Text Book - Hockly’s Insolvency Law - 9th Edition PDF

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E JUTA

9TH EDITION

HOC  KLY'S  INSOLVENCY LAW

ROBERT SHARROCK KATHLEEN V  AN

DER LINDE ALASTAIR SMITH Page v

Preface This ninth edition of Hockly’s Insolvency Law f ollows the expanded format of the previous three editions, and its basic purpose remains the same: to provide a concise, yet fairly detailed, account of the law of insolvency, winding-up, and business rescue proceedings (which have replaced judicial

management). The book aims at a wide readership. For the subject specialist, it offers an update of recent developments in the law relating to insolvency, winding-up and business rescue proceedings; for students, it is a text for both undergraduate and postgraduate study; and for insolvency practitioners, it provides both a clear and practical analysis of the law and material for research and argument. It will also soon be available as an e-book. Insolvency is an area in which there are continually developments in the case law and applicable legislation. We have endeavoured to include all the developments that have taken place in the six years since the last edition of Hockly’s Insolvency Law, including the fundamental changes introduced by the Companies Act 71 of 2008. The book mostly reflects the law of insolvency as at the end of August 2012, with a few additions made during the production process. As before, the appendices contain specimen applications, specimen estate accounts and the Insolvency Act. Further appendices now include excerpts from the Companies Act 61 of 1973, the Companies A  ct 71 of 2008 and the Close Corporations Act 69 of 1984, as well as the entire Cross-Border Insolvency A  ct 42 of 2000. Cross-references throughout are to paragraphs, not pages. A sincere vote of thanks must go to Linda van de Vijver for her invaluable assistance and co-operation in publishing this new edition. We would also like to thank Deidre du Preez for managing the project and compiling the table of cases, Adami Geldenhuys for compiling the table of statutes and the subject index, and preparing the statutes that appear in the appendices, Nic Jooste for designing the book covers, and Tommy Bell for the typesetting. RD SHARROCK KE VAN DER LINDE AD SMITH Page vii

Contents Preface Part 1 Introduction Chapter 1 Introduction Part 2 Obtaining a sequestration order Chapter 2 Voluntary surrender Chapter 3 Compulsory sequestration Part 3 Effects of sequestration Chapter 4 The legal position of the insolvent Chapter 5 Vesting of the assets of the insolvent Chapter 6 Vesting of the assets of the solvent spouse Chapter 7 Uncompleted contracts and legal proceedings not yet finalized Part 4 Collection of estate assets Chapter 8 Preservation of the estate pending the trustee’s appointment Chapter 9 Meetings of creditors and proof of claims Chapter 10 The election of the trustee Chapter 11 The duties and powers of the trustee Chapter 12 Impeachable dispositions Chapter 13 Interrogation of the insolvent and other witnesses Chapter 14 The duties of the insolvent Part 5 Realization and distribution of the assets Chapter 15 Realization of the estate assets Chapter 16 Creditors’ claims and their ranking Chapter 17

The estate accounts and the distribution of the estate Part 6 Composition and rehabilitation Chapter 18 Composition Chapter 19 Rehabilitation Part 7 Miscellaneous Chapter 20 Partnership and sequestration Chapter 21 Insolvent deceased estates Chapter 22 Offences Part 8 Winding-up and rescue of companies and close corporations Chapter 23 Winding-up of companies Chapter 24 Winding-up of close corporations Chapter 25 Business rescue and compromise Page viii

Part 9 Cross-border insolvency Chapter 26 Cross-border insolvency Appendices Appendix 1 Specimen applications Appendix 2 Estate accounts Appendix 3 Insolvency Act 24 of 1936 Appendix 4 Companies Act 61 of 1973, Chapter XIV Appendix 5 Companies Act 71 of 2008, Chapter 2 Appendix 6 Companies Act 71 of 2008, Chapter 6 Appendix 7 Close Corporations Act 69 of 1984, Part IX Appendix 8 Cross-Border Insolvency Act 42 of 2000 Table of cases Table of statutes Index Page 1

1.1 1.2 1.3 1.4 1.5 1.6 1.7

Part 1 Introduction Chapter 1: Introduction Meaning of ‘insolvency’ Purpose of a sequestration order What may be sequestrated Jurisdiction of the court The Master Condonation of irregularities Historical overview Page 3

Chapter 1 Introduction Synopsis 1.1 Meaning of ‘insolvency’ 1.2 Purpose of a sequestration order 1.3 What may be sequestrated 1.3.1 Meaning of ‘estate’ 1.3.2 Meaning of ‘debtor’ 1.4 Jurisdiction of the court 1.4.1 Which court has jurisdiction 1.4.2 Jurisdiction over a debtor and his estate 1.4.3 Jurisdiction in litigation against third parties 1.4.4 Competing courts—removal to another court 1.5 The Master 1.6 Condonation of irregularities 1.7 Historical overview 1.7.1 Roman law 1.7.2 Roman-Dutch law 1.7.3 South African law

