SEQUESTRATION INSOLVENCY: SEQUESTRATION - RATHER FAIL WITH HONOR THAN SUCCEED IN DEBT (PART 2)

“[Know what happens when an individual declares bankruptcy and how it affects his or her life” – quote by Marilyn vos Savant]

Bad things occur to decent people. It is imperative to comprehend at what time it is worth still fighting, and when it is time to make a new start. In life we walk around with a misconstrued discernment and baggage that we carry along with us. We contemplate that we warrant to ache for the rest of our lives.

 For example, where people in the position of losing their property or about to lose their property and is still left with a deficit. No ordinary person can recuperate from such a loss, and still having to rent to pay. Another example is where people have lost their car or about to have it attached and removed. In such situations people normally have a deficit on the vehicle sold at auction and therefore with such deficit, they are unable to purchase another mode of transport.

“Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt” (quote by Henrik Ibsen). It is clear from above that the debt state is just such that one will be paying for the rest of one’s life and cannot ever be able to purchase anything again.

Sequestration in a process that people have that assists in dealing with individual debts which one has no hope of recompensing in a sensible period. “Bankruptcy is a serious decision that people have to make” – quote by Herb Kohl.

Insolvency in South African law refers to a status of weakened legal capacity executed by the courts on persons who are incapable to recompense their debts or those people whose accountability surpass their possessions.

One can only sequestrate, in terms of the Insolvency Act, if individual possesses valuable assets to sell or if one has cash. If one does not own property and if one does not have a certain amount of cash, then one cannot sequestrate. In terms of the Insolvency Act, when one sequestrates it is essential that there must be an advantage to creditors. If one cannot make out a benefit to creditors, the Court cannot grant the order. 

Many have filed for sequestration, but they are not informed correctly of the process or implications thereof. “This filing spike is a result of bad information being pushed on people, and then they file for bankruptcy out of fear” – quote by Steve Bartlett. Below is a brief explanation of sequestration to guide one who intends to apply for sequestration.

1.                 What is sequestration:

As stated above briefly, Sequestration is well-defined as the surrender of an individual’s financial estate to the High Court under the governance of the Insolvency Act.

“Debt is one person's liability, but another person's asset” (quote by Paul Krugman).

There are two types of Sequestration:

• Compulsory Sequestration applies to debtors that cannot pay off debts, therefore resulting in credit providers applying to have the debtor’s estate sequestrated or
• Voluntary sequestration (also known as friendly sequestration) refers to debtors who willingly apply to the High Court for sequestration.

1.1.       Compulsory sequestration

1.1.1.      Characteristics of compulsory sequestration

In terms of the Insolvency Act 1936, section 9 (1), a sequestration order grants creditor the right to apply to the court for the sequestration of a debtor. Although the aim of the creditor is to recover monies due to them, the dual purpose of this sequestration order is to wind up an insolvent estate in methodical means while in the process shielding all creditors on an identical basis.

To determine if Compulsory Sequestration is applicable, there are four characteristics to consider when determining whether this form of sequestration is possible.

1.1.1.1.            Who may bring the application?

To bring this application, any of the creditors or their agents with a claim of not less than R 100,00 may bring an application for sequestration. The claim must be that of a monetary claim. It is possible for a claim for damages, but this application is not proposed for the retrieval of a sensibly undecided liability.

1.1.1.2.            Which court may hear the application?

The High Court has authority to deal with sequestration applications. To determine which High Court, one must approach the High Court in which the debtor is located or has been within twelve months before the application or has own or has immovable property.

1.1.1.3.            When may creditor launch the application?

There are various grounds upon which a creditor may launch a sequestration application.

If any of the grounds listed in Section 8 of the Insolvency Act 24 of 1936 applies or if the debtor is verified to be truly insolvent. While there are eight likely grounds listed in section 8 of the Insolvency Act, three of the sections that are most frequently resorted to, are:

• Where the applicant relies on a nulla bona return (Section 8(b)). This is where the debtor is served with a Write of Execution by the Sheriff but fails to have sufficient disposable assets to satisfy the debt or where the Sheriff could not affect personal service and was unable to find sufficient disposable property;
• Where the debtor gives notice in writing to the applicant that he is unable or unwilling to settle the debt (Section 8(g)).
•  Where the creditors attempt to make arrangements with another creditor to release the debtor absolutely or moderately from the debt (Section 8(e)).

1.1.1.4.            There must be an advantage to Creditors

It must be revealed by the applicant that he is certain that the sequestration will be to the advantage of creditors. This involves the consideration that there will be a financial advantage for all creditors.

1.2.       Friendly sequestration/Voluntary Surrender

1.2.1.      Characteristics of Friendly Sequestration / Voluntary Surrender.

This form of sequestration is an application which is brought through the co-operation of a creditor and a debtor.

To determine if Friendly Sequestration / Voluntary Surrender is applicable, there are three characteristics to consider when determining whether this form of sequestration is possible.

1.2.1.1.            Who may bring the application?

The following persons may apply to sequestrate their estates:

• An insolvent individual or his agent;
•  The executor of a deceased insolvent estate;
• An insolvent debtor who has been determined unable of managing his own affairs in terms of  the High Court Rules (HCR);
• The associates in a partnership.
• Where an application is made to surrender a combined estate of spouses, where such spouses are married in community of property, the application must be completed by both spouses.

