The term “insolvency” relates to both sequestration (for individuals and trusts) and liquidation (for companies and close corporations). Sequestration can either be effected by voluntary sequestration or compulsory sequestration. This article will deal with voluntary sequestration, where the person applying to the Court for sequestration is the insolvent individual himself/herself.
What does “insolvent” mean?
If someone is insolvent (bankrupt), the amount of her debts is more than the value of their assets and income, and she is unable to pay her creditors (a creditor is a person or business she owes money to).
How does voluntary sequestration work?
When a person becomes insolvent, she can apply to the Court for her estate to be sequestrated. There are, however, three requirements that she will have to meet before the Court will allow her estate to be sequestrated:
- She must prove that her debts are actually more than the value of her assets.
- She must have enough assets to pay the costs of the sequestration application.
- She must prove that the sequestration will benefit the persons and/or businesses she owes money to i.e. they must get paid (at least something) if her estate is sequestrated.
If the Court grants permission for sequestration, it will appoint a trustee/curator by court order who must manage the insolvent estate to the equal benefit of all the creditors.
The trustee/curator will sell her assets and use the money to pay her creditors. If the money from the sale of her assets is not enough to pay all creditors in full, the money will be divided pro rata between the creditors based on the amount owed to each creditor and the order of preference of payment. Any outstanding debt that remains thereafter will be written off by the creditors.
What happens when the voluntary sequestration process has been completed?
The insolvent person can start over with no debt to his name. This makes it sound as if a person can make debt, then apply for voluntary sequestration and walk away without paying his creditors. However, being sequestrated does have disadvantages.
What are the disadvantages of voluntary sequestration?
The following disadvantages should be considered before applying for a voluntary sequestration:
- The sequestrated person’s credit record will get a blow as he/she will be blacklisted at credit bureaus and lose their creditworthy status.
- The sequestrated person can’t borrow money or incur any other debt until he/she is rehabilitated.
The sequestrated person will qualify as being rehabilitated when declared as such by the Court, which can happen four years after the sequestration date or sometimes sooner. If the Court does not declare the sequestrated person rehabilitated, he/she will automatically become rehabilitated ten years after his/her sequestration date.
- If a person’s estate is sequestrated, it may lead to prohibition of membership of certain professional bodies until he/she is rehabilitated, or even future exclusion from certain professions.
Who may apply for voluntary sequestration?
- In the case of a natural person becoming insolvent, the person himself/herself may apply, or his/her representative.
- Where spouses are married in community of property, both spouses must apply for voluntary sequestration at the same time.
- The partners in a partnership who are resident in South Africa or their representative may apply for voluntary sequestration.
- When a deceased estate is insolvent, the executor of the estate may lodge an application for voluntary sequestration.
- The curator (curator bonis) of an estate where the individual is unable to handle his/her own affairs e.g. if the individual is mentally unfit.
- An insolvent trust.
Voluntary sequestration is not the panacea it appears to be at the surface. Although it might be a solution for the financial problems of an insolvent person, there is a price to pay in terms of losing a creditworthy status and/or a profession together with a good reputation which might have taken years to build up.
The decision to apply for voluntary sequestration should not be taken lightly and should only be used as a last resort after all other possible avenues have been exhausted. If you need more information on insolvency and voluntary sequestration, please contact your legal advisor.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)