1.1 Meaning of ‘insolvency’ In common parlance, a person is insolvent when he is unable to pay his debts. But the legal test of insolvency is whether the debtor’s liabilities, fairly estimated, exceed his assets, fairly valued (Venter v Volkskas Ltd 1  973 (3) SA 175 (T) 179; Ex parte Harmse 2005 (1) SA 323 (N) 325). Inability to pay debts is, at most, merely evidence of insolvency. A person who has insufficient assets to discharge his liabilities, although satisfying the test of insolvency, is not treated as insolvent for legal purposes unless his estate has been sequestrated by an order of the court. A sequestration order is a formal declaration that a debtor is insolvent. The order is granted either at the instance of the debtor himself (voluntary surrender: see c hapter 2) or at the instance of one or more of the debtor’s creditors (compulsory sequestration: see chapter 3). The terms ‘sequestration’ and ‘ sequestration order’ should strictly be used only with reference to a person’s estate. A debtor’s estate is sequestrated, not the debtor himself. | However, ‘ insolvent’. both When a debtor’s the word estate ‘ insolvent’ and  the is used debtor to himself describe may a debtor, properly it carries be described two possible as meanings: either that the debtor’s estate has been sequestrated, or that his liabilities exceed his  the Insolvency Act 24 of 1936, definition of ‘insolvent’). The notion of ‘becoming assets (cf s 2 of insolvent’, thus, has a wider meaning than that Page 4

 982 (3) SA 643 (C) of ‘being sequestrated’ (Land- en Landboubank van Suid-Afrika v Joubert NO 1 648).

1.2 Purpose of a sequestration order The main objective of a sequestration order is to secure the orderly and equitable distribution of a debtor’s assets where they are insufficient to meet the claims of all his creditors. Executing against the property of a debtor who is in insolvent circumstances inevitably results in one or a few creditors being paid, and the rest receiving little or nothing at all. The legal machinery that comes into operation on sequestration is designed to ensure that whatever assets the debtor has are liquidated and distributed among all his creditors in accordance with a predetermined (and fair) order of preference. The law proceeds from the premise that, once an order (or provisional order) of sequestration is granted, a concursus creditorum ( ‘coming together of creditors’) is established, and the interests of creditors as a group enjoy preference over the interests of individual creditors (Richter NO v Riverside Estates (Pty) Ltd 1  946 OPD 209 223). The debtor is divested of his estate and cannot burden it with any further debts. A creditor’s right to recover his claim in full by judicial proceedings is replaced by the right, on proving a claim against the insolvent estate, to share with all other proved creditors in the proceeds of the estate assets. Apart from what is permitted by the Act, nothing may be done which would have the effect of diminishing the estate assets or prejudicing the rights of creditors (Ward v Barrett NO & another NO 1  963 (2) SA 546 (A) 552). In Walker v Syfret NO 1  911 AD 141 166, Innes J explained the underlying principle as follows: ‘The object of the [Insolvency Act ] is to ensure a due distribution of assets among creditors in the order of their preference. . . . The sequestration order crystallises the insolvent’s position; the hand of the law is laid upon the estate, and at once the rights of the general body of creditors have to be taken into consideration. No transaction can thereafter be entered into with regard to estate matters by a single creditor to the prejudice of the general body. The claim of each creditor must be dealt with as it existed at the issue of the order.’ The law of insolvency exists

primarily for the benefit of creditors (cf Ex parte Pillay; Mayet v Pillay 1  955 (2) SA 309 (N) 311) and, accordingly, a court will not sequestrate a debtor’s estate unless it is shown that the sequestration will

be to the advantage of creditors. Thus, sequestration will generally not be resorted to if the debtor, although insolvent, has only one creditor and the latter is already in possession of a judgment against the debtor. In such a case, the normal execution procedure offers a less expensive means of exacting from the debtor whatever amount he is able to pay (cf Absa Bank Ltd v De Klerk and related cases 1  999 (4) SA 835 (E) 839; Lynn & Main Inc v Mitha NO 2  006 (5) SA 380 (N) 383). And sequestration will not be ordered if the assets in the debtor’s estate will be consumed by placing the estate under sequestration and there will be nothing left over for creditors. The court will make an order of sequestration only if the expected result will be an appreciable dividend for creditors. The requirement of advantage to creditors is discussed further in 2.2.3 a  nd 3  .1.3. Although sequestration was not designed to alleviate the position of the debtor, it inevitably has this effect because it relieves him from legal proceedings by creditors Page 5

