LIOP 3724: Overview of Insolvency Law in South Africa Assignment

This assignment provides a detailed overview of South African insolvency law, addressing key aspects such as the definition of insolvency, distinguishing between financial and legal insolvency, and outlining the different forms of insolvency applicable to natural and juristic persons. It explores the r...Read More

19
Insolvency Law in South
Africa
Assignment
(Student Details: )

Insolvency Law in South Africa
Table of Contents
Abstract............................................................................................................................................2
Question 1........................................................................................................................................3
Question 2........................................................................................................................................8
Bibliography..................................................................................................................................12
1

Insolvency Law in South Africa
Abstract
Insolvency can be defined as a state of financial breakdown where an individual losses
the potential to pay off ones expenses and bills. From the year 1980, the South African
Law commission was in process of generating a reform targeting the complete
Insolvency law of the country. Only by the year 2000, the commission came up with a
final proposal layout in terms of insolvency related to individuals along with partnership.
But later with the efforts of Centre for Advanced corporate and Insolvency law in
collaboration with then present Advisory committee on competition law that ideas
related to insolvency of corporate bodies and closed entities was added to the list.
It is an established fact that the corporate insolvency is rated much above the individual
insolvency in the country .The legal source which is the prime reference for the
insolvency matters in South Africa is the Insolvency Act (24 of 1936).However the act
mentions the impact of this law over the insolvent individuals and the bond of
partnerships. On the other hand, to the corporate bodies like companies and shut down
entities the norms are laid under Companies Act. The norms in relations to the winding
up are mentioned in Companies Act and that referring to closed entities has been
referred in Closed Corporation Act.
Based on such segregation, the insolvency law is applied in different forms to these
entities and the individuals and the following write up illustrates such laws and its
applications under South African Law of Insolvency.
2

Insolvency Law in South Africa
Question 1
As per the law “Insolvency” can be defined as a condition of a debtor where one fails to
repay his/her debts. It is a term to define the state of an individual or an organisation
which fails to fulfil the monetary obligations towards the lender and debts fall as due.
Under the legal framework, the mode to test insolvency is to check if the financial
liability of the debtor is exceeding his possessed assets which are expected to be fairly
calculated. A state of insolvency brings along the conditions as per which the debtor
losses his legal rights. This kind of elimination of rights is executed under the law in
order to protect the parties, specially the existing bunch of creditors and future creditors
from any form of damage1.
Until now under the South African law, insolvency is including in its ambit entities like
an individual, companies moving under liquidation, the established partnership, and the
corporate bodies which are shut down and are under the scrutiny of Companies Act
along with the Closed Corporation Act2.
Defined in the simplest terms, insolvency can be categorised into two forms i.e. financial
insolvency and legal insolvency and based on the nature, the two differ from each other.
The financial insolvency is applicable to a case where the liabilities of the insolvent are
greater in value, in comparison to one’s assets3. Whereas, under the concept of a legal
insolvency, an insolvent is believe to be one as a result of the changed legal status. A
legal status is one defined by law and it is associated with the identity of an individual.
1 Sharrock and Van Der Linde 2012:253.
2 See Close Corporations Act 69/1984
3 James 2014:30-55
3

Insolvency Law in South Africa
Under the law of insolvency, a “debtor” indicates to a person or bond of partnership. It
also includes the estate owned by the person4. Whereas, a certain class of debtors
which can be placed under the liquidation as per the Companies act are
 A company
 An external company
 Any other form of a corporate body
Such corporate bodies are referred as juristic person, also referred to as universitas.
Therefore, the following categories come under ambit of a “debtor”5.
 A natural person
 Any partnership, including ones with juristic person as its members.
 Deceased individual and also a person who is not in capacity to handle ones
affairs.
 Any other company which does not fall within the definition of “eternal company”
under the Companies Act for example a foreign institution not having a setup in
the country.
 Any association which does not fall under juristic person (example trust).
Under the provisions of Insolvency law, there are two types of insolvency with regard
to a natural person and that to a juristic person. In the case of a natural person,
considering the fact that such person will be into existence after such insolvency too,
thus estate of such person is “sequestrated”6. On the other hand, in case of a juristic
4 Evan 2010:465-483
5 Insolvency Act 24/ 1936
6 Otto 201:257
4

Insolvency Law in South Africa
person, one is liquidated due to the fact that it will dissolve right after insolvency. The
two forms are discussed below in detail.
Sequestration: The prime reason for executing such form of insolvency is to
proportionately distribute the assets of the debtor in a situation where they are
incapable of repaying the debts of the claimant. With such an execution, if not all, few of
the creditors end up receiving their credited amount successfully. There is an
appointment of a legal body which looks into these proceedings and takes care of a fair
assessment of the assets of a debtor7. The repayment is purely performed on a priority
basis. The procedure of Sequestration involves certain steps such as:
 The process where a financially stable individual attains a situation of insolvency
 There has to be an application in order to define a financially insolvent person
into a legal insolvent upon receiving a sequestration letter issued by the court.
 The assets of such insolvent are captured
 Once the assets are collected ,there is a fair evaluation of such assets in order to
pay back the creditors on a justified priority
 The insolvent is dissolved and the registration is denied of such legal person.
Other than whatever is provided under the act, there is no process to diminish the
estate assets or being biased towards the rights held by the creditors. The objective
reasoning of the act was highlighted in the case of Walker v Syfret NO8 where the court
stated:
7 Bezuidenhout 2012:1-35
8 Walker v Syfret NO 1911 AD 141
5

