Insolvency Law: South African study guide

About this module

Insolvency Law teaches what happens when a debtor cannot pay its debts: how an estate is sequestrated, what happens to the debtor and the debtor's property, how a trustee collects and distributes the assets, how transactions before sequestration can be set aside, the order in which creditors are paid, and how an insolvent is rehabilitated. It also introduces the winding-up of companies and business rescue. Educational tool, not legal advice. All law is South African.

Level: usually third or fourth year (LLB). Prior knowledge: Module 3 (Law of Contract), Module 7 (Property Law) and Module 8 (Specific Contracts), especially real security and suretyship.

How this guide teaches. Each chapter starts with a problem, gives the big picture, teaches the rules with case boxes (the legal issue, what the court held, and why it matters), lists common mistakes, sums up in short, and ends with practice questions, flashcards and a quiz. Cases are taught by the legal issue they decide, not by their facts or amounts.

Common cases and how they are checked

Module blueprint

IN1: Purpose and basic concepts

Problem. A debtor owes ten creditors. The first creditor to obtain judgment attaches and sells the debtor's car; the others get nothing. Why might the law prefer sequestration?

The big picture. Outside insolvency, creditors compete: the first to execute is paid first. Sequestration replaces this race with a collective procedure (a concursus creditorum): once the estate is sequestrated, the creditors' rights are fixed, individual execution stops, and the assets are collected and distributed by a trustee according to a statutory order. The aim is fairness among creditors and an orderly realisation of the estate, not primarily relief for the debtor.

IN1.1 Key concepts

• Insolvency (factual or balance-sheet): liabilities exceed assets, fairly valued.
• Commercial insolvency: inability to pay debts as they fall due. For individuals, sequestration usually requires actual insolvency or an act of insolvency (IN2).
• Debtor: natural persons, partnerships, deceased estates and trusts can be sequestrated. Companies and close corporations are wound up (liquidated) under company law (IN9), not sequestrated.
• Concursus creditorum: on sequestration, the position of creditors is fixed as at that moment, and nothing may be done by one creditor to the prejudice of the others.
• Free residue: the part of the estate not subject to any security; encumbered assets are those subject to security.

Back to the problem. Sequestration stops the race to execute. Once the estate is sequestrated, the creditors are treated as a group, and the trustee distributes the proceeds in the statutory order, so that similarly placed creditors share equally.

In short. Insolvency law replaces individual execution with a collective procedure (concursus creditorum). Natural persons, partnerships, deceased estates and trusts are sequestrated; companies are wound up. Factual versus commercial insolvency.

Common mistakes

• Thinking sequestration is mainly for the debtor's benefit; its focus is the creditors' advantage.
• Saying companies are sequestrated; they are wound up.

IN1 practice

1. Can a trust be sequestrated? Answer: yes; a trust is treated as a debtor under the Insolvency Act.

Flashcards

Quiz

1. The main purpose of sequestration is: (a) to punish the debtor (b) an orderly collective distribution for the benefit of creditors (c) to let the first creditor be paid. Answer: (b).