2023 Week 2

INS311
2023
WEEK 2
Professor Michel Koekemoer
TOPICS FOR THIS WEEK
Historical overview.
Influence of the Constitution and transformative
constitutionalism.
Law reform and where we are currently in this
process.
Terminology.
Jurisdiction of the court.
Irregularities (self-study)
OUTCOMES FOR THIS WEEK
To be able to identify and then locate the primary
sources of South African insolvency law.
To have an understanding of the need for reform of
current South African insolvency laws.
Explain the meaning of “insolvency”.
Explain the purpose of a sequestration order.
Explain the meaning of “estate” and “debtor”.
OUTCOMES FOR THIS WEEK
Describe the jurisdiction of the court over the debtor
and his estate, and the procedure where courts have
competing jurisdiction.
Distinguish between the different types of
irregularity, and explain how they are condoned
(self-study).
To apply the principles discussed this week to
activities.
Introduction and sources
What are the primary sources of South African
insolvency law?
Legislation
– Insolvency Act 24 of 1936.
– Companies Act 71 of 2008.
– Cross Border Insolvency Act 42 of 2000 (this is not part of your assessment).
Common law
For example: general rule pertaining to unexecuted contracts and the actio
Pauliana
Case law
Constitution (Transformative constitutionalism)
Constitution (Transformative constitutionalism)
Insolvency laws will pose a potential threat to a few fundamental rights.
– Section 21 Harksen v Lane 1998 (1) SA 300 (CC).
– The requirement that the sequestration should be to the advantage of creditors must not be
too rigid and there should not be set minimum dividend set in case of hostile applications for
sequestration (Stratford v Investec Bank Ltd 2015 (3) SA 1 (CC)).
– Sections 21 and 22 of the Alienation of Land Act 68 of 1981. What happens if seller goes
insolvent? Sarrahwitz v Maritz NO and Another 2015 (4) SA 491 (CC).
– The onerous task of rehabilitation could potentially infringe on the section 22 of the
Constitution that guarantees freedom of trade.
However, even though a principle conflicts with a fundamental right, the

principles are not automatically unconstitutional.
– Consider whether the limitation is reasonable and justifiable in an open and
democratic society based on human dignity, equality and freedom (s36)
Is there an urgent need to reform South African
insolvency law?
The 10th edition of Hockley contains a discussion on pages 15-18.
The question is asked whether South Africa must also be ‘more forgiving’
and start to move from the creditor-driven process to one where we are
more forgiving towards debtors.
Some examples of people writing on aspects of South African insolvency
law not developing like other African countries:
https://www.werksmans.com/legal-updates-and-opinions/south-africa-laggin
g-behind-when-it-comes-to-cross-border-insolvency/
https://www.clrnn.net/2021/11/05/insolvency-law-reform-the-african-experien
ce-part-i/
Terminology
Meaning of insolvency
 We are interested in the legal test for insolvency. Where do I find this ‘test’?
 Using the concept ‘insolvent’ can have two meanings:

– The legal status conveyed due to a sequestration order; or
– A wider meaning, ‘becoming insolvent’ in that there is compliance with the section 2 of the
Insolvency Act.
 Ex Parte Harmse 2005 (1) SA 323 (N)

– Liabilities of the debtor, fairly estimated, exceed the value of his assets, fairly valued’ (para
8). [Look at the nature of the documents provided to the court in the case]
– The court must be satisfied that ‘it is improbable’ that the debtor’s assets will realise
sufficient funds to settle his debts in full (para 9). Remember, the court is exercising a
discretion.
Terminology
Meaning of a sequestration order
Purpose of a sequestration
 Secure the orderly and equitable distribution of the debtor’s assets.
 Not all creditors are going to get something out, but there exists a fair and predetermined order of
preference.
– Creditors are effectively also protected against other creditors.
 Once there is a sequestration order (even a provisional order), there is a ‘coming together’ of
creditors (concursus creditorum).
 As a consequence, the debtor is divested of his estate, and can no longer burden the estate with
debt.
 There is a concept ‘to the advantage of creditors’, this being a pro-creditor principle.
– There is some relief for the debtor, but this is more a ‘by-product’.
 In summary: the sequestration brings certain consequences as soon as it is granted.
Can you list what those consequences are?