Insolvency Law in South Africa
“The purpose of the 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.” While assessing the assets of such insolvent, the priority is given to the group of
creditors over the individual creditors (Richter NO v Riverside Estates)9.
Liquidation (Winding up ) – In the case of legal person (corporate bodies and shut down
entities) the liquidator has an advantage to involve in a business rescue procedure so
as to avoid the situations and proceedings of liquidation and maintain the status of
solvency. During winding up the assets of the liquidator are captured and the total value
held by the company is calculated in order to distribute the right share to the creditor.
After such debt clearance, the residue amount is divided amongst the shareholders
depending on the rights one hold.
Any company can be opt for winding up by either of two ways- by the orders of the court
or voluntarily. The two ways can be illustrated as follows:
Voluntary Winding up – Any of the company can opt for winding up under a resolution
that has been registered with the registrar of the company. It is this resolution which will
define the nature of such winding up and will reflect whether it is winding up out of the
consent of the members or as per the will of the creditors.
9 Richter NO v Riverside Estates Ltd 1946 OPD 209:223
6

Insolvency Law in South Africa
Highlighting the difference in both it can be said that, under members will, the winding
up is possible only if the company is capable to pay its expenses and debts in full
capacity and it is some other factors on whose attainment the winding up is opted and
due to solvent status the provisions of the New company Act can apply10. Whereas,
under creditors choice, the company is no more in position to pay its debts and the
paying capacity is exhausted. This procedure is in resemblance to compulsory winding
up though.
Compulsory Winding up – There are situations where the court orders the company to
opt for mandatory winding up. Such procedure is initiated on filing of an application on
part of the creditor before the High Court supported by an affidavit. In such cases the
court has all the authority to uphold or pin down such an application which can also
involve interim orders11. In usual course such orders passed by the court is of a
provisional nature and issue a show cause notice against all the interested parties
asking them why such an order should not be made as a final one.
Legislations and Jurisdiction:
In South Africa, the Insolvency matters are regulated by three statutes and it is the
nature of the insolvency which decides the applicable statute. In general it is only a local
division of the High Court that may look into the matters of insolvency but as far as
criminal proceedings is concerned the Mag Court can intervene under the Act12.
Where the sequestration concerning a natural person is governed by Insolvency Act of
1936, the winding up of the legal persons or closed entities is governed by the Close
10 Milman 2017:25-30.
11 Museta 2013:68-81.
12 Pepler 2014:205-255
7

Insolvency Law in South Africa
Corporation Act 69 of 1984. Basically the provisions related to the winding up of the
companies are governed by Old Companies Act 61 of 1973 but it enables the
application of New Companies Act 2008.
Also, the cross border insolvency matters are presently being dealt under the Cross
border Insolvency Act 2000.There is incorporation of representatives who are appointed
for formal proceedings running overseas13.
In terms of jurisdiction, the court holds the authority to try an insolvent that resided or
carried one’s trade in that territory even if the offence was committed elsewhere. There
exist few of the exclusive norms which are applicable to only criminal prosecution where
as others may apply to both civil and criminal.
Question 2
2.1 - The nature of the insolvency act can appear on the face of it a breach to the
fundamental rights of the insolvent but the fact does not make it constitutionally void and
invalid14. Under the South African law, the mere fact that an act or a law appears to be
in conflict with one of the rights mentioned under the Bill of Right, it nowhere holds the
law to be unconstitutional.
When section 36 is referred, it lays an essential point in context of Bill of Rights stating
that such right will be “reasonable and justifiable” while exercised in a democracy. Such
application will be solely based on factors like freedom, equality and human dignity15.
Also the section further states that in order to check if such applied limitation is in
13 Franken 2013:97-131.
14 Ondersma 2014:269
15 Rehman 2010:55-96.
8

Insolvency Law in South Africa
harmony with justice, a close look should be taken on factors such as purpose of the
limitation, the nature of such given rights, the possible applicability and extent of such
limitation and the most crucial one i.e. the nexus between such limitation and the
rights16. In few of first judicial decisions regarding right to privacy in association with law
of insolvency was delivered in the case of Bryden NO & Others 17 .The court opined - “a
person who is sequestrated effectively sacrifices his or her right to privacy in regard to,
at the least, pre-sequestration patrimonial matters. The rights of creditors enjoy
preference over those of the insolvent and ... it is only reasonable and justice- able in an
open and democratic society that this should be so”.
However, in the case of Haig v Aitken the court held “personal correspondence of the
bankrupt with parliamentary, ministerial and government colleagues did not form part of
the property of the bankrupt’s estate and stated that any view to the contrary amounted
to a gross invasion of privacy”18. Another question that appears before the court is in
relation to the priority claims where a class of creditors or specific creditor holds priority
in claim over other creditor/s and here the court looks into the ambit of right to equality.
Under the South African Law, that creditor who is primarily granted with a right to
security from the insolvent in terms of his assets, is legitimate to attain prior claim. Here
the mare fact of being counted as less prior or credible does not amount to
discrimination and the unfair treatment.
16 Muchlinski 2012:145-177.
17 Bryden NO & Others 1899 A.C. 580
18 Haig v Aitken 2000 3 WLR 1117
9