and allows him, through rehabilitation, to free himself from all unpaid pre-sequestration debts (s 129(1)(b) ) . Because insolvency law aims to ensure that creditors receive an equitable share of the debtor’s estate, it is sometimes regarded as no more than an elaborate system of execution. In some legal systems, for instance, insolvency law is classified under civil procedure rather than under mercantile law, as in our system. But the notion that insolvency law is merely a system of execution is simplistic. If it were merely this, sequestration would affect only the debtor’s assets, whereas, as will be noted later (c hapter 4), sequestration also affects the debtor personally, restricting his capacity and freedom to enter into contracts, to follow a chosen vocation, to litigate, and to hold office. In Naidoo v Absa  010 (4) SA 597 Bank Ltd 2 (SCA) 601, the court accepted that a sequestration order is ‘not an ordinary judgment entitling a creditor to execute against a debtor’. It affects ‘not only the rights of the two litigants, but also of third parties, and involves the distribution of the insolvent’s property to various creditors, while restricting those creditors’ ordinary remedies and imposing disabilities on the insolvent’. It followed that sequestration proceedings instituted pursuant to breach of a credit agreement could not be classified as ‘legal proceedings to enforce the agreement’ as envisaged by s 129(b) o  f the National Credit Act 34 of 2005. Cachalia JA remarked (600): ‘[An] order for the sequestration of a debtor’s estate is not an order for the enforcement of the sequestrating creditor’s claim, and sequestration is thus not a legal proceeding to enforce an agreement.’ (See also FirstRand Bank Ltd v Evans 2  011 (4) SA 597 (KZD) 606.)

1.3 What may be sequestrated The Act provides for the sequestration of the ‘estate’ of a ‘debtor’. 1.3.1 Meaning of ‘estate’ An estate is usually conceived of as a collection of assets and liabilities (cf  923 OPD 234 235), but a debtor who has only liabilities may be regarded as Ex parte Foxcroft 1 having an estate for sequestration purposes. In Miller v Janks 1  944 TPD 127, M had acquired an estate by means of his occupation as a professional gambler. His assets had subsequently disappeared under highly suspicious circumstances, leaving only liabilities. His wife possessed fixed property which she had received while M was pursuing his occupation. The court granted an order sequestrating M’s estate. It rejected M’s argument that, because he no longer had any assets, he had ceased to have an estate and, therefore, sequestration was not possible. Murray J observed (132): ‘A debtor who has £1,000 assets and £2,000 liabilities has an estate, though one insolvent to the extent of £1,000: he does not cease to have an estate when the next day he pays over his £1,000 to his creditors, and remains insolvent to the same extent. . . . [A]n estate . . . is [no] less an estate because at one time it has only assets, at another time

only liabilities, and at yet another time both assets and liabilities.’ The joint estate of spouses married in community of property is an estate for purposes of insolvency. A debtor who is married in community of property does not have a separate estate which can be sequestrated, even where he (or she) is carrying on a business independently of his (or her) spouse (Ex parte Vally 1  930 CPD 304; De Wet NO v Jurgens 1  970 (3) SA 38 (A) 48). The spouses are both debtors and, on sequestration of Page 6