Terminology
Meaning of an estate
 Remember it is the estate of the debtor, not the debtor which is sequestrated.
This Photo by Unknown Author is licensed under CC BY-SA-NC
 The estate consists of a collection of assets and liabilities, but for the purposes of
determining ‘insolvency’, it is possible that an estate can consist of only liabilities.
 If you are married in community of property, there is 1 estate for the purposes of insolvency.
 If you are married out of community of property, the solvent spouse has a separate estate, but
section 21 brings in certain consequences, discussed in another week.
 A debtor can acquire a ‘new’ asset after sequestration.
– Meaning: he starts to build up another separate estate.
Do you see now why it is the estate and not the debtor which is sequestrated?
Terminology
Meaning of a debtor
Section 2 reads:
"debtor', in connection with the sequestration of the debtor's estate, means
a person or a partnership or the estate of a person or a partnership
which is a debtor in the usual sense of the word, except a body corporate
or a company or other association of persons which may be placed in
liquidation under the law relating to companies” (emphasis added).
It is the person or partnership/ its estate.

Association of persons mean, a juristic person with perpetual succession
and, which can hold property and can be sued in its corporate name.
– A trust is not a juristic person. Is it a ‘debtor’ under the Insolvency Act? Yes.
Terminology
Meaning of a debtor (continued)
Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly and another NNO 1984 (1) SA
160 (W)
 The legal question was whether the trust estate was susceptible to sequestration.
Accordingly, the court must determine whether a trust qualifies as a debtor under
the Insolvency Act.
Ratio
 A trust does not have a distinct legal persona.
 A trust is in the very least a debtor ‘in the usual sense of the word’. It has assets
and liabilities and can be sued.
 However, a trust is not a body corporate. It has been referred to having a quasi-
legal personality. What does this mean?
Jurisdiction of the court
Which court (general)
A provincial or local division of a high court.
– Why? A sequestration order changes the legal status of a
person.
There are aspects related to insolvency a magistrate’s
court can entertain.
Which specific court (relying on the specific facts)

Section 149(1).
Competing courts.
Which specific court (relying on the specific facts)
Section 149(1)
Where the debtor has domicile or owns property within the court’s jurisdictional area.
 The debtor has a personal right, so a right to some sort of performance.
– See the rule on intangible property following where a debtor is physically situated at a
given time (the right links to a person). See Nahrungsmittel GmbH v Otto 1993 (1) SA 639
(A).
 Where the debtor has residence or carried on business within 12 months

immediately preceding the lodging of the application.
 Ordinary residence means something more prolonged, but not necessarily that you must be
in this place for the entire 12 months.
Competing courts.
 More than one court can have jurisdiction to hear an application for sequestration.
 The main consideration is where it would be equitable and convenience, if the
order is to be granted.
 The court must look to answer this question from the perspective of the applicant
(not the respondent).
 The court then takes notice of the practical considerations of what must be done
during the sequestration process. For example:
– Where are the people situated who must be interrogated?
– It is not necessarily where creditors are located, as practically, a creditor can give written/
verbal instruction to the trustee on what must be done.
Thank You.
Questions?

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INS311

However, even though a principle conflicts with a fundamental right, the

 Using the concept ‘insolvent’ can have two meanings:

 Ex Parte Harmse 2005 (1) SA 323 (N)

 In summary: the sequestration brings certain consequences as soon as it is granted.

Can you list what those consequences are?

It is the person or partnership/ its estate.

Which specific court (relying on the specific facts)

 Where the debtor has residence or carried on business within 12 months

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