1.2.1.2.            Which court may hear the application?

The High Court has authority to hear the matter, if on the date of the application, the applicant is:

• lives in the specific High Court jurisdiction; or
• owns property; or
• is permitted to property within the court’s jurisdiction; or
• at any time within twelve months prior to the application being launched, the applicant ordinarily resided or carried on business within the jurisdiction.

1.2.1.3.            Practical requirements

The applicant (debtor) must show that he is insolvent, but that he owns enough property to cover the costs of the sequestration, and that an order of sequestration would be to the advantage of his or her creditors.

Factual Solvency Test is where one must establish whether liabilities exceed assets. To determine for what value, one can realise one’s assets, if at all, one must determine if there is enough equity in an asset that one can sell to recuperate debts. If so, then this test is applicable. However, if one does not have any assets or equity in an asset that one can realise, then one will need to contemplate if one’s income exceeds one’s expenses to such a degree that one can in due course is able to get out of debt.

Commercial Solvency Test is where on must establish whether one’s expenses exceed one’s income. If one’s expenses is more than one’s income, then one will fall further into debt. Some sequestrate because of sureties that were signed or because one’s income has been reduces or one lost their job and cannot repay creditors.

The test for insolvency in the circumstances of Friendly Sequestration/Voluntary Surrender is actual insolvency, as opposed to commercial insolvency.

2.                Steps of Sequestration 

The following steps is legal procedure of sequestration, namely:

• An advertisement gets printed in the Government Gazette and the local newspaper in the area in which the Debtor is situated or resides. This step will avert additional legal action taking place against the debtor.
• A Statement of affairs is drafted that one must sign before a Commissioner of Oath. This document is succumbed for review at the Master of the High Court for 14 days or with the local Magistrate.
•  Afterwards a registered letter is sent to all credit providers as notice of the yielding of one’s estate.
• SARS will also be informed.
• At the day of the Court proceedings an Advocate or attorney with right of appearance will represent the debtor.
•  Afterward the application has been accepted and approved in Court, a Curator is chosen to handle all financial matters on one’s behalf.
•  The Court Rules determine that you pay between 20c and 22c in a rand benefit to your creditors. The advantage of this method is that the reimbursement amount does not accumulate interest
• The debtor receives a document to list all household items. This document gets sent to the valuator to determine the worth of the items. Debtor’s assets will be appraised at a market related price.

3.                Disadvantages of Sequestration

• Sequestrated Debtor will be bankrupt for at least the next 2 to 4 years.
• Sequestrated Debtor can apply for rehabilitation after 18 months, but this is an exception rather than the rule.
• Sequestrated Debtor may not have a cheque account or credit card facility.
• Sequestrated Debtor may not engage in any debt arrangements.
• All assets in the insolvent estate is vested in the insolvent estate and not personally in the Debtor’s hands.
• In terms of the Companies Act, the sequestrated debtor is also barred from acting as a member of a Closed Corporation Company or being the director of a company.
• The sequestration will be listed on credit bureaus and as such you, the Sequestrated Debtor, will not be creditworthy. This will prevent a debtor from obtaining any further credit, until such a time as the debtor has become rehabilitated
• Sequestrated Debtor, may obtain credit during the sequestration period if the credit giver knows that you have been sequestrated.
• Sequestrated Debtor can be removed from being recorded as being sequestrated. There is an end made to the sequestration by way of a second application to court for a Rehabilitation order

4.                Advantages of Sequestration

• Sequestrated Debtor wages and other income is still his own and he does not have to pay any creditor.
• The sequestrated debtor will have had up to at least 80% of the debt written off.
• Only sequestrated debtor creditors are informed of the procedure and not sequestrated debtor’s boss or any other person. sequestrated debtor cannot be fired or removed from work because of it.
• Sequestrated debtor will not have to appear in Court.
• Sequestrated debtor’s curator can organize with the sequestrated debtor’s financial institution to keep their vehicle and if their instalments are up to date
• All creditors’ claims, preceding to date of sequestration, lays in the insolvent estate and viewed as settled at date of rehabilitation.
• In terms of Sections 20(1)(b), all legal action by or against the sequestrated debtor in terms of the insolvency act is stopped.
• In terms of Section 23(5) read with 23(9) & Section 23(7), the sequestrated debtor’s income or salary is protected together with any pension benefits that the insolvent debtor may obtain. This therefore protects the sequestrated debtor’s income from creditors who wish to attach the debtor’s salary by way of a garnishee order, amongst others.
• During the application for voluntary sequestration, sequestrated debtor refers all creditors to curator who will then correspond with them. This will minimize of harassment by creditors.
•  The amounts the sequestrated debtor will save on not repaying creditors can go toward the sequestrated debtor living expenses and other necessities.

Sequestration is a process not to be entered into informally and should be an road worth investigating if your financial conditions require it. It is important to note that a man in debt is a slave to his own pocket. “Today, certain people file for bankruptcy, businesses and individuals, and it no longer has the stigma it once had. Now it's almost considered wise, a way to regroup and come back again” (quote by David Dinkins).

(NOTE: this article is for information purposes only. Each case depends on merits of matter and should be consulted with an attorney)