What is insolvency?
The Insolvency Act 24 of 1936 and Companies Act 71 of 2008 primarily governs insolvency in South Africa. Insolvency in South African law refers to a status of diminished legal capacity imposed by the courts on persons and legal entities who are unable to pay their debts.
What does it mean to be sequestrated:
Sequestration is defined as the surrender of an individual’s estate to the High Court under the governance of the Insolvency Act.
Sequestration can either be executed voluntarily or compulsory. The procedure and requirements for each method differ in material respects (although the consequences of the sequestration order are same in both instances):
- Compulsory sequestration: Debtors who cannot pay off debts leads to creditors applying to have the debtor’s estate sequestrated.
- Voluntary sequestration: Debtors who willingly apply to the High Court for sequestration. National Credit Act 34 of 2005 along with the Insolvency Act has determined the exact process to be followed for voluntary sequestration in South Africa.
The process of sequestration
All movable and immovable property of the debtor before and after the sequestration, fall within his insolvent estate and is available for distribution. Upon the sequestration of an insolvent, his estate is handed over to the Master of the High Court (the Master) who appoints a trustee for the insolvent estate.
FREQUENTLY ASKED QUESTIONS
Can I be employed as the director of a company when I am sequestrated?
No, an insolvent is disqualified from practicing certain professions or careers. An insolvent may not, amongst others:
- be a director of a company;
- partake in the management of a close corporation of which he is a member;
- hold a fidelity fund certificate in accordance with the provisions of the Estate Agency Affairs Act;
- be registered as a manufacturer or distributor of liquor;
- act as a trustee of a trust under certain circumstances and may be removed as trustee by the Master;
- be a member of the National Assembly of Parliament;
- be a member of the National Council of Provinces;
- be a member of a provincial legislature; or
- be a board member of the National Credit Regulator.
How will my insolvency affect my spouse?
- A sequestration order also has an effect on the debtor’s spouse. Section 21 of the Act provides that the separate assets of both spouses vests in the Master and later the trustee when either spouse is placed under sequestration.
- If there is an existing marriage in community of property, there is in principal only one joint estate. Both spouses will therefore receive the status of an insolvent and the joint estate is sequestrated.
- If a marriage out of community (with or without accrual) exists, Section 21 places the burden of proof on the solvent spouse that all goods in his/her estate, is indeed his/her property, and therefore excluded from the debtor’s estate.
When does my insolvency come to an end?
Insolvency comes to an end when the insolvent becomes rehabilitated, which means that he is released from his pre-sequestration debts. The insolvent is therefore provided the opportunity of a new start. For more information on rehabilitation, click here.
THE LIQUIDATION / WINDING-UP OF A COMPANY
How does a company get wound up?
A company, like an individual, trust or partnership, can be wound up voluntarily or compulsory:
- Voluntary winding up: A company or closed corporation can wind itself up voluntarily by way of a special (75%) resolution of the shareholders or by way of application to court. A company can only be wound up by special resolution if no debt exists. An affidavit will be signed by the directors and a certificate by the auditor. A liquidator is appointed, who winds up the company according to the directives of the shareholders.
- Compulsory winding-up: Section 344 of the Companies Act provides that a company may be compulsorily wound up by court at the application of a creditor on various grounds, not necessarily related to the company’s insolvency. Most commonly, however, creditors will seek to wind up a company involuntarily on the basis that the company cannot pay its debts.
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