their joint estate, they both become insolvent debtors for purposes of the Act (Acar v Pierce and other like applications 1  986 (2) SA 827 (W) 830; Du Plessis v Pienaar NO & others 2  003 (1) SA 671 (SCA) 676; Berrange NO v Hassan & another 2  009 (2) SA 339 (N) 369). On divorce, each spouse regains a separate estate which must obviously be sequestrated separately (sequestration does not extinguish the liability of the solvent spouse for debts of the joint estate: s 17(5) of the Matrimonial Property Act 88 of 1984; Maharaj v Sanlam Life Insurance Ltd & others 2  011 (6) SA 17 (KZD) 19-20). However, if the divorce takes place after a creditor has already acquired the right to apply for sequestration of the joint estate, then the creditor is required to sequestrate the separate estates of both spouses (BP Southern Africa (Pty) Ltd v Viljoen en ’n ander 2  002 (5) SA 630 (O) 638). A debtor who is married out of community of property has a separate estate that can be sequestrated. However, as will be seen later (6  .1), the solvent spouse’s assets are also affected by the order, since they vest in the trustee of the insolvent estate until the solvent spouse can establish her (or his) title to them. A debtor whose estate has been sequestrated may, during his insolvency, acquire a new estate under a title valid against his trustee. This new estate may itself be voluntarily surrendered (Ex parte  980 (2) SA 788 Foxcroft (supra)) or sequestrated at the instance of a creditor (Ex parte Geeringh 1 (O) 789). Compulsory sequestration is possible, it seems, even where the assets in the second estate have been dissipated by the time the application for sequestration is made (Miller v Janks (supra)) . 1.3.2 Meaning of ‘debtor’ A ‘ debtor’ for purposes of the Insolvency Act is ‘a person or a partnership, or the estate of a person or 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’ (s 2). An entity or association of persons is regarded as ‘a debtor in the usual sense of the word’ if it is able to possess an estate and incur debts (Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly & another NNO 1  984 (1) SA 160 (W) 163).  337-426) of the The law governing the liquidation of insolvent companies is Chapter 14 (ss Companies A  ct 61 of 1973. These provisions were left in operation by the Companies Act 71 of 2008 and for the time being apply to the winding up and liquidation of companies (and other entities) under the latter statute (see further c hapter 23). The entities that may be placed in liquidation, according to s 337 o  f the 1973 Act, are a company, an ‘external’ company (one registered outside the Republic and meeting certain requirements: see s 1 of that Act), and ‘any other body corporate’. ‘Body corporate’, in this context, refers to a juristic person or universitas, ie, an association of persons that has perpetual succession and is capable of holding property and of suing and of being sued in its corporate name (Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly & another NNO (supra) 1  63). The term ‘ debtor’, therefore, embraces the following: •A natural person. •A partnership—even one whose members are all juristic persons (Commissioner, South African Revenue Services v Hawker Air Services (Pty) Ltd; Commissioner, South African Revenue Service v

Hawker Aviation Partnership & others 2  006 (4) SA 292 (SCA) 306, overruling P de V Reklame (Edms) Bpk v Page 7

Gesamentlike Onderneming van SA Numismatiese Buro (Edms) Bpk en Vitaware (Edms) Bpk 1  985 (4) SA 876 (C)). •A deceased person and a person incapable of managing his own affairs (cf s 3(1)). •An external company that does not fall within the definition of ‘external company’ in the Companies Act 61 of 1973, eg, a foreign company that has not established a place of business in the Republic (Lawclaims (Pty) Ltd v Rea Shipping Co SA: Schiffscommerz Aussenhandels Betrieb der VVB Schiffbau intervening 1  979 (4) SA 745 (N) 751). • An entity or association of persons that is not a juristic person, such as a trust (Magnum Financial Holdings (Pty) Ltd (in Liquidation) v Summerly & another NNO (supra); Commissioner for Inland Revenue v Friedman & others NNO 1  993 (1) SA 353 (A) 356). In Melville v Busane & another 2  012 (1) SA 233 (ECP), the court explained (234–7) that although a trust falls within the definition of a ‘juristic person’ in the Companies Act 71 of 2008 ( s 1), it does not meet the definition of a ‘company’ in that Act (a juristic person incorporated in terms of the Act) and, hence, cannot be liquidated under Chapter 14 of the 1973 Companies Act. A body corporate established in terms of the Sectional Titles Act 95 of 1986 is a ‘body corporate’ as referred to in the definition of ‘debtor’ in  the Insolvency Act and, therefore, is not capable of being sequestrated. It also cannot be wound up for non-payment of its debts or by reason of its insolvency. The legislature did not intend the law governing the winding••up of insolvent companies to apply to bodies corporate (Reddy v Body Corporate of Croftdene Mall 2002 (5) SA 640 (D) 645-7).

1.4 Jurisdiction of the court 1.4.1 Which court has jurisdiction As a rule, only a Provincial or Local Division of the High Court may adjudicate upon an insolvency matter (s 2 sv d  efinition of ‘ Court’). A magistrate’s court may preside over prosecutions for criminal offences under the Insolvency Act (see 22.1), proceedings to set aside voidable dispositions (see 12.3.2), and a few other matters, provided, in each case, the ordinary jurisdictional limits as to offence, person, and amount, imposed by the Magistrates’ Courts Act 32 of 1944, are not exceeded (ibid). 1.4.2 Jurisdiction over a debtor and his estate In terms of s 149(1), a court has jurisdiction ‘over [a] debtor and in regard to the estate of [a] debtor’ if: on the date when the application for voluntary surrender or compulsory sequestration of the debtor’s estate is lodged with the Registrar of the court, the debtor is domiciled, or owns property, or is entitled to property, situated within the jurisdiction of the court (s 149(1)(a) ) ; or at any time within the 12 months immediately preceding the lodging of the application, the debtor ordinarily resided or carried on business within the jurisdiction of the court (s 149(1)(b)) . (i) Domicile or property within jur...