Insolvency Law in South Africa
There are other parameters of fundamental rights which appear to infringe fundamental
rights under the constitution while implementation of the insolvency act but the reality is
not so until factors like just and fair implementation are core values of such law.
2.2 A strong argument that can be presented in order to prove failing constitutional
validity of the South African Insolvency Act is its infringing nature towards basic human
rights19. As laid under section 14 of the Constitution “everyone has the right to privacy”
where by one has right of not to have one’s property searched, one’s person or
residences searched, seizure of one’s property and not to have an infringement of
privacy to communicate20.
Section 6, 10 and 12 of the act demands the application of the sequestration to be
creditor favourable21. Where the voluntary surrender application, which is much more
stringent than the compulsory application for the fact that under the prior, the insolvent
has to prove that it shall serve for the benefit of the creditors whereas under the latter
the only requirement is to reflect a possibility of the advantage to the creditor. Such form
of differentiation in highlighting the benefit to the creditor makes a way to higher
prosecution of poorer debtors during insolvency proceedings.
Also another provision leading to collision with constitutional validity is Section 27 which
is in conflict with Section 9 of the constitution. It reflects a clear discrimination based on
marital status, sex and birth. In terms of marital status, the donations are protected by
falling under the insolvent estate. Section 27(1) shields the benefits that are attained by
the wife and nowhere of the man or a partner in civil terms. Along with this limitation,
19 Goldman 2014:225-355.
20 See Constitution of Republic of South Africa 1994
21 Goode 2011:288-387.
10

Insolvency Law in South Africa
section 27 restraints the benefits resulting out of child born in a legal wedlock and not to
the ones born outside of legal marriage. Just like the benefits extended to the wife, the
benefits exercised by the children are only in the case where the sequestered estate is
that of the man and not in the case of such estate belonging to wide22.
Another case of a clear disproportionate balance in between the Insolvency law and its
constitutional validity can be highlighted by concept of “debt administration”. This norm
under the law clearly breaches right to equality and right to be heard23. An individual
holding a huge amount of debts but is capable enough to incur the cost of court and file
sequestration application in terms of his estate under the Insolvency Act, can hold an
opportunity and discharge with pre-sequestration debts. Whereas one not cables to hold
such financial ability to file such an application and incur court fees, is bound to face
administration orders as per section 74 of the Magistrate Court Act.24Such legal
incidents and provisions clearly depict an unfit ability of such Insolvency law not being
harmony with constitutional validity.
Bibliography
SHARROCK R AND VAN DER LINDE K
22 Harding And Kohl 2016:55-95.
23 Bingham 2011:68-82.
24 Tolmie 2013:109-234.
11

Insolvency Law in South Africa
2012. Hockly's insolvency law. Cape town:Juta.
JAMES D
2014. Money from nothing: indebtedness and aspiration in South Africa. California:Stanford
University Press.
EVANS RG
2010. Law reform in respect of assets in insolvent estates in South Africa. SA Mercantile
Law Journal= SA Tydskrif vir Handelsreg. 22(4):465-483.
OTTO J
2010. The history of consumer credit legislation in South Africa. Fundamina.16:257.
BEZUIDENHOUT P. T. J
2012. A review of business rescue in South Africa since implementation of the Companies
Act (71/2008). Doctoral dissertation. North-West University.
MUSETA G.M
2013. The development of business rescue in South African law. Doctoral dissertation.
University of Pretoria.
MILMAN D
2017. Personal Insolvency Law, Regulation and Policy. London:Routledge.
FRANKEN S M
2013. Cross-border insolvency law: A comparative institutional analysis. Oxford:Oxford
Journal of Legal Studies.
PEPELER J J
12

Insolvency Law in South Africa
2014. Advantage for creditors in South African insolvency law-a comparative investigation.
Doctoral dissertation. Pretoria:University of Pretoria.
ONDERSMA C
2014. A human rights framework for debt relief. Pennsylvania: University of Pennsylvania.
REHMAN J
2010. International human rights law. London:Pearson education.
MUCHLINSKI P
2012. Implementing the new UN corporate human rights framework: Implications for
corporate law, governance, and regulation. Cambridge:Business Ethics Quarterly.
GOLDMANN M
2014. Human rights and sovereign debt workouts. Frankfurt:Goethe University.
GOODE R M
2011. Principles of corporate insolvency law. London:Sweet & Maxwell.
HARDING C AND KOHL U
2016. Human rights in the market place: the exploitation of rights protection by economic
actors. London:Routledge.
TOLMIE F
2013. Corporate and personal insolvency law. Routledge-Cavendish.
BINGHAM T
2011. The Business of Judging. Oxford University Press:Oxford.
13

Insolvency Law in South Africa
14