insolvency - PowerPoint Presentation

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insolvency

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insolvency

When liabilities exceed assets

Only legally insolvent when sequestrated by order of courtSlide3

legislation

In South Africa the

Insolvency Act 24 of 1936

deals with insolvency Slide4

sequestration

A sequestration order is a formal declaration that a debtor is insolvent. The order is granted at the request of the debtor himself (voluntary) or at the request of one or more of his creditors (compulsory).Slide5

Purpose of sequestration

The main purpose of a sequestration order is to ensure the orderly and equitable distribution of a debtors assets where they are insufficient to meet the claims of all his creditors.Slide6

Terminology

Sequestration – applies to natural persons

Liquidation – applies to legal personsSlide7

Types of sequestration

Voluntary surrender

Compulsory sequestration

Friendly

HostileSlide8

Voluntary surrender

Requirements:

The insolvent must comply with the prescribed formalities. These formalities pertain mainly to notification of creditors and other interested parties. The purpose of this is to enable the creditors to object to the application.

The debtor has to prove that he is in fact insolvent.

The surrender must be to the advantage of the creditors.

There must be sufficient assets to cover the costs of sequestration.Slide9

Compulsory

Brought by a creditor with a liquidated claim of at least R100

Creditor must prove:

He has established a claim that entitles him to apply for the sequestration of the debtors estate

The debtor has committed an act of insolvency or is insolvent

There is reason to believe that sequestration will be to the advantage to the creditor.Slide10

Acts of insolvency

The debtor leaves the Republic or is absent from the Republic or departs from his house with the intention to evade or delay payment of his debts.

Failure to satisfy judgment. If a court has given judgment against him, and he fails to satisfy the judgment due to insufficient property.

If the insolvent makes, or attempts making any disposition of any of his property which has, or would have, the effect of prejudicing his creditors or of preferring one creditor above another.Slide11

Acts of insolvency

If he removes, or attempts to remove, any of his property with an intention to prejudice his creditors or to prefer one creditor above another.

If the insolvent makes, or offers to make, any arrangements with any of his creditors to release him wholly or in part from his debts.

Failure to apply for surrender. If after having published a notice of surrender of his estate which has not yet lapsed or been withdrawn, fails to submit a substantively correct and complete statement of affairs with the Master, or fails to apply for acceptance of the surrender of the estate on the date indicated by the noticeSlide12

Acts of insolvency

Notice of inability to pay. If the debtor gives notice in writing to any one of his creditors that he is unable to pay any of his debts.

Inability to pay debts after notice of transfer of business. If, being a trader, he gives notice in the Gazette of his intention to transfer his business and is therefore unable to pay all of his debts.Slide13

Effect of sequestration on property

The sequestration of a person’s estate causes the insolvent estate to vest in the Master of the High Court and then in the trustee as soon as one is appointed to him. However, clothes, bedding, tools of trade and other essential means of substance remain in the hands of the insolvent.

Remuneration for work done by him after sequestration, pension monies, compensation for damages suffered by him in his personal capacity all remain in hands of insolvent.Slide14

Effects of sequestration

All civil proceedings stayed until trustee appointed

May not serve as director

Contracts – trustee to decideSlide15

Voidable dispositions

Can be set aside if:

Disposition made without value before sequestration & immediately afterwards liabilities exceeded assets

Disposition made not more than 6 months before sequestration which had effect of preferring one creditor

& immediately afterwards liabilities exceeded assets

Disposition at any time before sequestration with intent to prefer a creditor & immediately afterwards liabilities exceeded assets

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Trustee

Appointed by Master of the High Court to take control of insolvent estate

Duties include taking control of assets, collecting debts due, selling assets & paying creditors & doing admin and accounting to creditors and MasterSlide17

Creditors meetings

First meeting – prove claims, elect trustee, interrogate

2

nd

meeting – prove claims, interrogate, trustee reports back, creditors instruct

Additional meetings as necessarySlide18

Realisation of assets

Encumbered assets

Free residueSlide19

Submitting of claims

On affidavit with supporting documents

Only proven claims can share in proceeds

Danger of contributionSlide20

distribution

Secured creditors – mortgage, pawn, lien

Preferred creditors – notarial bond, tax, wages

etc

Concurrent – share in free residue

Liquidation & Distribution accountSlide21

compositions

Composition – offer to settle

Common law – only effective if all agree

Insolvency Act – needs to be accepted by ¾ of creditors holding ¾ of debtSlide22

rehabilitation

On application to High Court – (6 months – 10 years) – automatically after 10 years

On rehabilitation insolvents estate is restored, all debts prior to insolvency extinguished & full capacity Slide23

companies

Companies can be “wound-up” by the company registering a special resolution to wind up the company or by way of the company or creditors bringing a liquidation application to Court

Creditors can apply for liquidation if company fails to respond to payment demand, if

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bona

return or if proved company cannot pay its debts

Process similar to that of sequestration