application may be refused on the basis that the debtor has not acted
bona fide by not making a full disclosure of facts).
 It should aver that all the proper procedural steps have, prior to the application,
been duly followed. Supporting documents should be attached to the application
in proof of this, newspaper and Government Gazette cuttings; a certificate by the
Master that the statement of affairs had duly lain with him for 14 days; an affidavit
by debtor (or his attorney) that the notice of surrender was sent to each of the
known creditors etc.

If one or more creditors oppose the application they must each deliver to the
Master’s office an affidavit prior to the date of the hearing of the application setting
out the grounds for opposing the voluntary surrender. On the day of application,
therefore, the court will have documents both for and against the voluntary surrender
and can make a ruling.

Lastly, it must be added that if the debtor is also an employer, then according to
s189 of the Labour Relations Act 66 of 1995, he must provide a copy of the
application to a ‘consulting party’. A ‘consulting party’ in terms of the s189 of LLA is
any party(ies) with whom the debtor-employer would have to consult before
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dismissing employees due to operational requirements (in labour law terms
‘operational requirements’ essentially means financial difficulties).

Section 6: Acceptance by court of surrender of estate

 S6 lays down the consequences of making an application of voluntary

surrender: Either the application can be accepted in terms of s6(1) OR it can
be refused in terms of s6(2).

- According to s6(1) a court may accept the application of surrender and order that
the debtor’s estate be sequestrated provided that the 4 requirements contained
in s6(1) are met:

 Firstly, that ALL the provisions in s4 have been complied with (ie notice of
surrender, statement of affairs).

 Secondly, that the debtor’s estate is indeed insolvent (ie the liabilities exceed the
assets). The court will use the financial information from the statement of affairs
to determine this (see Ex parte Harmse), but the court is not bound by the
statement of affairs and can take a common sense approach by looking at the
debtor’s situation as a whole (see Ex parte Deemter).

 Thirdly, that ‘the debtor owns realizable property of a sufficient value to defray
(pay) all costs of the sequestration which will be payable out of the free residue
of the debtor’s estate’.

o The cost of sequestration includes all the administrative costs of surrender

(placing of adverts, tax costs, a proportion of the payment to the to curator
bonis / trustee, the master, the sheriff’s charges etc…).

o ‘Free residue’ is defined in s2 of the Act as ‘that portion of the estate which
is not subject to any right of preference by reason of any special
mortgage, legal hypothec, pledge or right of retention’. Thus, in other
words the ‘free residue’ is that part of the insolvent estate that is NOT
encumbered in any way. For example if a house (an immovable asset in
the insolvent estate) is subject to a mortgage bond it is an encumbered
asset and thus when sold by the trustee, the proceeds must go to the
bank (a creditor) and the proceeds are thus NOT free residue.
HOWEVER if a positive balance remains after the claim of any creditor(s)
have been discharged, then the balance forms part of the free residue.
For example if a house is worth R500 000 and is subject to a mortgage
bond of R450 000, once the bank has received its claim of R450 000 the
balance of R50 000 forms part of the free residue. If an assets is wholly
unencumbered then 100% of the proceeds fall into the free residue.

o ‘…property of a sufficient value to defray (pay) all costs…’ The debtor

must own enough property so that if the court had to hypothetically sell all
the debtor’s assets and discharge (pay off) the encumbrances, there must
be enough left for the costs of the sequestration (as mentioned above).
The onus of proving that there is sufficient realisable property that can fall
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into the free residue rests on the debtor and if he fails to discharge the
onus the application to surrender must fail.

 Fourthly, that the sequestration of the debtor will be to the advantage of the
creditors see Ex parte Henning. This requirement is somewhat linked to the third
requirement as if there are insufficient assets to pay the costs of the
sequestration, there will be nothing left or too little left to distribute amongst the
creditors, and that, of course is not to their advantage. At the moment the courts
generally demand a dividend of not less than 10c in the rand, although some
courts have been known to insist on 20c in the rand (the number usually
increases with inflation). A court will also generally not see a voluntary
sequestration as being to the advantage of ‘the creditors’ if only one creditor
would gain advantage from it – the general body of creditors must gain an
advantage from the sequestration before it can be said that the voluntary
surrender will be to the advantage of ‘the creditors’. [ NOTE: in compulsory
sequestration the standard of the requirement is ‘reason to believe that’ it will be to the advantage
of the creditors and NOT that it ‘will be’ to the advantage to the creditors. The onus of proof is
thus higher in an application for voluntary surrender ]

- In terms of s6(2):
- If the court refuses to accept the application for voluntary surrender the notice
of surrender will lapse, or

- If the debtor withdraws the notice of surrender in terms of s7 (and thus does not
make an application) the notice of surrender will lapse, or

- If the debtor fails to make the application timeously – ie within 14 days from the
date as specified on the notice of surrender as being the date upon which the
application will be heard (14 days of grace) then the consequence will be that the
notice of surrender will lapse (For example, if the debtor indicated in his notice of surrender
that he will make an application for voluntary surrender on 1st February 2009, but fails to do so,
he has 14 days from this date to make his application before his notice of surrender lapses.
Thus, if he has not made his application by the 15 th February 2009 the notice of surrender lapses.
If the debtor was truly serious about sequestrating his estate it means that he will have to start the
procedure de novo).

Further, in terms of s6(2) if a curator bonis was appointed, then once the Master
is satisfied that provision has been made for payment to the curator bonis for any
costs, the estate can be restored to the debtor.

NOTE: The court retains the ultimate discretion: Even if the debtor has followed
all the procedures correctly and none of the creditors have objected, the court may
still refuse to accept the application of voluntary surrender. Consider the following
favourable and unfavourable circumstances that a court may take into account:

Favourable circumstances:
- a distinct advantage to the creditors (ie a sufficient dividend)
- relief to the debtor from constant demands / threats by creditors
- to ensure an even and fair distribution of the debtors assets (ie if some creditors
have already attached some assets to the detriment of others)
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Unfavourable circumstance:
- if the court is of the opinion that the application of voluntary surrender is not a
genuine attempt to benefit the general body of creditors, but rather that the
debtor has an ulterior motive for making the application, eg to avoid paying his
debt or to defeat / interfere with the rights of a particular creditor (see Fesi and
another v ABSA Bank)
- if the debtor fails to make a complete and truthful disclosure of his financial
position
- if the debtor’s documents were deficient in a number of respects (see Ex parte
Harmse)
- if the creditors are not, in reality, harassing the debtor as the debtor may have
lead the court to believe, and in fact the creditors are willing to give the debtor
time to pay off the debt in monthly instalments.

Section 7: Withdrawal of notice of surrender

- In terms of s7(1) a notice of surrender published in the Government Gazette

cannot be withdrawn without the consent of the Master.

- According to s7(2) an application can be made to the Master for the withdrawal
of the notice from the Government Gazette. The Master shall give written
consent for the withdrawal (he is obliged) if it appears to him that the notice was
published in good faith AND if there is good cause for its withdrawal. A notice of
withdrawal (and of the Masters consent thereto) is then published (at the debtor’s
expense) in the GG and in the newspaper that published the notice of surrender.
Once this has occurred the notice of surrender is deemed to have been
withdrawn.

*Note: Some parts of these notes are an adaptation of:

R Sharrock ‘Insolvency’ in LAWSA 2ed vol 11 (2008) Durban, LexisNexis Butterworths.